PAKISTAN BUSINESS REVIEW - Institute of Business Management

Refreshing Incoherence in Neoclassical Economic Theory
Research
to appear in this formulation of interest rate theory. The interest
rate appears to be purely a technocratic notion independent of
all considerations of pricing. It is still open to debate whether
neoclassical long-run equilibrium theories can survive without a
centralized capital market equating investment and savings or
the demand and supply of capital. It is also a subject of discussion
what, if anything, has been abandoned in such models. Capital
controversy apparently ended as a theoretical defeat of
neoclassical economics, at least to its critics.
Underneath the apparently technical debate of the
Capital Controversy lies the clash of ideological and political
views of the two combating groups regarding the functioning of
market capitalist system. The Cambridge-England critics of
neoclassical economics regard market capitalism as an inherently
antagonistic social order where different classes (such as workers
and managers of capital) are trying to dominate each other. They
argue that the distribution of surplus value cannot be understood
independent of the political institutional structures of the market
capitalist system. These critics, having rejected the marginal
productivity theory of income distribution, argue ‘for a return to
the Classical method of analysis in which pricing is an aspect of
distribution’ instead of ‘distribution being but an aspect of pricing’
(Harcourt: 1972). The Cambridge critics, following Mill,
distinguished between the analysis of production and that of
distribution. They reinforced Mill’s view that: ‘the laws and
conditions of the production of wealth partake of the character of
physical truths. There is nothing optional or arbitrary in them’,
whereas, ‘It is not so with the Distribution of wealth. That is a
matter of human institution(s) solely’.
Neoclassical economists, on the other hand, have some
other beliefs. They struggle to show that capitalism is
fundamentally characterized by harmony where each individual
makes voluntary choices as a market participant—this is the
reason they employ the ‘equilibrium methodology’ to analyze
the market system. To them, the basic unit of a market capitalist
system is ‘a self-interested individual’ and not ‘social classes’.
Hence, in the neoclassical theory of income distribution there is
no room for the analysis of ‘class-struggle’. Their theory pretends
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