Is a Synthesis of Economic Theories Possible?

Abstract

The great innovation of neoclassical economics in the second half of the 19th century consisted in reasoning the notions of use value and cost (i.e. utility and disutility) not only in terms of totality and average — which is what classical economics had done already — but also marginally with the introduction of marginal analysis. Thus the concept of marginal utility permitted better understanding of demand and its paradoxes: highly useful products vital for living such as water and food are generally sold at much lower prices than superfluous products like gold and diamonds. And notions of marginal utility and marginal cost, which generally form the background of the definition of curves of supply and demand for goods, have made it possible to represent market adjustment mechanisms much more accurately in the short term. The “marginalist revolution” — the name given to the introduction of this new form of economic reasoning — opened the path to all types of optimisation calculations; in other words, how to obtain maximum advantage from rare resources through an alternative use. The crowning achievement of this theoretical construction was the demonstration of the conditions for general equilibrium over all markets. Developed by Walras (in 1874) and conclusively completed by Arrow and Debreu (in the 1950s), this analysis was aimed at verifying Adam Smith’s fine intuition regarding the irreplaceable role of markets in coordinating economic activities.