Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.
Neoclassical economics dominates microeconomics and, together with Keynesian economics, forms the neoclassical synthesis which dominates mainstream economics today. Although neoclassical economics has gained widespread acceptance by contemporary economists, there have been many critiques of neoclassical economics, often incorporated into newer versions of neoclassical theory, but some remaining distinct fields.
The term was originally introduced by Thorstein Veblen in his 1900 article 'Preconceptions of Economic Science', in which he related marginalists in the tradition of Alfred Marshall et al. to those in the Austrian School.
No attempt will here be made even to pass a verdict on the relative claims of the recognized two or three main "schools" of theory, beyond the somewhat obvious finding that, for the purpose in hand, the so-called Austrian school is scarcely distinguishable from the neo-classical, unless it be in the different distribution of emphasis. The divergence between the modernized classical views, on the one hand, and the historical and Marxist schools, on the other hand, is wider, so much so, indeed, as to bar out a consideration of the postulates of the latter under the same head of inquiry with the former. – Veblen
It was later used by John Hicks, George Stigler, and others to include the work of Carl Menger, William Stanley Jevons, Léon Walras, John Bates Clark, and many others. Today it is usually used to refer to mainstream economics, although it has also been used as an umbrella term encompassing a number of other schools of thought, notably excluding institutional economics, various historical schools of economics, and Marxian economics, in addition to various other heterodox approaches to economics.
Neoclassical economics is characterized by several assumptions common to many schools of economic thought. There is not a complete agreement on what is meant by neoclassical economics, and the result is a wide range of neoclassical approaches to various problem areas and domains—ranging from neoclassical theories of labor to neoclassical theories of demographic changes.
From these three assumptions, neoclassical economists have built a structure to understand the allocation of scarce resources among alternative ends—in fact understanding such allocation is often considered the definition of economics to neoclassical theorists. Here's how William Stanley Jevons presented "the problem of Economics".
Given, a certain population, with various needs and powers of production, in possession of certain lands and other sources of material: required, the mode of employing their labour which will maximize the utility of their produce.
From the basic assumptions of neoclassical economics comes a wide range of theories about various areas of economic activity. For example, profit maximization lies behind the neoclassical theory of the firm, while the derivation of demand curves leads to an understanding of consumer goods, and the supply curve allows an analysis of the factors of production. Utility maximization is the source for the neoclassical theory of consumption, the derivation of demand curves for consumer goods, and the derivation of labor supply curves and reservation demand.
Market supply and demand are aggregated across firms and individuals. Their interactions determine equilibrium output and price. The market supply and demand for each factor of production is derived analogously to those for market final output to determine equilibrium income and the income distribution. Factor demand incorporates the marginal-productivity relationship of that factor in the output market.
Neoclassical economics emphasizes equilibria, which are the solutions of agent maximization problems. Regularities in economies are explained by methodological individualism, the position that economic phenomena can be explained by aggregating over the behavior of agents. The emphasis is on microeconomics. Institutions, which might be considered as prior to and conditioning individual behavior, are de-emphasized. Economic subjectivism accompanies these emphases. See also general equilibrium.
Classical economics, developed in the 18th and 19th centuries, included a value theory and distribution theory. The value of a product was thought to depend on the costs involved in producing that product. The explanation of costs in classical economics was simultaneously an explanation of distribution. A landlord received rent, workers received wages, and a capitalist tenant farmer received profits on their investment. This classic approach included the work of Adam Smith and David Ricardo.
However, some economists gradually began emphasizing the perceived value of a good to the consumer. They proposed a theory that the value of a product was to be explained with differences in utility (usefulness) to the consumer. (In England, economists tended to conceptualize utility in keeping with the utilitarianism of Jeremy Bentham and later of John Stuart Mill.)
The third step from political economy to economics was the introduction of marginalism and the proposition that economic actors made decisions based on margins. For example, a person decides to buy a second sandwich based on how full he or she is after the first one, a firm hires a new employee based on the expected increase in profits the employee will bring. This differs from the aggregate decision making of classical political economy in that it explains how vital goods such as water can be cheap, while luxuries can be expensive.
