Marginalist Revolution (Prior to Marshall)

1. Marginalist Revolution(Prior to Marshall) ECON 205W Summer 2006 Prof. Cunningham

2. Identifying Elements • Applications of calculus, physics, engineering to economic analysis. • Labor theory of value is disproved. • Marginal principle provides a unifying framework. • Less emphasis on growth. • Focus on optimization. • Equilibrium method. • Mathematical methods and focus on economic science.

3. Related Issues • Was it a revolution? • What took so long? • Change in method. • Resistance by orthodoxy. • Three stages in the development of the marginalist principle.

4. The Method of the Marginalists • Marginal principle. • Microeconomic emphasis. • Abstract, deductive method. • Assumption of perfect competition. • Less emphasis on supply, more on demand in price setting. • Subjective valuation. • Equilibrium approach. • Equal footing for all factors of production. • Rational agents. • Minimal government involvement.

5. Additional Considerations • Who benefits? • Implications? • Longevity of the theory?

6. Forerunners of neoclassicals • 1814, Malthus mentions that differential calculus might be useful in economics. • 1824, Perronet Thompson became the first writer in English economist to use the calculus in economic analysis. • 1815, Georg von Buquoy applied the calculus to an agricultural problem. • 1839, Charles Ellet used the calculus to determine an optimal tariff.

7. Augustin Cournot (1801-77) • Background • 1838, Researches into the Mathematical Principles of the Theory of Wealth • First systematic development of the application of the marginal principle to the firm • Math. Econ of the “pure” type • Approach was consistent with French Rationalism: a theory that reason is in itself a source of knowledge superior to and independent of sense perceptions

8. Cournot (2) • Supply and Demand • Hypothesis: each person seeks the greatest value from his/her property or labor. • Theory of monopoly, builds on this until he reaches the competitive case. • Theory of the firm

9. Johann Heinrich von Thünen(1783-1850) • Background • The Isolated State • Sought empirical verification for certain principles he had deduced from observation. • Natural wage = • Isolated State = ideal closed economy • Developed principles of variable proportion and substitution • Widely acclaimed during his life.

10. Hermann Heinrich Gossen(1810-58) • Theory of Consumption • Frustrated by the neglect of others to his work. • 1854, Development of the Laws of Human Relationships and of the Rules to be Derived Therefrom for Human Action. • Gossen’s Two Laws. • Contributions largely unrecognized until 1878 when Jevons pointed out his work to Walras.

11. The “Revolution” • Almost simultaneous publication in the 1870s of books by: • William Stanley Jevons (1871), The Theory of Political Economy (England) • Carl Menger (1871), Principles of Economics (Vienna, Austria) • Leon Walras (1874-77), Elements of Pure Economics (Switzerland)

12. Revolution (2) • Contributions of the three • Why were the able to promote the new theory now? • What was their influence?

13. William Stanley Jevons (1835-82) • Background • 1971, Principles of Political Economy • Not aware of the work of Cournot, Thunen, or Gossen • Extensive use of utility theory • On the labor theory of value • Empirics • 1865, The Coal Question • 1884, Investigations in Currency and Finance • Includes a discussion of business cycles

14. Francis Ysidro Edgeworth(1845-1926) • Editor of the Economic Journal • Wrote many articles and a monograph entitled Mathematical Psychics (1881) • Sought to apply mathematics to the social sciences • Expanded Jevons notions on the utility function • Introduced indifference curves and the Edgeworth box

15. Philip H. Wicksteed(1844-1927) • Developed a theory of marginal productivity and distribution. • He alone asked whether and under what conditions the total product would be exhausted by the marginal products • Answer: Euler’s Theorem

16. Wicksteed (2) • Argued that exhaustion of the marginal product requires a linear homogeneous production function. • Also argued that this requires constant returns to scale. • 1894, Essay on the coordination of the Laws of Distribution • Not a fan of Marshall’s supply-demand apparatus.

17. Carl Menger (1840-1921) • Background • Had a substantial following, and came to be considered the leader of the Austrian School. • Opposed by the German Historical School. • Substantial legal training led him to make careful definitions. • Unlike Jevons and others, related utility maximization to “needs” not “pleasure”.

18. Menger (2) • Theory of Imputation (Zurechnung) • Value is not inherent in goods, but is imputed to them. • Value = exchange value. • Monetary Theory • 1883, Problems of Economics and Sociology • Defense of Menger’s approach to economics

19. Friedrich von Wieser (1851-1926)Eugen von Bohm-Bawerk (1851-1914) • Later Austrians—von Hayek, von Mises, Schumpeter—were students of these two. • Bohm-Bawerk always aware of the “cutting edge” of thinking, while von Wieser was completely attached from his time. • Both argued strongly against socialism.