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Neoclassical Economists and Beyond. ECON 205W Summer 2006 Prof. Cunningham. Neclassical School. World view Values Goals Assumptions Methodology At the core Concepts developed. Alfred Marshall (1842-1924). Background 23 years at Cambridge

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Neoclassical Economistsand Beyond


Summer 2006

Prof. Cunningham

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Neclassical School

  • World view

  • Values

  • Goals

  • Assumptions

  • Methodology

  • At the core

  • Concepts developed

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Alfred Marshall (1842-1924)

  • Background

  • 23 years at Cambridge

  • Established the Royal Economic Society and was its first president

  • Founded the Economic Journal

  • Founded the Cambridge School of Economics

  • Introduced the diagrammatic methodology to economics

  • Legacy through Pigou, Robinson, Keynes

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Marshall (2)

  • Assumed free competition, mobility of productive resources, rational pursuit of economic objectives.

  • Tried to make his theoretical models realistic.

  • Built on Classical Theory.

    • “Natura Non Facit Saltum”

  • Kept utility theory in the background

  • Expanded the concepts of supply and demand

  • Focused more on the firm than on the consumer or GE.

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Marshall (3)

  • Usual interpretation of his work is as a bridge from the classics to modern economics. –Marshall rejected that view.

  • Favored partial equilibrium over general equilibrium

    • Ceteris Paribus

  • 1890, Principles of Economics with Mary Paley. 8 editions, last in 1920.

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Marshall (4)

  • Demand Theory

    • Q = f(P)

    • Friedman on Marshall’s demand curve

    • Considers income and substitution effects

  • Identifies different kinds of industries—increasing cost, decreasing cost, increasing returns to scale, decreasing, etc.

  • Footnote on imperfect competition.

  • Monetary Theory: Cambridge tradition.

    • M = kPy

  • Develops concepts of economic time—market run (immediate present), short-run, long-run

  • Theory of quasi-rents.

  • Internal and external economies.

  • Tendency to focus on a single industry.

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Marshall (5)

  • On labor and wages

    • Wages are not determined by marginal productivity alone, but also by supply and demand for labor.

  • Four laws of Derived Demand

    • Cet. Par., the greater the substitutability of other factors for labor, the greater will be the elasticity of demand for labor.

    • Cet. Par., the greater the price elasticity of product demand, the greater will be the elasticity of labor demand.

    • Cet. Par., the larger the proportion of total production costs accounted for by labor, the greater will be the elasticity of labor demand.

    • Cet. Par., the greater the elasticity of the supply of other inputs, the greater the elasticity of demand for labor.

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Irving Fisher (1867-1947)

  • 1911, Purchasing Power of Money

  • Quantity Theory

    • No micro foundations, only macro

    • Long run

    • MV=PT

    • In percentage form p% = m% + v% - t%

    • For long-run stability, p% = 0

    • Therefore, m% = t% - v%

    • V%  0 over time, so m% = t%

    • To convert to income (GDP), T = cy

    • P% = y% for price stability

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Fisher (2)

  • Very Monetarist

    • Transmission mechanism

    • Creates detail in the equation of exchange by including different forms of money with separate velocities.

    • Make currency redeemable for whatever quantity of gold that would represent constant purchasing power. I.e., the exchange rate for gold would vary.

    • Believed that business cycles were caused by erratic changes in the money supply.

  • Saw debt as the cause of deflation in the Great Depression.

    • Recommended requiring 100% reserves on deposits.

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Ralph George Hawtrey(1879-1975)

  • British treasure official

  • Develops a theory of business cycles caused by fluctuations in credit.

    • Changes in the money supply cause interest rate shifts that exert powerful effects on wholesale merchants.

  • Suggested discretionary policy through OMOs, changes in the re-discount rate, and variations in the reserve requirements of commercial banks.

