Neoliberalism and neo-classical economics are often terms that are used interchangeably by various economists and financial writers, but actually, there are important differences between the two. We’ve had some requests from readers to make that distinction more obvious, so here goes…

Neo-classical economic theory puts ‘man’ as a rational human being at the heart of the economic system, extrapolating the functions of the economy based on optimised behaviour of rational, well-informed individuals trading with one in another in what is effectively a barter system (which as I’m sure we all know by now, never actually existed). It is based on the general equilibrium model pioneered by late 19th century economist Leon Walras, of the Lausanne School. Ironically, neoclassical economics guarantees full employment because it models a system with no frictions or inconveniences like trade unions, minimum wage laws or imperfect information. Also false.

It also guarantees that society will find an optimal allocation of resources on its own, so long as markets are competitive, and there are no externalities, like pollution, which go unaccounted for.

Neoclassicists are concerned about monopoly power, neoliberals are not. Neoclassicists believe it merits government intervention and regulation. Neoliberals, do not.

It is possible to be a neoclassical without being a neoliberal.

The most important thing to understand is that neoliberalism is a post-war political movement that grew out of the Mont Pelerin Society, a thought collective that formed a consensus not to put the market at the centre of the state, but to take it over completely. Its entire objective is to co-opt economics and subvert the public interest to suit the needs of powerful capitalist institutions and the politicians, economists, financiers, philosophers, bankers, think-tanks and media organisations that support them.

Neoliberalism is associated with laissez-faire economic liberalism and was pioneered by economist Milton Friedman & Friedrich Hayeck, but as the economic historian, Philip Mirowski points out, this is a deliberate deception to trick people into thinking it is concerned about market equilibrium.

It is the doctrine by which white collar crime has been allowed to prosper unprosecuted while governments of wealthy nations like the US and UK have abdicated their responsibility for employment, health care, education and the general well-being of the populations they are supposedly elected to serve. In their minds, government exists only to maintain property rights, defend capitalists and maintain price stability, (which apparently doesn’t count as intervention when it works in the favour of the wealthy).

We are what we eat, well, in free market terms anyway…


Whilst 90% of the US media (film, TV and radio) is controlled by only 6 companies.

Unlike neoclassicists and neoliberals, heterodox economists and other post-Keynesians, reject the notion of general equilibrium. They believe the economy evolves through non-equilibrium states over time. Heterodox economists believe governments need to introduce instability-thwarting mechanisms to stabilise the economy, maintain full employment, and retain social equity.

“Free-market economists may want you to believe that the correct boundaries of the market can be scientifically determined, but this is incorrect,” writes institutional economist, Ha-Joon Chang, in his book 23 Things They Don’t Tell You About Capitalism.

“If the boundaries of what you are studying cannot be scientifically determined, what you are doing is not a science,” writes the Cambridge University economist.

“Recognising that the boundaries of the market are ambiguous and cannot be determined in an objective way lets us realise that economics is not a science like physics or chemistry, but a political exercise.”

In other words, a strong economy requires constant time, attention, assessment, and when it is called for, intervention. The rules will not always be the same, nor the causes. But it helps to start with an understanding of the role and purpose of government spending and taxation.

Further Listening

Listen to this interview economic historian Philip Mirowski who delves into the further nuances of these economic mindsets.

Claire Connelly

Claire Connelly

Claire Connelly is the lead writer of Renegade Inc. An award-winning freelance journalist, speaker, and founder of subscription journalism experiment, Hello Humans.

Specialising in economics, technology and policy, Connelly is working on her first book due out in 2018.

With more than a decade of experience under her belt, Claire has written for leading publications including The Australian Financial Review, The Saturday Paper, ABC, SBS, Crikey, New Matilda, VICE & others. She is the co-host of The Week In Start-Ups Australia, and features regularly as a commentator on TV and radio shows including Radio National's Download This Show, ABC's The Drum, Ten's The Project, and more.
Claire Connelly

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15 thoughts on “Neoliberal v Neoclassical economics – what’s the difference?

