The Neoclassical Revolution in Economics

The overall development of economics in the classical tradition has been toward replacing models of fixedness with models based on fluidity. In the nanve preclassical tradition, patterns of exchange were taken to be fixed by divine plan, or by timeless usage and human nature. Prices, for example, were taken to have some natural level, with strongly moral overtones; anything that disrupted these normative levels -- price-gouging by merchants, debasement of currency by kings -- was an offense against nature that would extract some price before balance was restored.

The classical economists fluidized the economy as a whole, recognizing that it responded to opportunities as signaled by price disequilibria. The macroeconomic realm thus ceased to be a fixed, arbitrary architecture and became a system that found its own balance of growth and stability. However, while the classical economists recognized that the macroeconomy was composed of and regulated by a host of microeconomic actions -- the pricing and production decisions of individual firms and consumers -- the classical model did little to explain those firms' behavior. Adam Smith's pin maker could exploit the division of labor to produce far more pins at a far lower price (1976, I. pp. 8-9).

But how many pins would it be worthwhile for him to make? Put another way, at what point would his factory expansion plans bump up against market limits, and why? The classical theorists had no cle

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