Transcript 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.

Marginalist Revolution
(Prior to Marshall)
ECON 205W
Summer 2006
Prof. Cunningham
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Identifying Elements
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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.
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Related Issues
Was it a revolution?
 What took so long?
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Change in method.
 Resistance by orthodoxy.
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Three stages in the development of
the marginalist principle.
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The Method of the Marginalists
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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.
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Additional Considerations
Who benefits?
 Implications?
 Longevity of the theory?
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Forerunners of neoclassicals
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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.
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Augustin Cournot
(1801-77)
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Background
1838, Researches into the Mathematical
Principles of the Theory of Wealth
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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
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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
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Johann Heinrich von Thünen
(1783-1850)
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Background
The Isolated State
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Sought empirical verification for certain
principles he had deduced from observation.
Natural wage = a p
Isolated State = ideal closed economy
Developed principles of variable
proportion and substitution
Widely acclaimed during his life.
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Hermann Heinrich Gossen
(1810-58)
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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.
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The “Revolution”
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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)
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Revolution (2)
Contributions of the three
 Why were the able to promote the
new theory now?
 What was their influence?
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William Stanley Jevons
(1835-82)
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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
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Includes a discussion of business cycles
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Francis Ysidro Edgeworth
(1845-1926)
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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
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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
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Answer: Euler’s Theorem
TP   xi MPxi
i
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Wicksteed (2)
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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.
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Carl Menger (1840-1921)
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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”.
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Menger (2)
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Theory of Imputation (Zurechnung)
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Value is not inherent in goods, but is
imputed to them.
Value = exchange value.
Monetary Theory
1883, Problems of Economics and
Sociology
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Defense of Menger’s approach to economics
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Friedrich von Wieser (1851-1926)
Eugen von Bohm-Bawerk (1851-1914)
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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.
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