The change in economic theory from classical to neoclassical economics has been called the "marginal revolution", although it has been argued that the process was slower than the term suggests. It is frequently dated from William Stanley Jevons's Theory of Political Economy (1871), Carl Menger's Principles of Economics (1871), and Léon Walras's Elements of Pure Economics (1874–1877). Historians of economics and economists have debated:
In particular, Jevons saw his economics as an application and development of Jeremy Bentham's utilitarianism and never had a fully developed general equilibrium theory. Menger did not embrace this hedonic conception, explained diminishing marginal utility in terms of subjective prioritization of possible uses, and emphasized disequilibrium and the discrete; further Menger had an objection to the use of mathematics in economics, while the other two modeled their theories after 19th century mechanics. Jevons built on the hedonic conception of Bentham or of Mill, while Walras was more interested in the interaction of markets than in explaining the individual psyche.
Alfred Marshall's textbook, Principles of Economics (1890), was the dominant textbook in England a generation later. Marshall's influence extended elsewhere; Italians would compliment Maffeo Pantaleoni by calling him the "Marshall of Italy". Marshall thought classical economics attempted to explain prices by the cost of production. He asserted that earlier marginalists went too far in correcting this imbalance by overemphasizing utility and demand. Marshall thought that "We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production".
Marshall explained price by the intersection of supply and demand curves. The introduction of different market "periods" was an important innovation of Marshall’s:
Marshall took supply and demand as stable functions and extended supply and demand explanations of prices to all runs. He argued supply was easier to vary in longer runs, and thus became a more important determinant of price in the very long run.
An important change in neoclassical economics occurred around 1933. Joan Robinson and Edward H. Chamberlin, with the near simultaneous publication of their respective books, The Economics of Imperfect Competition (1933) and The Theory of Monopolistic Competition (1933), introduced models of imperfect competition. Theories of market forms and industrial organization grew out of this work. They also emphasized certain tools, such as the marginal revenue curve.
Joan Robinson's work on imperfect competition, at least, was a response to certain problems of Marshallian partial equilibrium theory highlighted by Piero Sraffa. Anglo-American economists also responded to these problems by turning towards general equilibrium theory, developed on the European continent by Walras and Vilfredo Pareto. J. R. Hicks's Value and Capital (1939) was influential in introducing his English-speaking colleagues to these traditions. He, in turn, was influenced by the Austrian School economist Friedrich Hayek's move to the London School of Economics, where Hicks then studied.
These developments were accompanied by the introduction of new tools, such as indifference curves and the theory of ordinal utility. The level of mathematical sophistication of neoclassical economics increased. Paul Samuelson's Foundations of Economic Analysis (1947) contributed to this increase in mathematical modelling.
The interwar period in American economics has been argued to have been pluralistic, with neoclassical economics and institutionalism competing for allegiance. Frank Knight, an early Chicago school economist attempted to combine both schools. But this increase in mathematics was accompanied by greater dominance of neoclassical economics in Anglo-American universities after World War II. Some argue that outside political interventions, such as McCarthyism, and internal ideological bullying played an important role in this rise to dominance.
Hicks' book, Value and Capital had two main parts. The second, which was arguably not immediately influential, presented a model of temporary equilibrium. Hicks was influenced directly by Hayek's notion of intertemporal coordination and paralleled by earlier work by Lindhal. This was part of an abandonment of disaggregated long run models. This trend probably reached its culmination with the Arrow–Debreu model of intertemporal equilibrium. The Arrow-Debreu model has canonical presentations in Gérard Debreu's Theory of Value (1959) and in Arrow and Hahn's "General Competitive Analysis" (1971).
Many of these developments were against the backdrop of improvements in both econometrics, that is the ability to measure prices and changes in goods and services, as well as their aggregate quantities, and in the creation of macroeconomics, or the study of whole economies. The attempt to combine neo-classical microeconomics and Keynesian macroeconomics would lead to the neoclassical synthesis which has been the dominant paradigm of economic reasoning in English-speaking countries since the 1950s. Hicks and Samuelson were for example instrumental in mainstreaming Keynesian economics.
Macroeconomics influenced the neoclassical synthesis from the other direction, undermining foundations of classical economic theory such as Say's law, and assumptions about political economy such as the necessity for a hard-money standard. These developments are reflected in neoclassical theory by the search for the occurrence in markets of the equilibrium conditions of Pareto optimality and self-sustainability.
