9954830

“The decisive weakness in neoclassical economics...is not the error in the

assumptions by which it elides the problem of power...Rather in eliding power – in

making economics a nonpolitical subject – neoclassical theory, by the process,

destroys its relation with the real world.” (Galbraith, 1973). Discuss.

An economic approach that relates demand and supply to a person's rationality

and their capacity to capitalise on profit or utility is known as neoclassical economics

(Aspromourgos, 1986, p. 265). Neoclassical economists suppose that the primary concern

of the consumer is to boost individual fulfilment and that everybody settles on choices

dependent on thoroughly educated assessments regarding utility (Himmelweit et al, 2001,

p. 5). This hypothesis concurs with the concept of rational behaviour theory, which

postulates that individuals behave logically when settling on financial decisions.

Additionally, neoclassical economics states that service or goods frequently have a cost

that is more than its input values. Such as, whereas classical economics supposes that the

price of a service or product is inferred as the labour cost and the cost of materials,

neoclassical experts articulate that customers have an apparent product and service value

that influences its demand and price (Himmelweit et al, 2001, p. 28). Lastly, the

economic hypothesis asserts that competition prompts a proficient allotment of resources

in an economy. The allocation of resources sets up the market balance between demand

and supply. Contrasted to Keynesian economics, this field of economics postulates that

savings establish investment and is mainly worried about market balance and

development at full employment instead of the under-allocation of resources (Galbraith,

1973, p. 3). From its foundation, neoclassical economics has developed and turned into
9954830

the central interpretation of contemporary economics. Even though it is presently the

most extensively taught type of economics, it still has its critics. The most analysis points

out that neoclassical economics makes numerous unwarranted and doubtful theories that

do not characterise actual circumstances. Among these detractors is a Canadian Scottish,

John Kenneth Galbraith, who disputed mainstream economics by his two institutional

hypotheses: the dependence effect and the behaviour of the firm.

Galbraith's economic inputs can be seen both positively and negatively. In the

negative sense, he seems as a gadfly, extremely critical of conventional methods to

comprehend how the economy functions and the financial strategies that are sought after.

Galbraith has reprimanded economic hypothesis for obscuring and overlooking the

financial control, accrued by big organisations (Galbraith, 1973, p. 5). He has

disapproved of lawmakers who align themselves with the goals of the big organisation as

opposed to ensuring the interests of the public are met. Additionally, he has pointed out

that some of his economists' colleagues are ‘idiot savants’ who execute complex

mathematical study; however, they do not look to comprehend the actual world

(Galbraith, 1973, p. 113).

Consumers in the society, within neoclassical economics hypotheses, are

sovereign. It is the consumers’ need, which generates the demand for services and goods

and then moves to production to fulfil these needs (Ozanne, 2016, p. 5). Nonetheless,

Galbraith and his hypothesis do not accept this method of capitalising on the utilities of

the consumers. Galbraith contends that as the world is shifting from a period of poverty
9954830

to a time of prosperity, there are no urgent needs in society (Ozanne, 2016, p.4). Overall,

the neoclassical welfare model subsides, as societal welfare does not go up when

production is enhanced since a more substantial amount of production prompts much

more unique needs, which call for a more prominent fulfilment (Schor, 1995, p. 20).

Galbraith, when additional requirements are created when relying upon production to

fulfil it, identifies this as the Dependent Effect. Schor (1995) mentions that John Maynard

Keynes bolsters Galbraith's hypothesis of the production as a maker of needs by uttering

that an individual's consumption turns into their neighbour's desire (Schor, 1995, p. 19).

