Literature 1900 – 2008, Neoclassical economics and neoliberalism

In the 20th century economic theory was dominated by the neoclassical approach. Neoclassical theories focus on markets with perfect competition, complete information, no uncertainty, and rational humans. Given these assumptions, there is no economic rent. The neoclassical theory did acknowledge that monopoly rent can exist, but this was seen as an exception that was supposed to be temporary. The focus was on the theory of perfect markets. In addition, the neoclassical school tried to prove that factors of production receive income according to their contribution. Economic rent does not fit in such a model, see Blaug (1979), Ryan-Collins (2017), and Mazzucato (2018) for a review of classical and neoclassical theories regarding value, price, and rent.

As a result of neoclassical dominance, the interest in economic rent declined to a minimum in the universities and in textbooks. There was some revival with the publications of Tullock (1967) and Krueger (1974). They analyzed the impact of lobbying by interest groups to influence government policies in their favor, and Krueger (1974) introduced the label “rent-seeking” for such behavior. The analysis of rent-seeking was mostly theoretical and in line with the neoclassical deductive reasoning method, without a test based on empirical research. This is also true for most publications that built on the work of Tullock and Krueger, see the review articles by Congleton (2018) and Mitchell (2019).

In the neoclassical approach, there is little interest in the real world because the focus is on pure theory, with elegant mathematical models and no empirical research, apart from examples that are more an illustration than a test. In neoclassical theory, the marginal utility determines the price, but this is circular reasoning because the price is viewed as the revealed preference of utility. The theory is true by definition, and cannot be tested, see Lowe (1965) and Blaug (1979). The focus in economics on pure, untested theory has been criticized by many, with limited success.

One of the critics was Wassily Leontief (1971) who won the Nobel prize for economics. He addressed the weakness of economics as a science in a speech for the American Economic Association with a significant title: “Theoretical assumptions and non-observed facts”. He noticed in his speech that pure theory is much more popular among many economists than empirical research. This is highly questionable since any scientific theory should be tested. Leontief (1986) wrote in the introduction paragraph of chapter 1: “As a result, we have in economics today a high concentration of theory without fact on the one hand and a mounting accumulation of fact without theory on the other”. The impact of these lessons by Leontief was limited, but since the 2008 crisis, the awareness of the need for a combination of theory and empirical research seems to grow, see for example the textbook by the CORE team (2017).

The period between the rise of neoliberalism since 1980 and the economic crisis in 2008 is characterized by increasing inequality, comparable to the situation in the late 19th century that was analyzed by Henry George. Therefore there is a similar relevance for society to find out if there is a relationship between economic rent and inequality. If that is the case then measures to reduce rents and taxation can be relevant. However, some researchers doubt if rents play an important role, for example, Piketty (2014), see also Boushey, DeLong, Steinbaum (2017).

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