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Swedish School

  • Most prominent thinker was Knut Wicksell

  • Keynes draws heavily on Wicksell

    • Natural rate of interest

    • Money rate of interest

  • Anticipates Hicks and Robinson

  • Common features of the Swedes

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Knut Wicksell (1851-1926)

  • Background

  • Principal works available only in German until 1930s

  • Exponent of pure theory

  • Examined a wide variety of social and political problems

  • Degrees in Math and Law

    • Need Law degree to get econ. prof. job

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Wicksell (2)

  • 1900 (age 49) joins faculty of Univ. of Lund

  • 1893, Value, Capital and Rent, translated into English 1954

    • Submitted to Upsalla Univ as dissertation, but not accepted.

  • 1896, Theory of Incidence of Taxation, accepted as dissertation.

  • 1898, Interest and Prices (English, 1934)

  • Lectures in Political Economy (two vols. 1901, 1906; English 1934-35)

  • Superior mathematician

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Wicksell (3)

  • Contributions were mostly highly technical refinements

  • Malthusian

  • Opposed to Socialism

  • Monetary Theory

    • Not purely a quantity theorist

    • Anticipates Keynes in many areas

    • Discusses imperfect competition, sticky prices

    • Natural and Bank rates of interest

    • Monetary equilibrium

    • Work extended by Ohlin, Myrdahl, Lindahl

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Joan Robinson (1903-83)

  • Background

  • Received her degree in 1921, the first year that it had been allowed for women

  • After Joan Robinson’s publication of The Economics of Imperfect Competition, Mary Paley Marshall wrote to Joan “thank you for helping to lift off the reproach cast on the economic women.”

    • Joan never view herself as a feminist.

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Joan Robinson (2)

  • 1932, pamphlet “Economics is a Serious Subject”

    • Dedication “To JMK. To the optimist who showed that optimism can be justified.”

  • 1934, a mother, an author of many important articles and the book Economics of Perfect Competition (1933), she was made a “probationary faculty assistant lecturer in economics” at Cambridge.

  • The “circus” was meeting around Keynes. Close collaboration on many topics.

  • Cambridge, 1930, lunch: Richard Kahn and the Robinsons.

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Joan Robinson (3)

  • With regard to his Banking, Policy, and the Price Level, Dennis Robertson write of Keynes:“so much of chapters V and VI are due to Keynes that neither of us knows how much is Keynes and how much is Robertson.”

  • Keynes wrote that Kahn put in weeks going over his manuscripts.

  • According to Paul Samuelson,

    • Kahn may have contributed extensively to the geometry and algebra in Joan Robinson’s book.

    • Kahn may have written parts of Keynes’ General Theory.

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Joan Robinson (4)

  • Imperfect Competition: the book

  • Shackle argues that Robinson essentially provided for the “veritable destruction” of traditional microeconomics.

  • Introduced monopsony. Argued for trade unions or trade board to regulate.

  • Challenged marginal productivity theory.

  • Joan thought she had initiated a revolution.

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Joan Robinson (5)

  • Chamberlain

    • Joan sent him the book in 1933, same year that his book was published.

    • Thought Joan had stolen his work, possibly even lifted whole sentences and paragraphs.

    • He had been working on the theory for about 10 years.

    • The key to monopolistic competition is product differentiation.

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Piero Sraffa (1898-1983)

  • Background

  • 1927, moves to Cambridge, joins Keynes’ “circus”.

  • 1931, Prices and Production.

  • Wrote Works and Correspondence of David Ricardo.

  • 1960, Production of Commodities by Means of Commodities: A Prelude to a Critique of Economic Theory.

    • Neo-Ricardian Theory.

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Sraffa (2)

  • 1960, Production of Commodities

    • Attempts to “purify” Keynesian theory of any residual marginal elements.

    • Distinguishes changes in relative prices resulting from distributional changes vs. changes in production techniques.

    • Leads to Post Keynesian capital controversies.

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Nicholas Kaldor (1908-86)

  • Background

  • An Expenditure Tax (1955)

  • The Scourge of Monetarism (1982)

  • Completely opposed to orthodox price theory based on marginal products and the theory of income determination based on IS-LM.

  • Theory of Post Keynesian Growth