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

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Marginalist Revolution (Prior to Marshall)

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marginalist revolution prior to marshall

Marginalist Revolution(Prior to Marshall)


Summer 2006

Prof. Cunningham

identifying elements
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.
related issues
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.
the method of the marginalists
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.
additional considerations
Additional Considerations
  • Who benefits?
  • Implications?
  • Longevity of the theory?
forerunners of neoclassicals
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.
augustin cournot 1801 77
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
cournot 2
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
johann heinrich von th nen 1783 1850
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.
hermann heinrich gossen 1810 58
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.
the revolution
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)
revolution 2
Revolution (2)
  • Contributions of the three
  • Why were the able to promote the new theory now?
  • What was their influence?
william stanley jevons 1835 82
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
francis ysidro edgeworth 1845 1926
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
philip h wicksteed 1844 1927
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
wicksteed 2
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.
carl menger 1840 1921
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”.
menger 2
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
friedrich von wieser 1851 1926 eugen von bohm bawerk 1851 1914
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.