Neoclassical 8 d2y5s

 JEVONS, MENGER & WALRAS (MARGINAL ANALYSIS)  ALFRED MARSHALL (PARTIAL EQUILIBRIUM)  WALRAS & GENERAL EQUILIBRIUM

SOME CRITICS • INSTITUTIONAL • HISTORICAL • AUSTRIAN CRITIQUE

MARGINAL ANALYSIS Important writers: 1. Antoine Augustin 2. Cournot 3. H. H. Gossen 4. W.S Jevons 5. Carl Menger 6. Leon Walras 7. Friedrich Von Wieser 8. Eugen von Bohm-Bawerk

MERCANTILISM 1500-1750

MERCHANT INTERN. TRADE PROCTECT. POLICY

♦CAPITALIST ♦INTERRELATEDNESS ♦L PRODUCTIVITY ♦NATURAL WORKING ECONOMIC FORCES

PHYSIOCRACY 1750-1780

INTERRELATEDNESS AGRICULTURE SECTOR NATURAL LAWS

CLASSICAL 1776-1890s

Smith (1776-1820) Ricardo (1820-1850s) Mills (1850s-1890s)

MARGINAL ANALYSIS 1870s

Theory of demand

MARGINAL UTILITY

1890s

Theory of production

MARGINAL PRODUCTIVITY

1870-1930: microeconomics theory deductive in approach & highly abstract models Marshall & Walrass – P determines by SS & DD + interrelatedness ec activity Vs Classical labor theory of value; classical cost of production theory of value; classical residual theory of income

• The beginning of the marginalist school is dated at 1871 – the year Jevons & Menger published. • Historical Background - serious economic & social problems (poverty, uneven distribution of wealth & income, business fluctuations, farmers & laborers had difficulties, rise of monopolistic ent) . • Marginalists opposed 3 approaches to attack the probs: promote socialism, trade unionism & g intervention. • Marginalists argued that although the value & dist. theories of the classical were inaccurate, their policy views were correct.

The marginalists sought to advance the interest of all the humankind through promoting better understanding of how a market system efficiently allocates resources & promotes economic liberty

Succeeded (above):  Under competitive mkt – the pay received by workers wld be equal to their contribution to the value of the product.  Counter the Marxian call for revolution by the proletariats.  Benefited employers (by opposing unions).

 Defended - landowners & the wealthy.

• Today, pure competition can be found in only a few sectors of the economy (1870 -). • Historical & institutional factors dominated rational individual calculations in determining such as length of the workday, consumer behavior, wage rate, & the like. • The view that the best g is the one that interferes the least – outdated as events transpired & new economic theories developed. • Business Cycles were ignored – full employment is the rule. Failed to explain economic growth & inadequate for slowly developing countries.

Lasting contributions  The basic of monopoly model  Theory of duopoly  The theory of diminishing MU  The theory of rational consumer choice  The law of demand  The law of diminishing marginal returns  The concept of returns to scale  Work-leisure choice analysis  The marginal productivity theory of factor returns  & so forth The ‘choice-theoretic’ approach

Major Tenets •Focus on Margin – on the point of change, decisions are made •Rational economic behavior – assumed, people act rationally in balancing pleasure & pains, in measuring marginal utilities of different goods, and in balancing present against future needs. Random abnormalities will cancel each other out. •Microeconomic emphasis – the individual person & firm instead of aggregate economy; individual decision making, market decision for single type of good, the output of specific firms & so forth; •the use of the abstract, deductive method – rejected the historical method.

• The pure competitive emphasis – individualistic, independent entrepreneurs, uniform prices, no advertising, ……. • Demand-oriented price theory – demand is the primary force in P determination. • Subjective utility – demand depends on MU, which is subjective. • Equilibrium approach – economic forces are generally tend toward equilibrium. • Merger of land with capital goods – lumped land & capital resources together & r, rent & profit as the return to property resources (avoid rent as unearned income & unnecessary payment). • Minimal g involvement – the most desirable policy.

• The final three decades of the nineteenth century gave way to the neoclassical microeconomic theory. • A new set of analytical tools transform classical economics into Neoclassical economics. • The most important of these tools was

Analysis (1870-1900).

Marginal

• It initiated increasing mathematics in the economic analysis. • The 1st notable application of MA was to the theory of demand. • In the early 1870s, 3 academicians applied MA to demand theory and developed the concept of Marginal Utility. Utility

• Two of these, Leon Walras and Carl Menger – MA to the theory of firm. • Walras went further, general equilibrium analysis. • The marginalists concerned with resource allocation (microeconomics). • Early classicals, interested mainly in analyzing the process of economic development & discovering and implementing policies that would produce high rates of economic growth. • The idea of utility had existed in economic lit. • For a long time – Aristotle used the concept.

JEVONS, MENGER AND WALRAS • Between 1871-1874, Jevons, Menger and Walras, published books that influenced the development of orthodox economic theory. • Concentrated on the forces determining the value or price. • Jevons argued that value depends entirely upon UTILITY. • Jevons’s contribution was largely in the application of MA to demand. • Menger – application of MA to both DD & SS • Walras – similar, and general equilibrium model of an economy.

INADEQUACIES OF THE CLASSICAL THEORY OF VALUE • The classical theory of value inadequate to explain the forces determining prices. • The cost of production theory lacked generality because there were a number of goods whose prices could not be analyzed within the classical framework. • The value or price of goods with a perfectly inelastic supply curve – land, rare coins, painting and wines did not depend on their costs of production.

• JMW - large costs incurred in producing goods will not necessarily result in high prices. • According to the MU theory, value depends instead upon UTILITY or consumption, and comes not from the past but from the future. • No matter what costs are incurred in producing the goods, in the market its price will depend upon the utility the buyers expects to receive. • Addressing the problem whether value was produced in final goods by the factors of production (classical theory) or whether final goods determined the values of the factors of production.

• Preclassical & classical economic theory failed to recognize that the significant element in price determination is MU, but not the total or average utility. • E.g diamond-water paradox (Adam Smith). • It is MU that determines consumer choice (successive units consume) and hence price. • JMW assumed diminishing MU, which states that as the consumption of a good increases, the MU decreases. • JW used mathematical representation of utility function.

COMPARISONS OF UTILITY • Jevons believed that an additional amount of income given to a person with a high income will yield less MU than the same amount given to someone with a low income. • Jevons argued that interpersonal comparisons of utility were impossible, but he made them anyway. • The utility an individual receives from consuming a good depends exclusively on the quantity of that good consumed.

• Utility, demand & exchange: Walras was the most successful because greater mathematical ability. • He had a much more understanding of the interrelatedness of the various sectors of the economy. • Demonstrate the relationship between MU, max. of consumer satisfaction, and exchange in a much more through and generalized manner than either Jevons or Mengers.

THE VALUE OF FACTORS OF PRODUCTIONS • Value come from the past: they argue, value come from the future, expected utilities to be enjoyed when consuming final goods. • The price of a final good depends upon its MU and price of factor of productions depends upon utility of the produced final good. • JW treated the causal relationship between a final good and its factors of production in a partial equilibrium framework. • Walras, consideration of value in his general equilibrium analysis and saw the causal relationships as more complex.