  1. What were Hayek’s contributions to capital theory? Just wondering. I have never encountered a single person who speaks of “neoliberalism” (a term we ourselves never use to describe what we believe) who has read a single word of Hayek’s economic work. Or who even knows who Ludwig von Mises is.

    (Whenever the two economists mentioned are Milton Friedman and F.A. Hayek, I know I’m dealing with somebody who hasn’t read anything.)

    1. But of course you have read everything and know all, right Tom ? What specifically is wrong with this account ? If you can’t dispute anything within the piece why do you attempt to dismiss it out of hand by implying without a shred of evidence what someone has or hasn’t read ? How could you possibly know what someone has read or hasn’t ?

    2. What actually is “capital theory”, Tom. Why don’t you use the term ‘neoliberalism?
      Why do you think Claire hasn’t heard of Mises and why would it be important anyway? Mises and the Austrian School are part of the problem that the article refers to.

  2. “(Whenever the two economists mentioned are Milton Friedman and F.A. Hayek, I know I’m dealing with somebody who hasn’t read anything.)”

    I think you meant “dealing to”.

    And why so ignorant of Hayek on capital theory? 😉

  3. Sorry. I just don’t believe even smart people can manage markets. That’s the nature of markets: they are individual. If you haven’t read Von Mises or Hayek, you’re missing out on the thinking of two very smart people. It is hard for me to embrace the idea that – because a market doesn’t seem to function as a person might want it to – persons should be given authority to govern those markets in a way that suits them. That, in itself, distorts the market.

  4. I am responding to an article by you in today’s The Automatic Earth about the vengeance of capitalism. I could not get the response area to work so that is why I am coming to you this way.

    You write eloquently and I see the creation of increasing suffering due to a form of capitalism and class privilege in America and globally. I have read and listened to Keen, Hudson and Kelton. From my review they all approach the ability of a nation that controls their own currency as an ability to create an unlimited amount of money to use to reduce human suffering with no discussion of the ultimate end game if we continue to do so.

    There is a lot of suffering now and because of climate change, increasing usurping of jobs by technology and global resource depletion and more a lot more suffering may be coming our way.

    How much money are they (and you) thinking of creating?

    What are the implications of creating money at a much more rapid pace than we have been with no upper limits in sight?

    What are the upper limits of money creation? How would we know?

    Our present system of capitalism and privilege is like a drug. It feels good at the start but kills us in the end,

    I am fearful that an addiction to the unlimited or substantial and on going use of money created from thin air will do the same.

    What say you?

    PS: Please accept with compassion all the typos that are probably in this note.

    1. You keep forgetting that having the ability to create money also gives you the ability to destroy that same money. What is collected in tax revenue is destroyed. More money is issued to create infrastructure. The deficit in a country that can create it’s own currency is really just a ratio of what is collected(destroyed) and what is created(spent).
      Now ask yourself what happens when you quit destroying money and keep right on creating it…………

  5. great article Claire! love your articles at New Matilda by the way, and enjoyed your interview at Redacted Tonight and love Renegade INC at RT 🙂

  6. The aim of distinguishing neoclassical and neolilberal is of merit. The interview with Mirowski makes clear, however, that that are numerous strands of neoliberalism that overlap with each other, with some drawing on neoclassical arguments, and others having a different starting point. But it is not clear to me that all of them agree on the market fundamentalism, which is generally regarded as the defining characteristic of neoliberalism. Was Joseph Schumpeter a neoliberal? His ideas about entrepreneurship have probably done more to make monopoly respectable than the parallel work of von Mises. Schumpeter’s thought has entered the mainstream in the U.S. via Peter Drucker, who thought the modern corporation was the engine of all forms of human progress. In Germany, Ordo-liberalism was another form of neoliberalism that called for a strong state. Was this self-contradiction? What I find frustrating in most discussions on the Left of these thinkers is the inability or unwillingness to recognize the ***partial*** validity of their ideas. On the particular subject of government interference to protect against monopoly power, it was Gabriel Kolko, a socialist, who first showed in 1962 that Progressives were responsible for the national monopolies that emerged around 1900. Even now, progressives fail to comprehend the many ways in which regulation benefits big business and stifles small business. Designing regulations that do more social and environmental good than harm is much harder than most progressives seem to recognize. Analyzing the sociology and politics of neoliberal organizations, as Mirowski does, gets us no closer to finding way to create effective government programs that do not simultaneously feed the leviathan of an expansive state. I would very much like to know which heterodox economists are actually addressing the tough problems we face rather than defining the boundaries between neoclassical thought and their own domain..