Other than the worry about the Dependence Effect, the over-provided private

services and goods deduct the allocated resources for the public sector, which lead to

public poverty and private abundance. Galbraith classified this circumstance as social

inequality (Galbraith, 1973, p. 8). An excellent scenario for this is that the rising

utilisation and buying of motor vehicles calls for additional insurance, highways and

roads, traffic control frameworks, and pollution control policies. To deal with these

imbalances, Galbraith recommends imposing substantial consumption taxes on specific

services and goods as opposed to labouring taxes or land taxes (8). Nevertheless, the

dispute does not just present between the public and private sector, but additionally

between interests of the public and influential private sector (Galbraith, 1973, p. 9). A

few proofs for this are that the government may spend significantly more on roads and

defence as opposed to improving the education and healthcare system and poverty relief,

which may alter the structure of the societal class (Ozanne, 2016, p. 7). This incredible

market power can allude back to the behaviour of the firm in the beginning.
9954830

In neoclassical economics hypothesis, firms have distinctive behaviours because

of different goals. For instance, the objective of a self-governing organisation is to

amplify its profit to be able to sell the services and goods at a minor expense. Galbraith

classifies this kind of business into a market segment. Nonetheless, there is an

unquestionably progressively intricate and significant form of business, known as the

planning sector, where ownership and control are detached (Ozanne, 2016, p. 8). These

big or even large firms have various proprietors, which are called shareholders. The vast

majority of these shareholders take an insignificant portion of the entire organisation;

consequently, they have no power over the firm. Instead, big companies frequently

contract a group of specialists in various sectors like economists, engineers, designers, or

managers (Ozanne, 2016, p. 26). These individuals will create a board of director to

manage the entire organisation. Conversely, shareholders can change their money from

the share of one organisation to the next. Hence, to keep the money, the board of

directors will attempt their best to capitalise on the dividend and return of the

shareholders. Their goal is significantly more intricate than the maximisation of profit

(Galbraith, 1973, p. 6). Galbraith characterised their goals as affirmative and protective.

The first thought of protective reason is to stay in the market in short, continued

existence. In this manner, they make an adequate return in profit to the shareholders to

keep their money within the corporation. Additionally, they maintain the retained profit

as the money for the development of the organisation grows. Under such conditions,

numerous big corporations will attempt to stay away from the competition by either

comprehending the functioning of other comparative organisations or directly mending

the price. A neo-classicist will see this as amplifying joint profits by limiting the

production quantity, whereas Galbraith treats this less-than-augmenting profit as a pledge

for opponents to survive (Galbraith, 1973, p. 6).

The centre of the affirmative reason is to ensure the organisation develops in

profits, sales, and revenue for there to be a bonus to the board of directors, such as

managerial behaviour. In the orthodox hypothesis of the behaviour of the firm,

oligopolists bring down their output to enhance profits although Galbraith pointed out

that the maximisation of profit is not the purpose of such firms (Galbraith, 1973, p.6).

Instead, their significant investment in hardware and advertising aims at increasing

market share, which matches its development goal. These essential endeavours have

looked to liberate conviction by asking people in general to scrutinise the standard

composition of financial information and to dispute the conformist way of thinking. In

Economics and the Public Purpose, Galbraith et al. contend that the liberation of

conviction is needed to dispute the authority of acknowledged values, which leave out the

likelihood of every opposing idea and avoid an appropriated comprehension of how the

economy functions (Galbraith, 1973, p. 285). Galbraith contends that the prestige and

power of big corporations are supported through the traditional way of thinking that

prompts economic study that is neither socially applicable nor valuable (Galbraith, 1973,

p. 8). Consequently, he has censured the different customary way of thinking that

penetrated social idea. His objective has been to amplify the responsiveness to varying

thoughts regarding how the economy functions and the strategic plan that is needed the
9954830

moment individuals have an appropriate comprehension of how the economy truly

functions.

Conveniently, Galbraith has looked to study power and its financial dealings as

well as examine and comprehend the real advancement and operations of economies. A

comprehension of power is vital for understanding the behaviour of the company because

it is an establishment that looks to manage and override the industry to increase the

influence of its governmental contraption, which Galbraith calls "the technostructure"

(Galbraith, 1973, p. 5). A legitimate comprehension of the firm's character brings about

an examination of how power is employed in the public just as the economic outcomes

that come from these influence (Galbraith, 1973, p. 8). Likewise, a comprehension of

power is fundamental for seeing how the social and economic strategy can counteract the

control of corporations and work to enhance the functioning of the economy and the

existences of the individuals, disappointed by the contemporary method of production.

