Neoclassical theory won because it backed the right horse


Jason Collins


December 2, 2013

An interesting idea in Herb Gintis’s review of The Origin of Wealth (pdf):

One of the ironies of history is that if the Walrasian model were plausible, there would be no need for real markets, real competition, or even capitalism itself. Socialism, consisting of a bureau of technocrats implementing the Walrasian auctioneer, could harness the general equilibrium system to a system of public ownership of wealth. This aspect of the general equilibrium model was clearly understood by Oskar Lange, F. M. Taylor, and Enrico Barone in their famous defense of market socialism (Barone 1935, Lange and Taylor 1938). This defense was so successful that it induced Josef Schumpeter to predict the imminent demise of capitalism (Schumpeter 1942), and led Friedrich von Hayek to rethink, and finally abandon, his commitment to neoclassical theory (Hayek 1945).

Ironically, however, Neoclassical theory has been an unrelenting defender of capitalism, and by casting its lot with real-world “competition” and real-world “markets”, it has thereby made a strategic choice that ensured its victory over the Socialists, the Syndicalists, the Institutionalists, the Populists, the Anarchists, the Communalists, and the other various movements that proposed alternatives to capitalism. Nevertheless, neoclassical theory is quite incapable of explaining what role “competition” and “markets” in fact play in a successful economy, since the terms refer to completely different concepts in Walrasian theory and in economic reality.