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Camera Shy. Marginalist Hall of Fame: Calculus Rules. Johann Heinrich von Thünen 1780-1850. Antoine Augustin Cournot 1801-1877. Hermann Heinrich Gossen 1810-1858. William Stanley Jevons, 1835-1882. Léon Walras, 1834-1910. Marginalist Hall of Fame: Neoclassical Economics. - PowerPoint PPT Presentation
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Marginalist Hall of Fame: Calculus Rules
Johann Heinrich von Thünen 1780-1850
Antoine Augustin Cournot1801-1877
CameraShy
Hermann Heinrich Gossen1810-1858
William Stanley Jevons, 1835-1882 Léon Walras, 1834-1910
Marginalist Hall of Fame: Neoclassical Economics
John Bates Clark1847-1938
Francis Ysidro Edgeworth1845-1926
Vilfredo Pareto1848-1923
Knut Wicksell1851-1926
Philip H. Wicksteed1844-1927
Marginalist Hall of Fame: Austrian School
Carl Menger, 1841-1921
Eugen von Böhm-Bawerk, 1851-1914 Friedrich von Wieser, 1851-1926
The Marginalist Revolution: A Short Tour• Johann Heinrich von Thünen, The Isolated State with respect
to agriculture and the national economy, 1826.• Explicit optimization: agricultural production/intensity as function of
distance• Land rent declines with distance from “city”
• August Cournot, Researches into the mathematical principle of the theory of wealth, 1838.
• Profit maximization in competition, monopoly, and duopoly: MR = MC• Precursor of non-cooperative game theory:
Duopolist acts in anticipation of opponent’s action reaction curves equilibrium between monopoly and competition
• Hermann Heinrich Gossen, Development of the laws of human interaction, 1854.
• Diminishing marginal utility allocation of resources, including time• Equilibrium where “the last atom of money creates the same
pleasure in each pleasurable use.”» Precursor of Jevons, Walras, Menger
The Marginalist Revolution: The Heavy Hitters• William Stanley Jevons, The Theory of Political Economy, 1871.
• “to maximize pleasure is the problem of economics”• Constrained optimization in the face of diminishing marginal utility
(the final degree of utility) relative prices– MU decreases with quantity (Gossen’s First Law)
– Equilibrium: MUx/px = MUy/py = MUz/pz (Gossen’s Second Law)
• Léon Walras, Elements of Pure Economics,1874,1877• General Equilibrium: Cantillon/Quesnay interdependencies• Tâtonnement: “Groping” for equilibrium
» “Auctioneer” announces and revises prices until markets clear
» Quantities demanded and supplied equate relative marginal utilities to relative prices: MUx/MUy = px/py (Gossen’s Second Law)
• Free competition maximum welfare, given factor endowments» Thems that gots gits
The Marginalist Revolution: Contributors• Vilfredo Pareto, Manuel d’économie politique, 1906, 1909
• Walras explained
• Pareto’s Law of Income Distribution (people, not classes, get shares)» Log (Fraction w/income >= x) = - a Log x
• Ordinal, not cardinal, utility for individual can’t compare across individuals
• Pareto efficiencyPareto efficiency: if someone gains and no one loses, do it.
• Francis Ysirdo Edgeworth, Mathematical Psychics, 1881• Indifference curves Edgeworth Box Contract Curves
• Marginal Productivity Theory of DistributionUnder competition, Wage = Marginal Value Productlabor = P x MPPlabor
– John Bates Clark … championed principle: to each according to his contribution (given his endowments) Capitalism Rocks
– Phillip Wicksteed … established product exhaustion no exploitation• Wage Bill + Profit Bill = Value of Output
• wL + rK = (P * MPPLabor ) * L + (r * MPPKapital ) * K = P
– Knut Wicksell …did it all first
The Marginalist Revolution: The Austrian School• Carl Menger,Carl Menger, Principles of Economics (Grundsätze), 1871
• Value established by loss principle: satisfaction of last unit• Realistic decisions about lumpy alternatives, not marginal
adjustments … calculus not needed/welcome in Vienna
• Eugen von Böhm-Bawerk, Capital and Interest, 1884• Roundaboutness of production
interest rate without reference to time preference• Causal vs. mathematical analysis: debates with Wicksell and Fisher
» “His denunciation of mathematics became a curse that condemned his followers to provincialism.” Jürg Niehans
• Friedrich von Wieser, On the Origin and Principle Laws of Economic Value, 1884
• Cost = Forgone utility
• Marginal utility:Jevon’s “final degree of utility” Grenznutzen MU
• Austrian methodology:• Step-by-step human action, not equilibrium of supply and demand
• Market as information processor price signals
• Student and teacher at Cambridge• Majored in math
• Married Mary Paley, an economist• Teacher of teachers: Pigou, Keynes
• …cool heads but warm hearts
• Insecure in his writings: held back publication• Principles of Economics, 1890 (1st edition), 1920 (8th edition)
• Neoclassical economicsNeoclassical economics: marginalist – mathematical framework
• Written for intelligent layman: graphs in footnotes; math in appendices
• Account for the concrete: biological, not mechanical/mathematical, analogies
Alfred Marshall, 1842-1924
From Keynes’ eulogy:[An economist] must be a mathematician, historian, statesman, philosopher – in somedegree. He must understand symbols and speak in words.
Keynes on Jevons – Marshall priority: [Jevon’s final utility] livesmerely in the tenuous world of brightideas … Jevons saw the kettle boil and cried out with the delighted voice of a child; Marshall too had seen the kettle boil and sat down silently to build an engine.
Classical – Neoclassical Economics: An AsideClassical Economics
• Smith – Mill?• Labor theory of value• Malthusian population• Say’s law• Quantity theory of money
• Physiocrats – Marx?Include RicardoRicardo/Malthus
Concern: consequences of consequences of capitalist accumulationcapitalist accumulation
First Principles:• Price independent of demand
» Labor theory of value
• Natural (long-run) prices equalize rates of profit
• Real wage = “subsistence”» Wage fund – Iron Law
Neoclassical Economics• Marshallian economics
• Gossen/Jevons/Edgeworth• MicroeconomicsMicroeconomics
Concern: allocationallocation of scarce resources
First Principles:• Decision at margin
• Prices determined by interaction of supply (costs) and demand (utilities)
• Distribution accords with marginal productivities
Marshall’s Principles of Economics: Themes and Contents• Economics … a study of mankind in the ordinary business of life.• Partial equilibrium analysis … representative agents and firms
• Recognition of Walras’ general equilibrium framework• But focus on specific markets
» Supply (costs) interact with demand (utilities)» Ceteris paribus conservative tilt: “Nature does not leap” (Marshall)
• Supply and demand curvesSupply and demand curves (the Marshallian cross)• Value determined by both blades of the scissors
• Consumer and producer surplus• Reciprocal demand curves in trade• Elasticity of demand
• Price decline increase in real income• Anticipates income and substitution effect analysis
• Short-run and long-run supply – fixed and variable costs• Elasticity of supply increases with time
» Value in short-run depends on demand» Value in long-run depends on supply
• Internal economies difficulties for competitive market paradigm• External economies (of industry scale)
Arthur Cecil Pigou
1877 - 1959
• Economics of Welfare, 1920 … Reform, not Revolution• Economies and diseconomies of production• Divergence between private and social costs and benefits Role for government
» Make railroads liable for damage sparks do to forests» Subsidize smokeless smokestacks» Fine polluters
Adherent to Say’s Law“Classical” foil for Keynes in General TheoryPigou response:
Pigou effect = “Real Balance EffectP down (M/P) up
Automatic adjustment to full employment (?!?)