The Mathematical Mistakes of Neoclassical Theory and its Reformation
58 Pages Posted: 29 Sep 2020 Last revised: 19 Oct 2021
Date Written: September 17, 2020
This paper completes my previous paper "A Revision of the Theory of Perfect Competition and of Value" with a more global analysis of the mathematical mistakes of the neoclassical theory. During the second half of the twentieth century Microeconomic theory moved increasingly away from price theory, which was gradually displaced by more modern trends such as game theory, behavioral-empirical-experimental economics, industrial organization, neuroeconomics, heterodox economics, etc. This was due to serious shortcomings and (mathematical) mistakes of the traditional theory that is based on Neoclassical economics. The most obvious of those mistakes is that the equilibrium point does not maximize the profits of firms, as they are maximized at the intersection of total supply (marginal cost according to neoclassicals) with the marginal revenue from the total demand and not with the total demand itself as neoclassicals argue. The correction of those mistakes entails dramatic changes in the Neoclassical theory and its fundamental outcomes, concerning perfect competition, price determination, value theory, income distribution, social welfare, and other major fields of economics. This reformation results also in an integrated theory in which market works, regardless of the number of firms, i.e. from monopoly to perfect competition. But most importantly, by this reformation traditional price theory regains its self-efficiency, prestige, and dominant position in economics.
Keywords: individual demand curves for the firms, price determination, equilibrium at firm and at market level, aggregate industry profit maximization, number of firms in perfect competition, supply curve, monopolistic nature of perfect competition, social welfare, Pareto efficiency
JEL Classification: B12, B13, B21, D21, D41, D42, D43, D46, D50, D60, E10, E13, E30
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