–1 vote
asked ago in General Economics Questions by (110 points)
Adam Smith's economics is an economic growth model; Alfred Marshall's is a static equilibrium model. These are opposed. The former posits productive efficiency but (though Smith hoped it would) can't deliver distributive efficiency. The latter (neoclassical) model posits distributive efficiency and productive efficiency within  a static framework, but forgets, at its root about the power of innovative, economic profit driven, growth. But these goals are contrary. Does orthodox economics need to make up its mind?

For example, large drug manufacturers are monopolistic or oligopolistic and are distributively (and productively) inefficient (in a Microeconomics framework). Yet (though Smith flouted the need for patents), growth advocates argue this imperfect competition is necessary for economic profits to create an incentive structure that ensures that more and more powerful drugs continue to be developed--who is right? And can both of these arguments exist side by side?

1 Answer

0 votes
answered ago by (180 points)
I like to reply the question, by asking another more incisive question, in order to drive the line on what came to be known as "neo-classical" theory in post sixties world! The question is what happened to "neo-classical economics" on the way to 'the forum?' The concern demonstrated by the question "Can Classical and Neoclassical economics really coexist in Orthodox Economics," had been greatly addressed by the proponents of "neo-classical synthesis." This indeed happened prior to the unleashing of what came to be known as supply side economics! I think the difference was not one of a kind, but that of degree, to which, society can actually afford to provide "incentives." The question that must be answered is naturally, about the economic efficiency. of such incentives. How long and to what extent such programs should continue? That is a matter of cost-effectiveness!  Unfortunately such concerns are rather easily side-stepped in political economy!
commented ago by (110 points)
Neo-classical synthesis does not answer this question, it, and this will soon become very important, is a static equilibrium (AS=AD) model at full employment, and argues that the real wage has to fall to increase employment, meaning that there is exactly the assumed contradiction between growth and allocative efficiency spoken of. Supply-Side economics, as can be inferred from my question, ignores neo-classical efficiency (that was my point) it is true that ultimately a "balance" between allocative, and "growth" incentives efficiency, maximizing total societal welfare has to be reached.  But the first step is that Orthodox economics acknowledge its contradiction. Beyond this, the trick is estimating values to reach this balance. There is certainly a lot of AI to help us do that at this point. However, it will be necessary to dump ordinal utility for estimated cardinal utility--as Milton Friedman's (this paper is, ironically, what happened to Microeconomics on the way to the forum, BTW) "The Methodology of Positive Economics" would suggest that we do.