Neoclassical economics is sometimes criticized for having a normative bias. In this view, it does not focus on explaining actual economies, but instead on describing a theoretical world in which Pareto optimality applies.
Perhaps the strongest criticism lies in its disregard for the physical limits of the Earth and its ecosphere which are the physical container of all human economies. This disregard becomes hot denial by Neoclassical economists when limits are asserted, since to accept such limits creates fundamental contradictions with the foundational presumptions that growth in scale of the human economy forever is both possible and desirable. The disregard/denial of limits includes both resources and 'waste sinks,' the capacity to absorb human waste products and man-made toxins.
The assumption that individuals act rationally may be viewed as ignoring important aspects of human behavior. Many see the "economic man" as being quite different from real people. Many economists, even contemporaries, have criticized this model of economic man. Thorstein Veblen put it most sardonically that neoclassical economics assumes a person to be:
[A] lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift about the area, but leave him intact.
Large corporations might perhaps come closer to the neoclassical ideal of profit maximization, but this is not necessarily viewed as desirable if this comes at the expense of neglect of wider social issues.
Problems exist with making the neoclassical general equilibrium theory compatible with an economy that develops over time and includes capital goods. This was explored in a major debate in the 1960s—the "Cambridge capital controversy"—about the validity of neoclassical economics, with an emphasis on economic growth, capital, aggregate theory, and the marginal productivity theory of distribution. There were also internal attempts by neoclassical economists to extend the Arrow-Debreu model to disequilibrium investigations of stability and uniqueness. However a result known as the Sonnenschein–Mantel–Debreu theorem suggests that the assumptions that must be made to ensure that equilibrium is stable and unique are quite restrictive.
Neoclassical economics is also often seen as relying too heavily on complex mathematical models, such as those used in general equilibrium theory, without enough regard to whether these actually describe the real economy. Many see an attempt to model a system as complex as a modern economy by a mathematical model as unrealistic and doomed to failure. A famous answer to this criticism is Milton Friedman's claim that theories should be judged by their ability to predict events rather than by the realism of their assumptions. Mathematical models also include those in game theory, linear programming, and econometrics. Some see mathematical models used in contemporary research in mainstream economics as having transcended neoclassical economics, while others disagree. Critics of neoclassical economics are divided into those who think that highly mathematical method is inherently wrong and those who think that mathematical method is potentially good even if contemporary methods have problems.
In general, allegedly overly unrealistic assumptions are one of the most common criticisms towards neoclassical economics. It is fair to say that many (but not all) of these criticisms can only be directed towards a subset of the neoclassical models (for example, there are many neoclassical models where unregulated markets fail to achieve Pareto-optimality and there has recently been an increased interest in modeling non-rational decision making). Its disregard for social reality and its alleged role in aiding the elites to widen the wealth gap and social inequality is also frequently criticized.
It has been argued within the field of ecological economics that the neoclassical economic system is by nature dysfunctional since it holds the destruction of the natural world through the accelerating consumption of non-renewable resources as well as the exhaustion of the 'waste sinks' of the ecosphere as 'externalities' that are nowhere taken into account in the theory.
Alfred Marshall, FBA (26 July 1842 – 13 July 1924) was one of the most influential economists of his time. His book, Principles of Economics (1890), was the dominant economic textbook in England for many years. It brings the ideas of supply and demand, marginal utility, and costs of production into a coherent whole. He is known as one of the founders of neoclassical economics. Although Marshall took economics to a more mathematically rigorous level, he did not want mathematics to overshadow economics and thus make economics irrelevant to the layman.Carl Menger
Carl Menger (; German: [ˈmɛŋɐ]; February 23, 1840 – February 26, 1921) was an Austrian economist and the founder of the Austrian School of economics. Menger contributed to the development of the theory of marginalism (marginal utility), which rejected the cost-of-production theories of value, such as were developed by the classical economists such as Adam Smith and David Ricardo. As a departure from such, he would go on to call his resultant perspective, the “Subjective Theory of Value”.Classical economics
Classical economics or classical political economy is a school of thought in economics that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus , and John Stuart Mill. These economists produced a theory of market economies as largely self-regulating systems, governed by natural laws of production and exchange (famously captured by Adam Smith's metaphor of the invisible hand).
Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics. The fundamental message in Smith's book was that the wealth of any nation was determined not by the gold in the monarch's coffers, but by its national income. This income was in turn based on the labor of its inhabitants, organized efficiently by the division of labour and the use of accumulated capital, which became one of classical economics' central concepts.In terms of economic policy, the classical economists were pragmatic liberals, advocating the freedom of the market, though they saw a role for the state in providing for the common good. Smith acknowledged that there were areas where the market is not the best way to serve the common interest, and he took it as a given that the greater proportion of the costs supporting the common good should be borne by those best able to afford them. He warned repeatedly of the dangers of monopoly, and stressed the importance of competition. In terms of international trade, the classical economists were advocates of free trade, which distinguishes them from their mercantilist predecessors, who advocated protectionism.
The designation of Smith, Ricardo and some earlier economists as 'classical' is due to Karl Marx, to distinguish the 'greats' of economic theory from their 'vulgar' successors. There is some debate about what is covered by the term "classical economics", particularly when dealing with the period from 1830–75, and how classical economics relates to neoclassical economics.Criticisms of neoclassical economics
Neo-classical economics has come under critique on the basis of its core ideologies, assumptions, and other matters.Factors of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, finished goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relationship called the production function. There are three basic resources or factors of production: land, labor, and capital. The factors are also frequently labeled "producer goods or services" to distinguish them from the goods or services purchased by consumers, which are frequently labeled "consumer goods".
There are two types of factors: primary and secondary. The previously mentioned primary factors are land, labor, and capital goods.
Materials and energy are considered secondary factors in classical economics because they are obtained from land, labour, and capital. The primary factors facilitate production but neither becomes part of the product (as with raw materials) nor becomes significantly transformed by the production process (as with fuel used to power machinery). Land includes not only the site of production but also natural resources above or below the soil. Recent usage has distinguished human capital (the stock of knowledge in the labor force) from labor. Entrepreneurship is also sometimes considered a factor of production. Sometimes the overall state of technology is described as a factor of production. The number and definition of factors vary, depending on theoretical purpose, empirical emphasis, or school of economics.Heterodox economics
Heterodoxy is a term that may be used in contrast with orthodoxy in schools of economic thought or methodologies, that may be beyond neoclassical economics. Heterodoxy is an umbrella term that can cover various schools of thought or theories. These might for example include institutional, evolutionary, Georgist, Austrian, feminist, social, post-Keynesian (not to be confused with New Keynesian), ecological, Marxian, socialist and anarchist economics, among others.Economics may be called orthodox or conventional economics by its critics. Alternatively, mainstream economics deals with the "rationality–individualism–equilibrium nexus" and heterodox economics is more "radical" in dealing with the "institutions–history–social structure nexus". Many economists dismiss heterodox economics as "fringe" and "irrelevant", with little or no influence on the vast majority of academic mainstream economists in the English-speaking world.
A recent review documented several prominent groups of heterodox economists since at least the 1990s as working together with a resulting increase in coherence across different constituents. Along these lines, the International Confederation of Associations for Pluralism in Economics (ICAPE) does not define "heterodox economics" and has avoided defining its scope. ICAPE defines its mission as "promoting pluralism in economics."
In defining a common ground in the "critical commentary," one writer described fellow heterodox economists as trying to do three things: (1) identify shared ideas that generate a pattern of heterodox critique across topics and chapters of introductory macro texts; (2) give special attention to ideas that link methodological differences to policy differences; and (3) characterize the common ground in ways that permit distinct paradigms to develop common differences with textbook economics in different ways.One study suggests four key factors as important to the study of economics by self-identified heterodox economists: history, natural systems, uncertainty, and power.John Bates Clark
John Bates Clark (January 26, 1847 – March 21, 1938) was an American neoclassical economist. He was one of the pioneers of the marginalist revolution and opponent to the Institutionalist school of economics, and spent most of his career as professor at Columbia University.John Hicks
Sir John Richard Hicks (8 April 1904 – 20 May 1989) was a British economist. He was considered one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economics were his statement of consumer demand theory in microeconomics, and the IS/LM model (1937), which summarised a Keynesian view of macroeconomics. His book Value and Capital (1939) significantly extended general-equilibrium and value theory. The compensated demand function is named the Hicksian demand function in memory of him.
