RH351

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RH351 Rhetoric of Economic Thought Transparencies
Set 5 Marshal, Marginalism, Alternative
Voices Economics Comes of Age
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Economic Analysis Key Contributors, 19th
century
1900
1800
Adam Smith (1723 1790)
David Ricardo (1772 1823)
John Stuart Mill (1806 1873)
Mill
Karl Marx (1818 1883)
August Cournot (1807 1877)
Johann von Thünen (1793 1850)
Hermann Gossen (1810 1858)
Cournot
Stanley Jevons (1835 1882)
Leon Walras (1834 1910)
Carl Menger (1840 1921)
Alfred Marshall (1842 1924)
Walras
Jevons
Marshall
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Marshalls Inaugural Lecture, Cambridge, February
1885
It is vain to speak of the higher authority of a
unified social science. No doubt if that existed
Economics would gladly find shelter under its
wing. But it does not exist it shows no signs
of coming into existence. There is no use in
waiting idly for it we must do what we can with
our present resources. There is wanted wider
and more scientific knowledge of facts an
organon stronger and more complete, more able to
analyze and help in the solution of the economic
problems of the age. To develop and apply the
organon rightly is our most urgent need and
this requires all the faculties of a trained
scientific mind. Eloquence and erudition have
been lavishly spent in the service of Economics.
They are good in their way but what is most
wanted now is the power of keeping the head cool
and clear in tracing and analyzing the combined
action of many combined causes.
Alfred Marshall 1842 - 1924
that part of economic doctrine, which alone
can claim universality, has no dogmas. It is not
a body of concrete truth, but an engine for the
discovery of concrete truth, similar to, say, the
theory of mechanics. why are so many lives
draggled on through dirt and squalor and misery?
Why are there so many haggard faces and stunted
minds? Chiefly because there is not wealth
enough and what there is, is not well
distributed, and well used   Never was there
an age so full of great social problems as ours
surely they are not unworthy of the best efforts
of the best minds among us. It will be my
most cherished ambition, my highest endeavor, to
do what with my poor ability and my limited
strength I may, to increase the numbers of those,
whom Cambridge, the great mother of strong men,
sends out into the world with cool heads but warm
hearts
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Precursors to marginalism Cournot
Economists understand by the term Market, not any
particular market place in which things are
bought and sold, but the whole of any region in
which buyers and sellers are in such free
intercourse with one another that the prices of
the same goods tend to equality easily and
quickly
August Cournot 1803 - 1877
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Precursors to marginalism Gossens 1st 2nd
laws
Hermann Gossen,  1810-1858 The Development of
the Laws of Exchange among Men and of the
Consequent Rules of Human Action (1854)
First Law "... the magnitude of a given pleasure
decreases continuously if we continue to satisfy
this pleasure without interruption until satiety
is ultimately reached."
Second Law "The magnitude of each single pleasure
at the moment when its enjoyment is broken off
shall be the same for all pleasures."
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The marginalist revolution Jevons
We may state as a general law that the degree of
utility varies with the quantity of commodity,
and ultimately decreases as that quantity
increases.
Stanley Jevons 1832 1882 "Brief Account of a
General Mathematical Theory of Political
Economy", 1866 The Theory of Political Economy ,
1871.
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The marginalist revolution Menger
Carl Menger 1841 -- 1921 Grundsätze (Principles
of Economics , 1871)
Never was there an age that placed economic
interests higher than does our own. Never was the
need of a scientific foundation for economic
affairs felt more generally or more acutely. And
never was the ability of practical men to utilize
the achievements of science, in all fields of
human activity, greater than in our day. If
practical men, therefore, rely wholly on their
own experience, and disregard our science in its
present state of development, it cannot be due to
a lack of serious interest or ability on their
part. Nor can their disregard be the result of a
haughty rejection of the deeper insight a true
science would give into the circumstances and
relationships determining the outcome of their
activity. The cause of such remarkable
indifference must not be sought elsewhere than in
the present state of our science itself, in the
sterility of all past endeavors to find its
empirical foundations.
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The marginalist revolution Walras
Leon Walras 1834 -- 1910 Elements of Pure
Economics (1874)
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The marginalist revolution Walras
General Equilibrium
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Marshall on method
I never read mathematics now in fact I have
forgotten how to integrate a good many
things But I know I had a growing feeling in the
later years of my work at the subject that a good
mathematical theorem dealing with economic
hypotheses was very unlikely to be good
economics and I went more and more on the
rules (1) Use mathematics as a shorthand
language, rather than as an engine of inquiry.
(2) Keep to them until you have done. (3)
Translate into English. (4) Then illustrate by
examples that are important to real life. (5)
Burn the mathematics. (6) If you cant succeed in
(4), burn (3).
Alfred Marshall 1842 - 1924
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Second Generation Marginalists / Neoclassical
Economics

