Classical Economic Theory, which was developed by Adam Smith, Thomas Malthus, David Ricardo, John Stuart Mill and Karl Marx, contained inherent defficiencies in some of the assumptions, resulting in the birth of Neoclassical economics in the late nineteenth century. It is believed that the term "neoclassical" was first coined by famous economist, Thorstein Veblen. According to E. Roy Weintraub in "Fortune", the primary defficiency in classical thought "was that prices in the market did not necessarily reflect the "value" so defined, for people were often willing to pay more than an object was "worth". The classical "substance" theory of value, which took value to be a property inherent in an object, gradually gave way to a perspective in which value was associated with the relationship between the object and the person obtaining the object." Value theory began to take on "subjective elements" which, according to Weintraub, came to be known as "supply and demand". This change , which "came to be known as the Marginal Revolution in economics", was the beginning of Neoclaasical Economics.
According to Weintraub, the framework of Neoclassical economics is as follows:
"Buyers attempt to maximize their gains from getting goods, and they do this by increasing their purchases of a good until what they gain from an extra unit is just balanced by what they have to give up to obtain it....Likewise, individuals provide labor to firms that wish to employ them, by balancing the gains from offering the marginal unit of their services (the wage they would receive) with the disutility of labor itself--the loss of leisure....Similarly, producers attempt to produce units of a good so that the cost of producing the incremental or marginal unit is just balanced by the revenue."
According to Weintraub, neoclassical economics is a "metatheory", which is "a set of implicit rules or understandings for constructing satisfactory economic theories....Theories based on, or guided by these assumptions are neoclassical theories." These fundamental assumptions are as follows:
The popularity of Neoclassical economics is due in very large part to its mathematical beauty, i.e., the ability to move the study of economics from the social science catagory to the physical science category. The primary contributors to this move are the economists, William Stanly Jevons, Leon Walras and Irving Fisher.
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