In 1972 he received the Nobel Memorial Prize in Economic Sciences (jointly) for his pioneering contributions to general equilibrium theory and welfare theory.Lausanne School
The Lausanne School of economics, sometimes referred to as the Mathematical School, refers to the neoclassical economics school of thought surrounding Léon Walras and Vilfredo Pareto. It is named after the University of Lausanne, at which both Walras and Pareto held professorships. The central feature of the Lausanne School was its development of general equilibrium theory. Polish economist Leon Winiarski is also said to have been a member of the Lausanne School.Léon Walras
Marie-Esprit-Léon Walras (French: [valʁas]; 16 December 1834 – 5 January 1910) was a French mathematical economist and Georgist. He formulated the marginal theory of value (independently of William Stanley Jevons and Carl Menger) and pioneered the development of general equilibrium theory.Mainstream economics
Mainstream economics is the body of knowledge, theories, and models of economics, as taught across universities, that are generally accepted by economists as a basis for discussion. It can be contrasted to heterodox economics, which encompasses various schools or approaches that are accepted by their proponents. The economics profession has generally been associated with neoclassical economics and with the neoclassical synthesis, and over time the profession has included the Keynesian approach to macroeconomics.Neoclassical
Neoclassical or neo-classical may refer to:
Neoclassicism or New Classicism, any of a number of movements in the fine arts, literature, theatre, music, language, and architecture beginning in the 17th century
Neoclassical architecture, an architectural style of the 18th and 19th centuries
Neoclassical sculpture, a sculptural style of the 18th and 19th centuries
New Classical architecture, an overarching movement of contemporary classical architecture in the 21st century
in linguistics, a word that is a recent construction from New Latin based on older, classical elements
Neoclassical ballet, a ballet style which uses traditional ballet vocabulary, but is generally more expansive than the classical structure allowed
The "Neo-classical period" of painter Pablo Picasso immediately following World War I
Neoclassical economics, a general approach in economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand
Neoclassical realism, theory in international relations
Neo-classical school (criminology), a school in criminology that continues the traditions of the Classical School within the framework of Right Realism
Neo-classical theology, another name for process theology, a school of thought influenced by the metaphysical process philosophy of Alfred North Whitehead
Neoclassical transport is an effect seen in magnetic fusion energy reactorsNeoclassical synthesis
The neoclassical synthesis was a post-World War II academic movement in economics that worked towards absorbing the macroeconomic thought of John Maynard Keynes into neoclassical economics. The resultant macroeconomic theories and models are termed Neo-Keynesian economics. Mainstream economics is largely dominated by the synthesis, being largely Keynesian in macroeconomics and neoclassical in microeconomics.Much of Neo-Keynesian economic theory was developed by John Hicks and Maurice Allais, and popularized by the mathematical economist Paul Samuelson. The process began soon after the publication of Keynes' General Theory with the IS/LM model (investment saving–liquidity preference money supply) first presented by John Hicks in a 1937 article. It continued with adaptations of the supply and demand model of markets to Keynesian theory. It represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded.
Samuelson appears to have coined the term "neoclassical synthesis", and helped disseminate the resultant work, partly through his technical and academic writing, and also via his influential textbook, Economics.New institutional economics
New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the social and legal norms and rules (which are institutions) that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics. It can be seen as a broadening step to include aspects excluded in neoclassical economics. It rediscovers aspects of classical political economy.Post-autistic economics
The post-autistic economics movement (French: autisme-économie) or movement of students for the reform of economics teaching (French: mouvement des étudiants pour une réforme de l'enseignement de l'économie) is a political movement which criticises neoclassical economics and advocates for pluralism in economics. The movement gained attention after an open letter signed by almost a thousand economics students at French universities and Grandes Écoles was published in Le Monde in 2000.Rational agent
In economics, game theory, decision theory, and artificial intelligence, a rational agent is an agent that has clear preferences, models uncertainty via expected values of variables or functions of variables, and always chooses to perform the action with the optimal expected outcome for itself from among all feasible actions. A rational agent can be anything that makes decisions, typically a person, firm, machine, or software.
