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