Undoubtedly, Galbraith contended that the traditional wisdom neglects to reveal insight

into numerous modern concerns, for example, the underproduction of public merchandise

and overproduction of private products (Galbraith, 1973, p. 9). The excess nature of

technical development directed at commodities that are not relevant and the failure of

economic growth to enhance enduring societal issues. Other concerns include the

irregular allocation of government overheads, shown in the unwarranted military

spending and various types of societal road and rail network and disregard spending on

sectors like healthcare and education. The inexorably skewed pay dissemination between

multiple segments and faculty and the continuing difference between the low income and
9954830

high-income organisations is also included. The impassiveness of the contemporary firm

and global organisations to public opinions and pressure and the issues of worldwide

economic coordination and the proceeding concern of inflation instead of deflation are

also some current concerns, raised by Galbraith (Galbraith, 1973, p. 3).

Galbraith (Galbraith, 1973, p. 8) asserts that it is smarter to constrain the control

of big corporations than to get rid of that power by separating it. Governments ought to

look to support the progression of counteracting power in the private segment of the

economy by, for instance, backing smaller competitive companies and labour unions. The

power amid the market and planning frameworks can be progressively made equivalent

by actualising strategies, counting low-income legislation, ensuring small companies are

supported and guaranteeing that tariffs are protected as well as minimum wages

(Galbraith 4). When it is impossible or hard to create counteracting power, the

government should ensure there is a sufficient supply of the services and products that

have a societal worth yet that are not manufactured by big companies — for instance,

moderately low inflation levels, decent wages to all employees, and a clean environment.

Many other economists rejected Galbraith's attacks on orthodox economics. The

notion of unreceptive customers believes in advertising refutes their powerful motivation.

An example is cultural goods. An artist may convey his idea when doing the work.

However, audiences will not just take the words as opposed to processing them and

contrive a new image in their minds. Something very similar occurs in advertising;

customers who are active users are more likely to change and translate the meaning of the
9954830

advertisement. The non-profit maximising purpose additionally draws detractors. An

organisation with non-profit maximising purposes, over the long haul, will offer the

public an off-putting picture about their capability to make future incomes with the goal

that its share value will lower as a direct result of the non-profit maximising purpose

(Galbraith, 1973, p. 6). In such a situation, if an organisation might want to offer a more

expansive rate to the shareholders, the entire firm will be swiftly taken over.

Galbraith was amongst the first orthodox economists; his disputes on traditional

economics hypothesis cause a lot of backfires, which made him an economist with public

stand. His initial thoughts made neo-classicists stop and contemplate more on their

analysis. As an orthodox economist, he needs an increasingly complete hypothesis and

models to develop his way of thinking. The public was motivated to be wary of the

advertisement and media influences. Neoclassical economic hypothesis presently

comprises for the most of investigating economic structures. It has since long abandoned

this present reality and mollifies itself with demonstrating things about concocted

universes. The empirical proof assumes a minor part in the neoclassical economic

hypothesis, where structures mainly work as alternatives for empirical evidence. The

problem with neoclassical economics is not that it utilises models primarily but that it

uses poor models. They are inadequate since they do not connect to the existing reality

target framework that we live in.

 
9954830

Bibliography:

• Aspromourgos, Tony. "On the Origins of the Term 'Neoclassical'." Cambridge Journal

of Economics 10.3, 1986, pp.265-270.

• Galbraith, John Kenneth. Economics and The Public Purpose. Houghton Mifflin, 1973

• Galbraith, John Kenneth. "Power and the Useful Economist." American Economic

Review 63.1, 1973, pp.1-11.

• Himmelweit, Susan, Roberto Simonetti, and Andrew Trigg. Microeconomics:

Neoclassical and Institutionalist Perspectives on Economic Behaviour. Cengage Learning

EMEA, 2001.

• Ozanne, Adam. Power and Neoclassical Economics: A return to Political Economy in

the Teaching of Economics. Springer, 2016.

• Schor, Juliet B. "A New Economic Critique of Consumer Society." Philosophy and

Public Policy Quarterly 15.4, 1995, pp.17-21.