• Francis Edgeworth (1845 1926)
• Contemporary of Marshalls Oxford chair
• Utility theory, indifference curves, Edgeworth
  box

Now, it is remarkable that the principal
inquiries in Social Science may be viewed as
maximum-problems Since, then, Social Science, as
compared with the Calculus of Variations, starts
from similar data loose quantitative relations
and travels to a similar conclusion
determination of maximum why should it not
pursue the same method, Mathematics? Mathematical
Psychics, (1881)
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Second Generation Marginalists / Neoclassical
Economics

• Vilfredo Pareto (1848 1923)
• Successor to Walras at Lausaunne
• Pioneer in the area of welfare economics
• Manual of Political Economy (1906)
• Pareto optimality

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Second Generation Marginalists / Neoclassical
Economics

• John Bates Clark (1847 1938)
• Teacher at Columbia University
• Marginal productivity theory of distribution

John Bates Clark 1847 - 1938
The distribution of income to society is
controlled by a natural law, and this law, if it
worked without friction, would give to every
agent of production the amount of wealth which
that agent creates. Distribution of Wealth (1889)
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Second Generation Marginalists / Neoclassical
Economics

• Irving Fisher (1868 1947)
• Professor of Economics at Yale
• Proponent of the Quantity Theory of Money
• The Theory of Interest (1907)

Stock prices have reached what looks like
permanently high plateau. October 17, 1929
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Second Generation Marginalists / Neoclassical
Economics

• Arthur Cecil Pigou (1877 1959)
• Successor to Marshall at Cambridge
• Pioneer in the area of welfare economics
• Keyness foil in The General Theory

