Marginalist Revolution 1871

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Marginalist Revolution … 1871

• Marx (1868) BIG Picture … Trajectory of
  capitalism
• Capitalism self-destructs
• 1871 Jevons, Walras, Menger
• Utility, not cost-of-production
• Allocation/Optimization
• Precursors von Thünen, Cournot, GOSSEN
• Precursors to precursors
• Aristotle utility ? value
• Bernoulli (1738) diminishing MU of income
• Reiterated by Bentham
• Galiani (1751) Value Utility x Scarcity
  (solves diamondwater paradox)
• Condillac (1776) Industry commerce ? utility
  (not just agriculture)
• Say (1803) Entrepreneurs concern with consumer
  wants ? utility
• Senior (1834) diminishing (marginal) utility in
  consumption as well as diminishing returns in
  production
• Lloyd (1834) Cardinal utility ? MU

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Marginalist Hall of Fame Calculus Rules
Camera Shy
Johann Heinrich von Thünen  1780-1850
Antoine Augustin Cournot 1801-1877
Hermann Heinrich Gossen 1810-1858
William Stanley Jevons, 1835-1882
Léon Walras, 1834-1910
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Marginalist Hall of Fame Neoclassical Economics
John Bates Clark 1847-1938
Vilfredo Pareto 1848-1923
Francis Ysidro Edgeworth 1845-1926
Knut Wicksell 1851-1926
Philip H. Wicksteed 1844-1927
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The Marginalist Revolution A Short Tour

• Johann Heinrich von Thünen, The Isolated State
  with respect to agriculture and the national
  economy, 1826.
• Explicit optimization agricultural
  production/intensity as function of distance ?
  Spatial economics
• Land rent declines with distance from city
• If all workers paid MPL of last worker ?
  exploitation by employer
• Just wage SQRT(a.p.) … between MPL and APL
• August Cournot, Researches into the mathematical
  principle of the theory of wealth, 1838.
• Profit maximization in competition, monopoly, and
  duopoly MR MC
• Precursor of non-cooperative game theory
• Duopolist acts in anticipation of opponents
  action
• ? reaction curves? equilibrium between
  monopoly and competition

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• Hermann Heinrich Gossen, Development of the laws
  of human interaction, 1854.
• Obscure amateur … Acknowledged by Jevons
• Gossens 1st Law
• Diminishing marginal utility ? allocation of
  resources, including time
• Gossens 2nd Law
• Equilibrium where the last atom of money creates
  the same pleasure in each pleasurable use.
• MUx/Px MUy/Py

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The Marginalist Revolution The Heavy Hitters

• William Stanley Jevons, The Theory of Political
  Economy, 1871.
• to maximize pleasure is the problem of
  economics
• Constrained optimization in the face of
  diminishing marginal utility (the final degree of
  utility) ? relative prices
• MU decreases with quantity (Gossens First Law)
• Equilibrium MUx/px MUy/py MUz/pz (Gossens
  Second Law)
• Léon Walras, Elements of Pure Economics,1874,1877
• General Equilibrium Cantillon/Quesnay
  interdependencies
• Tâtonnement Groping for equilibrium
• Auctioneer announces and revises prices until
  markets clear
• Quantities demanded and supplied equate relative
  marginal utilities to relative prices MUx/MUy
  px/py (Gossens Second Law)
• Free competition ? maximum welfare, given factor
  endowments
• Thems that gots gits

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The Marginalist Revolution Contributors

• Vilfredo Pareto, Manuel déconomie politique,
  1906, 1909
• Walras explained
• Paretos Law of Income Distribution (people, not
  classes, get shares)
• Log (Fraction w/income gt x) - a Log x
• Ordinal, not cardinal, utility for individual ?
  cant compare across individuals
• Pareto efficiency if someone gains and no one
  loses, do it.
• Francis Ysirdo Edgeworth, Mathematical Psychics,
  1881
• Indifference curves ? Edgeworth Box ? Contract
  Curves
• Marginal Productivity Theory of Distribution
• Under competition, Wage Marginal Value
  Productlabor P x MPPlabor
• John Bates Clark … championed principle to each
  according to his contribution (given his
  endowments) ? Capitalism Rocks
• Phillip Wicksteed … established product
  exhaustion ? no exploitation
• Wage Bill Profit Bill Value of Output
• wL rK (P MPPLabor ) L (r MPPKapital )
  K P
• Knut Wicksell …did it all first

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Marginalist Hall of Fame Austrian School
Carl Menger, 1841-1921
Eugen von Böhm-Bawerk, 1851-1914
Friedrich von Wieser, 1851-1926
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The Marginalist Revolution The Austrian School

