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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 economists and beyond

Neoclassical Economistsand Beyond

ECON 205W

Summer 2006

Prof. Cunningham

neclassical school
Neclassical School
  • World view
  • Values
  • Goals
  • Assumptions
  • Methodology
  • At the core
  • Concepts developed
alfred marshall 1842 1924
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
marshall 2
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.
marshall 3
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.
marshall 4
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.
marshall 5
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.
irving fisher 1867 1947
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
fisher 2
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.
ralph george hawtrey 1879 1975
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.
swedish school
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
knut wicksell 1851 1926
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
wicksell 2
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
wicksell 3
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
joan robinson 1903 83
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.
joan robinson 2
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.
joan robinson 3
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.
joan robinson 4
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.
joan robinson 5
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.
piero sraffa 1898 1983
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.
sraffa 2
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.
nicholas kaldor 1908 86
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
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