  7. There are a very large number of errors in this piece. Fundamentally, what is described as “neoclassical economics” is actually just one model, Walras’ circa 1870 general equilibrium model. If one defines neoclassical economics as equivalent to that one model, then there has never been a single neoclassical economist, as absolutely no one limits attention to that one model.

    The body of research most actual economists would describe as “neoclassical economics” encompasses an enormous body of work which posits that some social phenomena can be understood as emergent results of individual, intentional behavior. That research includes literally thousands of papers studying the phenomena the author wrongly believes are simply excluded by assumption, such as unemployment, unions, minimum wage laws, and imperfect information. There is an entire field, Public Economics, devoted to the study of “the role and purpose of government spending and taxation.”

    The idea that government can and should “introduce instability-thwarting mechanisms to stabilize the economy, maintain full employment, and retain social equity” is also, contrary to the article’s assumptions, very much part of mainstream, neoclassical thought, and has been for almost a century.

    After having implicitly defined mainstream economics as solely the study of a single 1870 model, the article then also misrepresents heterodox economics. Notably, the Marxian economist (less than 1% of all economists) such as Chang do not “reject the notion of general equilibrium”. Marxian analysis is explicitly grounded in general equilibrium, both in Marx’s work and in modern neo-Marxian form, and can be expressed in the same analytical framework as the Walrasian model (see for example:

    The article is correct that neoliberalism is a strain of political thought, and not economics at all: they’re not even the same type of thing, much the same thing. That’s all the article ought to say—it gets everything about what economists think, and what neoclassical economics is, really, really wrong.

    Chris Auld
    Department of Economics
    University of Victoria

    1. Chris, your criticism is so misleading.

      Most though not all mainstream economics is neoclassical economics.

      Neoclassical economics is based on marginalism, or optimising behaviour, expected utility theory, and either implicit or explicit general equilibrium analysis. The economy, in the absence of frictions, would behave like a stable equilibrium system. In a macroeconomic sense, this is the basis of all versions of the neoclassical synthesis, including second generation dynamic stochastic general equilibrium models.

      These models all have Walrasian and Wicksellian roots. They all assume optimising behaviour. They always adopt the ergodic hypothesis and these days adopt rational expectations formation. Not only that, they have all been constructed in defiance of what we know about the history and nature of money; they all ignore ontological uncertainty, in the Keynesian sense; they all exclude genuinely endogenous financial instability and crisis; they are biased towards an essentially technological explanation of income distribution; they all incorporate a natural or non-accelerating inflation rate of unemployment; they all exhibit long run money neutrality; they all incorporate an efficient markets approach to financial markets.

      There are of course elements of what some would regard these days as mainstream economics which don’t fit under the neoclassical banner. However, for the most part, mainstream = neoclassicism.

      The greatest divide between neoclassical economics and genuine (i.e. not ‘new’) institutional economics, is the F-twist of Milton Friedman – the notion that unrealistic axiomatic foundations in some sense don’t matter, and neither does an approach which does not naturally incorporate realistic institutions.

      Of course, economists using a neoclassical frame have things to say about unemployment, minimum wages, etc. But, as Hyman Minsky put it, “The game of policy making is rigged; the theory used determines the questions that are asked and the options that are presented. The prince is constrained by the theory of his intellectuals.”

      You accuse the author of errors, and I think you are ungenerous – and, more importantly – incorrect. My advice to you is to read Steve Keen’s best-seller ‘Debunking Economics’. You could even read my ‘Economics for Sustainable Prosperity’. If you read these two books, you will be much more aware of the limitations of neoclassical economics, and the rich insights available from the many economists who have worked, and who are working today, outside the neoclassical frame.

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