The Origins of our Economic Word View 2: The Marxist Criticism and the Arrival of Neoclassical Econo

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The Origins of our Economic Word View 2 The
Marxist Criticism and the Arrival of Neoclassical
Economics

• Bernardo Aguilar-Gonzalez

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We left at
Sohow is it that, as you are saying Mr. Smith,
if value is originating in labor (therefore we
need more workers and division of
labor-population growth and economic growth), all
of the profit is kept by factory owners?
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What is the social context that we are looking at?

• Heroic Materialism

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London A PilgrimageGustave Doré and Jerrold
Blanchard
London is all too charged with misery. The mighty
capital comprehends whole townships of the almost
hopeless poor. You step out of the Strand into
Drury Lane or Bedfordbury out of Regent Street
by the East, into the slums of the shirtless out
of the Royal Exchange into Petticoat Lane nay,
out of the glittering halls of Parliament into
the Alsatia that--diminished, but not
destroyed--lies, a shame and scandal, behind
Westminster Abbey. The Devil's Acre skirts the
Broad Sanctuary. But, a great hospital faces St.
Stephen's and sits, a comely presence by the
river side, within the shadow of the Lollard's
Tower. The silver fringes are deepening from day
to day round the cloud whereon we have traced the
acuteness of London misery.
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Other Schools Opposing the Early Classics

• German Romantic School-opposed the
  individualistic basis of the classics. It held an
  organic vision of the State of which the economy
  was one part. Thus, it seeks an economic system
  that would pursue self sufficiency.
• German Historical School-opposed selfish
  deduction (the way he called the Classics
  method) in favor of an ethical-historical method.
  This method conceives the economy as a system of
  relations with the totality of social and
  historical phenomena. Therefore, they reject the
  importance of self interest to define the
  economy.

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Marx 101

• Historical Dialectical Materialism
• Social relations and History are defined by the
  forces of production and power is defined by
  their ownership.
• Class structure

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Marx 101

• Historical Dialectical Materialism
• Social relations and History are defined by the
  forces of production and power is defined by
  their ownership.
• Class structure
• Surplus or Value added Labor Theory of Value
• Social control and oppression-Class struggle
• Revolution is the only means of change to
  establish social property and evolve toward a
  communist situation
• Critical of international division of labor
• Growth?

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Marx in Practice?
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The Neoclassics (aka marginalist revolution)
Walras
Jevons
Menger
Marshall
Pareto
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The Marshallian Cross
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General Equilibrium or Pareto Optimality(Welfare
Economics)
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General Equilibrium

• Partial Equilibrium Neglects the way in which
  changes in one market affect other
  (product/factor) markets.
• General Equilibrium Analyses the way in which
  the choices of economic agents are co-ordinated
  across all product and factor markets.

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Agenda

• Exchange Economy
• 2 individuals/consumers (A and B)
• 2 products (X and Y)
• Production Economy
• 2 products (X and Y)
• 2 factors (L and K)
• General Equilibrium
• 2 individuals/consumers (A and B)
• 2 products (X and Y)
• 2 factors (L and K)

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Exchange Economy
2 Individuals A and B
2 Products
Assume a world with no production and with fixed
endowments of X and Y (hence the line on top of X
and Y).
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Edgeworth Box

• Look at the world from Individual As perspective
• Look at the world from Individual Bs perspective
• Combine A and Bs worlds to form an Edgeworth box

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Edgeworth Box
Total amount of
Individual A
Total amount of
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Edgeworth Box
Total amount of
Individual B
Total amount of
Individual A
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Edgeworth Box
Total amount of
Individual B
Total amount of
Individual A
Each point within the box represents a particular
allocation of the two products between the two
individuals
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Pareto Efficient Allocation

• Pareto Efficient Allocation Each individual is
  on the highest possible indifference curve, given
  the indifference curve of the other individual.

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Edgeworth Box
Individual B
a
Total amount of
YB
b
Individual A
Total amount of
XA
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Pareto Inefficient Allocation

• a and b are Pareto inefficient allocations.
• Why? Because there exists changes in allocations,
  starting from a or b, that would make at least
  one individual better off without making the
  other individual worse off.

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Edgeworth Box
Individual B
Total amount of
g is a pareto efficient point
g
Individual A
Total amount of
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Pareto Efficient Allocation

• At point/allocation g
• Individual A is on the higher possible
  indifference curve given Bs indifference curve
  and
• Individual B is on the highest possible
  indifference curve given As indifference curve.
• Therefore, g is a pareto efficient allocation
• Note The two indifference curves are tangential
  to each other

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Pareto Efficient Allocations
Individual B
Total amount of
e
e and d are also Pareto efficient allocations
g
d
Individual A
Total amount of
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Contract Curve
Individual B
Total amount of
e
Joining up these Pareto efficient points yields
the contract curve
g
d
Individual A
Total amount of
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Contract Curve

• The curve connecting all Pareto efficient
  allocations is known as the contract curve.
• At each point on the contract curve, the MRSs
  for A and B are equal, i.e.
• MRSAxy MRSBxy

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Market Place Exchange Economy Equilibrium
Individual B
UA
Total amount of
UB
Individual A
Total amount of
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Exchange Edgeworth Box Summary
XB
Individual B
Total amount of
YB
YA
Individual A
Total amount of
XA
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Production Economy

• Two firms produce two products (X and Y)
• The firms use two factors of production, capital
  (K) and labour (L)
• Assume fixed endowments of K and L.

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(Production) Edgeworth Box
Firm Producing Good Y
Y0
Total amount of
X1
At the tangency points MRTSXLKMRTSYLK
Y1
X0
Firm Producing Good X
Total amount of
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(Production) Edgeworth Box
Firm Producing Good Y
Y0
Total amount of
X1
You can join up all these (Pareto) efficient
points to form the contract curve.
Y1
Y
X0
Firm Producing Good X
Total amount of
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Production Possibility Curve
Each point on the production possibility curve is
(Pareto) efficient
y
x
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Production Possibility Curve
Where on the PPC? How much X and how much Y
should be produced?
y
x
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General Equilibrium
The slope of the PPF Px/Py
y
Px/Py
x
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General Equilibrium
At this point we can draw in the amount of x and
y produced
y
Px/Py
x
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General Equilibrium
This is the amount of x produced
y
Px/Py
x
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General Equilibrium
This is the amount of y produced
y
Px/Py
x
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General Equilibrium
Recall the Edgeworth box
y
Px/Py
x
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General Equilibrium

y
Individual B
Px/Py
Individual A
x
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General Equilibrium
y
Individual B
Px/Py
Individual A
x
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General Equilibrium
Recall that MRSxy Px/Py
y
Individual B
Px/Py
Individual A
x
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General Equilibrium
y
MRS MRPT Px/Py
Px/Py
UA
Px/Py
UB
x
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General Equilibrium
Three Conditions for General Equilibrium
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Welfare Economics

• 1st Fundamental Theorem of Welfare Economics
• If all markets are perfectly competitive, the
  allocation of resources will be Pareto efficient.
• But what type of human being is needed?

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Homo economicus
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Butwhat do we do when there is a recession or a
world war?