Economic Growth and Change in a Material World
2. Micro-foundations of economics 2.1 THE STANDARD NEOCLASSICAL ECONOMIC MODEL AND SOLOW’S ‘TRINITY’ Economics is only a part (the most quantiﬁable part) of social science. Even so it is enormously complex. To theorize it is necessary to simplify. Neoclassical economics, which is the creed taught in most universities and textbooks, is a reduced version of the generic social science model, as described brieﬂy in the Introduction. In particular, the description of ‘economic man’ is essentially a caricature. To be fair, this is increasingly recognized within the profession, and each of the various simplifying restrictions has been relaxed at one time or another in the various sub-disciplines of economics. Two standard assumptions that permeate neoclassical economics are (1) declining marginal value (utility) of any form of wealth, (2) declining marginal returns to labor, or investment, as applied to any given activity. These two assumptions are almost two sides of the same coin, except that declining marginal utility is an assumption about individual human behavior while declining returns is an assumption about social processes. These characteristics are not universal, as it happens. There are important exceptions.1 Cultural goods may provide increasing returns, for instance. We discuss non-declining (increasing) returns mainly in the context of technological processes, where the phenomenon is quite important. In fact, increasing returns, especially to knowledge, has been offered as a possible explanation of economic growth (Romer 1986, 1987; Lucas 1988). A third assumption that underlies much of standard economic theory, but which we reject, is that...
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