• Carl Menger, Principles of Economics
  (Grundsätze), 1871
• Civil servant, professor, tutor of Crown Prince,
  appointed to Herrenhaus
• Value established by loss principle satisfaction
  of last unit
• Given supply, where does price settle? No S D
  adjustments
• Realistic decisions about lumpy alternatives, not
  marginal adjustments
• Causal analysis … calculus not needed/welcome
  in Vienna
• Eugen von Böhm-Bawerk, Capital and Interest, 1884
• Civil servant, Professor, Finance Ministry,
  Minister, Professor
• Roundaboutness of production ? increased
  productivity
• ? interest rate without reference to time
  preference
• Causal vs. mathematical analysis debates with
  Wicksell and Fisher
• Interest jointly determined with output, wages
  and capital intensity, the simultaneous equations
  that Böhm-Bawerk rejected but implicitly used
• His denunciation of mathematics became a curse
  that condemned his followers to provincialism.
  Jürg Niehans

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The Marginalist Revolution The Austrian School

• Friedrich von Wieser, On the Origin and Principle
  Laws of Economic Value, 1884
• Cost Forgone utility
• Values of goods in equilibrium Utility
  Technology
• Essentially demand and supply, but awkwardly
  avoided
• Joint determination of outputs and shadow prices,
  obscured by causal analysis
• Marginal utility Jevons final degree of
  utility ? Grenznutzen ? MU
• Austrian methodology
• Step-by-step human action, not equilibrium of
  supply and demand
• Market as information processor ? price signals
• von Mises victory over Lange economic planning
  could never work

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• Student and teacher at Cambridge
• Majored in math
• Married Mary Paley, an economist
• Teacher of teachers Pigou, Keynes
• …cool heads but warm hearts
• Insecure in his writings held back publication
• Principles of Economics, 1890 (1st edition), 1920
  (8th edition)
• Neoclassical economics marginalist
  mathematical framework
• Written for intelligent layman graphs in
  footnotes math in appendices
• Account for the concrete biological, not
  mechanical/mathematical, analogies

From Keynes eulogy An economist must be a
mathematician, historian, statesman, philosopher
in some degree. He must understand symbols and
speak in words.
Keynes on Jevons Marshall priority Jevons
final utility lives merely in the tenuous world
of bright ideas … Jevons saw the kettle boil and
cried out with the delighted voice of a child
Marshall too had seen the kettle boil and sat
down silently to build an engine.
Alfred Marshall, 1842-1924
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Marshalls Principles of Economics Themes and
Contents

• Economics … a study of mankind in the ordinary
  business of life.
• Partial equilibrium analysis … representative
  agents and firms
• Recognition of Walras general equilibrium
  framework
• But focus on specific markets
• Supply (costs) interact with demand (utilities)
• Ceteris paribus ? conservative tilt Nature does
  not leap (Marshall)
• Supply and demand curves (the Marshallian cross)
• Value determined by both blades of the scissors
• Consumer and producer surplus
• Reciprocal demand curves in trade
• Elasticity of demand value
• Price decline ? increase in real income
• Anticipates income and substitution effect
  analysis
• Short-run and long-run supply fixed and
  variable costs
• Elasticity of supply increases with time
• Value in short-run depends on demand
  quantity
• Value in long-run depends on supply
• Internal economies ? difficulties for competitive
  market paradigm
• External economies (of industry scale)

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• Arthur Cecil Pigou
• 1877 - 1959
• Economics of Welfare, 1920 … Reform, not
  Revolution
• Economies and diseconomies of production
• Divergence between private and social costs and
  benefits
• ? Role for government
• Make railroads liable for damage sparks do to
  forests
• Subsidize smokeless smokestacks
• Fine polluters

Adherent to Says Law ?Classical foil for
Keynes in General Theory Pigou response Pigou
effect Real Balance Effect P down ? (M/P)
up ? Automatic adjustment to full employment
(?!?)
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Classical Neoclassical Economics An Aside

• Neoclassical Economics
• Marshallian economics
• Gossen/Jevons/Edgeworth
• Microeconomics
• Concern allocation of scarce resources
• First Principles
• Decision at margin
• Prices determined by interaction of supply
  (costs) and demand (utilities)
• Distribution accords with marginal productivities

• Classical Economics
• Smith Ricardo/Malthus Mill
• Labor theory of value
• Malthusian population
• Says law
• Quantity theory of money
• Physiocrats Marx
• Balanced growth/imbalance
• Concern consequences of capitalist accumulation
• First Principles
• Price independent of demand
• Labor theory of value
• Natural (long-run) prices equalize rates of
  profit
• Real wage subsistence
• Wage fund Iron Law