Rational agents are also studied in the fields of cognitive science, ethics, and philosophy, including the philosophy of practical reason.Socialist calculation debate
The socialist calculation debate, sometimes known as the economic calculation debate, was a discourse on the subject of how a socialist economy would perform economic calculation given the absence of the law of value, money, financial prices for capital goods and private ownership of the means of production. More specifically, the debate was centered on the application of economic planning for the allocation of the means of production as a substitute for capital markets and whether or not such an arrangement would be superior to capitalism in terms of efficiency and productivity.A central aspect of the debate concerned the role and scope of the law of value in a socialist economy. Although contributions to the question of economic coordination and calculation under socialism existed within the socialist movement prior to the 20th century, the phrase socialist calculation debate emerged in the 1920s beginning with Ludwig von Mises' critique of socialism. The historical debate was cast between the Austrian School represented by Mises and Friedrich Hayek, who argued against the feasibility of socialism; and between neoclassical and Marxian economists, most notably Cläre Tisch (as a forerunner), Oskar R. Lange, Abba P. Lerner, Fred M. Taylor, Henry Douglas Dickinson and Maurice Dobb, who took the position that socialism was both feasible and superior to capitalism. The debate was popularly viewed as a debate between proponents of capitalism and proponents of socialism, but in reality a significant portion of the debate was between socialists who held differing views regarding the utilization of markets and money in a socialist system and to what degree the law of value would continue to operate in a hypothetical socialist economy. Socialists generally held one of three major positions regarding the unit of calculation, including the view that money would continue to be the unit of calculation under socialism; that labor-time would be a unit of calculation; or that socialism would be based on calculation in natura or calculation performed in-kind.Debate among socialists has existed since the emergence of the broader socialist movement between those advocating market socialism, centrally planned economies and decentralized planning. Recent contributions to the debate in the late 20th century and early 21st century involve proposals for market socialism and the use of information technology and distributed networking as a basis for decentralized economic planning.Solow–Swan model
The Solow–Swan model is an economic model of long-run economic growth set within the framework of neoclassical economics. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress. At its core is a neoclassical (aggregate) production function, often specified to be of Cobb–Douglas type, which enables the model "to make contact with microeconomics". The model was developed independently by Robert Solow and Trevor Swan in 1956, and superseded the Keynesian Harrod–Domar model.
Mathematically, the Solow–Swan model is a nonlinear system consisting of a single ordinary differential equation that models the evolution of the per capita stock of capital. Due to its particularly attractive mathematical characteristics, Solow–Swan proved to be a convenient starting point for various extensions. For instance, in 1965, David Cass and Tjalling Koopmans integrated Frank Ramsey's analysis of consumer optimization, thereby endogenizing the saving rate, to create what is now known as the Ramsey–Cass–Koopmans model.Urban economics
Urban economics is broadly the economic study of urban areas; as such, it involves using the tools of economics to analyze urban issues such as crime, education, public transit, housing, and local government finance. More narrowly, it is a branch of microeconomics that studies urban spatial structure and the location of households and firms (Quigley 2008).
Much urban economic analysis relies on a particular model of urban spatial structure, the monocentric city model pioneered in the 1960s by William Alonso, Richard Muth, and Edwin Mills. While most other forms of neoclassical economics do not account for spatial relationships between individuals and organizations, urban economics focuses on these spatial relationships to understand the economic motivations underlying the formation, functioning, and development of cities.
Since its formulation in 1964, Alonso's monocentric city model of a disc-shaped Central Business District (CBD) and surrounding residential region has served as a starting point for urban economic analysis. Monocentricity has weakened over time because of changes in technology, particularly, faster and cheaper transportation (which makes it possible for commuters to live farther from their jobs in the CBD) and communications (which allow back-office operations to move out of the CBD).
Additionally, recent research has sought to explain the polycentricity described in Joel Garreau's Edge City. Several explanations for polycentric expansion have been proposed and summarized in models that account for factors such as utility gains from lower average land rents and increasing (or constant returns) due to economies of agglomeration (Strange 2008).
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