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Alternative voices in the history of economic
thought
German Romanticism
Adam Muller (1779 1829)
Early German Historical School
Wilhelm Roscher (1817 1894) Friedrich List
(1789 1846) Karl Knies (1821 1898)
Later German Historical School
Early American Economists
Austrian School
Methodenstreit (Debate over Method)
Gustov Schmoller (1838 1917) Werner Sombart
(1863 1941)
Carl Menger (1840 1921) Friedrich von Wieser,
(1851 -- 1926), Eugen von Böhm-Bawerk
(1851 -- 1914)
Richard Ely (1854 1943) John Bates Clark (1847
1938)
Early American Institutionalism
Ludwig von Mises (1881 1973) Joseph Schumpeter
(1883 1950)
Richard Ely (1854 1943) John Bates Clark (1847
1938)
Friedrich von Hayek (1889 1992) Oscar
Morgenstern (1902 1976)
New Institutionalism
Old Institutionalism
Ronald Coase Oliver Williamson
Wesley Mitchell (1874 1948) John Kenneth
Galbraith (1908 2006)
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Institutionalism in Economic Thought
A complex organism cannot be understood if each
segment is treated as if it were unrelated to the
larger entity. Economic activity is not merely
the sum of the activities of persons motivated
individually and mechanically by the desire for
maximum monetary gain. In economics there are
also patterns of collective action that are
greater than the sum of the parts. An
institution is not merely an organization or
establishment for the promotion of a particular
objective, like a school, a prison, a union, or a
federal reserve bank. It is also an organized
pattern of group behavior, well-established and
accepted as a fundamental part of the culture.
It includes customs, social habits, laws, modes
of thinking, and ways of living Economic life,
said the institutionalists, is regulated by
economic institutions, not by economic laws.
Thorestein Veblen 1857 - 1929
John Commons 1862 1945
Stanley Brue, The Evolution of Economic Thought
Wesley Mitchell 1874 1948
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Veblen and neoclassical analysis
In all the received formulations of economic
theory, whether at the hands of English
economists or those of the Continent, the human
material with which the inquiry is concerned is
conceived in hedonistic terms that is to say,
in terms of a passive and substantially inert
and immutably given human nature The
hedonistic conception of man is that of a
lightning calculator of pleasures and pains who
oscillates like a homogeneous globule of desire
of happiness under the impulse of stimuli that
shift him about the area, but leave him intact.
He has neither antecedent nor consequent. He is
an isolated definitive human datum, in stable
equilibrium except for the buffets of the
impinging forces that displace him in one
direction or another. Self-imposed in elemental
space, he spins symmetrically about his own
spiritual axis until the parallelogram of forces
bears down upon him, whereupon he follows the
line of the resultant. When the force of the
impact is spent, he comes to rest, a
self-contained globule of desire as before.
Spiritually, the hedonistic man is not a prime
mover.
Thorestein Veblen 1857 - 1929
Why is Economics not an Evolutionary Science?
(1898)
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Veblens Style Theory of the Leisure Class
Generally, as industrial activity further
displaces predatory activity in the communitys
everyday life and in mens habits of thought,
accumulated property more and more replaces
trophies of predatory exploit as the
conventional exponent of prepotence and
success. Conspicuous consumption of valuable
goods is a means of reputability to the gentleman
of leisure. Throughout the entire evolution of
conspicuous expenditure, whether of goods or of
services or human life, runs the obvious
implication that in order to effectually mend the
consumers good fame it must be an expenditure of
superfluities. In order to be reputable, it must
be wasteful..
Thorestein Veblen 1857 - 1929
The Theory of the Leisure Class (1899)
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Veblens Critique of Modern Capitalism
In more than one respect the industrial system of
today is notably different from anything that has
gone before. It is eminently a system,
self-balanced and comprehensive and it is a
system of interlocking mechanical processes it
lends itself to systematic control under the
direction of industrial experts, skilled
technologists, who may be called
production engineers, for want of a better term
technological specialists whose constant
supervision is indispensable to the general staff
of industry The captains of industry have
per force continued to employ the technologists,
to make money for them, but they have done so
only reluctantly, tardily, sparingly, and with a
shrewd circumspection only because and so far as
they have been persuaded that the use of these
technologists was indispensable to the making of
money. By settled habit, the technicians, the
engineers and industrial experts, are a harmless
and docile sort, well fed on the whole, and
somewhat placidly content with the full
dinner-pail which the lieutenants of the Vested
Interests habitually allow them.
Thorestein Veblen 1857 - 1929
The Engineers and the Price System (1921)
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Institutionalists and Business Cycle Studies
Mitchell's life work was the documentation of the
U.S. business cycle.
Wesley Mitchell 1874 1948
Kuznets's life work was the collection and
organization of the national income accounts of
the United States
Simon Kuznets 1901 1985
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Galbraiths New Industrial State
The Affluent Society (1958) The New Industrial
State (1967) From The New Industrial State,
chapter 31 Viewing the whole economy in purely
technical terms, no natural superiority can be
assumed either for the market or for planning.
In some places market responses still serve.
Over a very large area such responses cannot be
relied upon the market must give way to more or
less comprehensive planning of demand and supply.
Here, if the industrial system does not plan,
performance will be poor and perhaps appalling
The error is in basing action on generalization.
There is no natural presumption in favor of the
market given the growth of the industrial system
the presumption is, if anything, the reverse.
And to rely on the market where planning is
required is to invite a nasty mess.
John Kenneth Galbraith 1898 2006
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Schumpeters contradictory views
Schumpeter turned Karl Marx on his head Hateful
gangs of parasitic capitalists become, in
Schumpeters hands, innovative and beneficent
entrepreneurs. Thomas K. McCraw, Prophet of
Innovation Joseph Schumpeter and Creative
Destruction
Major Publications The Theory of Economic
Development (1911) Capitalism, Socialism and
Democracy (1942) History of Economic Analysis
(1954)
Joseph Schumpeter 1883 1950
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Schumpeters contradictory views
Capitalism, Socialism and Democracy (1942) Can
capitalism survive? No. I do not think it
can. But this opinion of mine, like that of every
other economist who has pronounced upon the
subject, is in itself completely uninteresting.
What counts in any attempt at social prognosis is
not the Yes or No that sums up the facts and
arguments which lead up to it but those facts and
arguments themselves. They contain all that is
scientific in the final result. Everything else
is not science but prophecy The thesis I shall
endeavor to establish is that the actual and
prospective performance of the capitalist system
is such at to negative the idea of its
breaking down under the weight of economic
failure, but that its very success undermines the
social institutions which protect it, and
inevitably creates conditions in which it will
not be able to live and which strongly point to
socialism as the heir apparent.
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Schumpeters Creative Destruction
The opening up of new markets, foreign or
domestic, and the organizational development
from the craft shop and factory to such
concerns as U.S. Steel illustrate the same
process of industrial mutation that incessantly
revolutionizes the economic structure from
within, incessantly destroying the old one,
incessantly creating a new one. This process
of Creative Destruction is the essential fact
about capitalism.
Joseph Schumpeter Capitalism, Socialism and
Democracy
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The Austrian School of Economics
First Generation Friedrich von Wieser (1851 --
1926), Eugen von Böhm-Bawerk (1851 -- 1914)
Second Generation Ludwig von Mises (1881
1973) Joseph Schumpeter (1883 1950)
Third Generation Friedrich von Hayek (1889
1992) Oscar Morgenstern (1902 1976)

• Radically "subjectivist" strain of  marginalism
• Dedication to a priorism and an emphasis on
  methodological individualism
• Time-theoretic approach to capital theory
• Monetary overinvestment business cycle theory
• Analysis of markets in terms of disequilibrium
• Stress on uncertainty and information in the
  economy