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Neoclassical Economistsand Beyond

ECON 205WSummer 2006Prof. Cunningham

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Neclassical School World view Values Goals Assumptions Methodology At the core Concepts developed

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Alfred Marshall (1842-1924)

Background 23 years at Cambridge Established the Royal Economic Society

and was its first president Founded the Economic Journal Founded the Cambridge School of

Economics Introduced the diagrammatic methodology

to economics Legacy through Pigou, Robinson, Keynes

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Marshall (2) Assumed free competition, mobility of productive

resources, rational pursuit of economic objectives.

Tried to make his theoretical models realistic. Built on Classical Theory.

“Natura Non Facit Saltum” Kept utility theory in the background Expanded the concepts of supply and demand Focused more on the firm than on the consumer

or GE.

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Marshall (3) Usual interpretation of his work is as a

bridge from the classics to modern economics. –Marshall rejected that view.

Favored partial equilibrium over general equilibrium Ceteris Paribus

1890, Principles of Economics with Mary Paley. 8 editions, last in 1920.

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Marshall (4) Demand Theory

Q = f(P) Friedman on Marshall’s demand curve Considers income and substitution effects

Identifies different kinds of industries—increasing cost, decreasing cost, increasing returns to scale, decreasing, etc.

Footnote on imperfect competition. Monetary Theory: Cambridge tradition.

M = kPy Develops concepts of economic time—market run (immediate

present), short-run, long-run Theory of quasi-rents. Internal and external economies. Tendency to focus on a single industry.

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Marshall (5) On labor and wages

Wages are not determined by marginal productivity alone, but also by supply and demand for labor.

Four laws of Derived Demand Cet. Par., the greater the substitutability of other factors for

labor, the greater will be the elasticity of demand for labor. Cet. Par., the greater the price elasticity of product demand,

the greater will be the elasticity of labor demand. Cet. Par., the larger the proportion of total production costs

accounted for by labor, the greater will be the elasticity of labor demand.

Cet. Par., the greater the elasticity of the supply of other inputs, the greater the elasticity of demand for labor.

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Irving Fisher (1867-1947)

1911, Purchasing Power of Money Quantity Theory

No micro foundations, only macro Long run MV=PT In percentage form p% = m% + v% - t% For long-run stability, p% = 0 Therefore, m% = t% - v% V% 0 over time, so m% = t% To convert to income (GDP), T = cy P% = y% for price stability

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Fisher (2) Very Monetarist

Transmission mechanism Creates detail in the equation of exchange by including

different forms of money with separate velocities. Make currency redeemable for whatever quantity of

gold that would represent constant purchasing power. I.e., the exchange rate for gold would vary.

Believed that business cycles were caused by erratic changes in the money supply.

Saw debt as the cause of deflation in the Great Depression. Recommended requiring 100% reserves on deposits.

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Ralph George Hawtrey(1879-1975)

British treasure official Develops a theory of business cycles

caused by fluctuations in credit. Changes in the money supply cause interest

rate shifts that exert powerful effects on wholesale merchants.

Suggested discretionary policy through OMOs, changes in the re-discount rate, and variations in the reserve requirements of commercial banks.

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Swedish School Most prominent thinker was Knut

Wicksell Keynes draws heavily on Wicksell

Natural rate of interest Money rate of interest

Anticipates Hicks and Robinson Common features of the Swedes

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Knut Wicksell (1851-1926)

Background Principal works available only in

German until 1930s Exponent of pure theory Examined a wide variety of social

and political problems Degrees in Math and Law

Need Law degree to get econ. prof. job

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Wicksell (2) 1900 (age 49) joins faculty of Univ. of Lund 1893, Value, Capital and Rent, translated into

English 1954 Submitted to Upsalla Univ as dissertation, but not

accepted. 1896, Theory of Incidence of Taxation, accepted

as dissertation. 1898, Interest and Prices (English, 1934) Lectures in Political Economy (two vols. 1901,

1906; English 1934-35) Superior mathematician

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Wicksell (3) Contributions were mostly highly technical

refinements Malthusian Opposed to Socialism Monetary Theory

Not purely a quantity theorist Anticipates Keynes in many areas Discusses imperfect competition, sticky prices Natural and Bank rates of interest Monetary equilibrium Work extended by Ohlin, Myrdahl, Lindahl

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Joan Robinson (1903-83)

Background Received her degree in 1921, the first

year that it had been allowed for women After Joan Robinson’s publication of The

Economics of Imperfect Competition, Mary Paley Marshall wrote to Joan “thank you for helping to lift off the reproach cast on the economic women.” Joan never view herself as a feminist.

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Joan Robinson (2) 1932, pamphlet “Economics is a Serious Subject”

Dedication “To JMK. To the optimist who showed that optimism can be justified.”

1934, a mother, an author of many important articles and the book Economics of Perfect Competition (1933), she was made a “probationary faculty assistant lecturer in economics” at Cambridge.

The “circus” was meeting around Keynes. Close collaboration on many topics.

Cambridge, 1930, lunch: Richard Kahn and the Robinsons.

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Joan Robinson (3) With regard to his Banking, Policy, and the

Price Level, Dennis Robertson write of Keynes:“so much of chapters V and VI are due to Keynes that neither of us knows how much is Keynes and how much is Robertson.”

Keynes wrote that Kahn put in weeks going over his manuscripts.

According to Paul Samuelson, Kahn may have contributed extensively to the

geometry and algebra in Joan Robinson’s book. Kahn may have written parts of Keynes’ General

Theory.

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Joan Robinson (4) Imperfect Competition: the book Shackle argues that Robinson essentially

provided for the “veritable destruction” of traditional microeconomics.

Introduced monopsony. Argued for trade unions or trade board to regulate.

Challenged marginal productivity theory. Joan thought she had initiated a

revolution.

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Joan Robinson (5) Chamberlain

Joan sent him the book in 1933, same year that his book was published.

Thought Joan had stolen his work, possibly even lifted whole sentences and paragraphs.

He had been working on the theory for about 10 years.

The key to monopolistic competition is product differentiation.

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Piero Sraffa (1898-1983)

Background 1927, moves to Cambridge, joins

Keynes’ “circus”. 1931, Prices and Production. Wrote Works and Correspondence of

David Ricardo. 1960, Production of Commodities by

Means of Commodities: A Prelude to a Critique of Economic Theory. Neo-Ricardian Theory.

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Sraffa (2) 1960, Production of Commodities

Attempts to “purify” Keynesian theory of any residual marginal elements.

Distinguishes changes in relative prices resulting from distributional changes vs. changes in production techniques.

Leads to Post Keynesian capital controversies.

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Nicholas Kaldor (1908-86)

Background An Expenditure Tax (1955) The Scourge of Monetarism (1982) Completely opposed to orthodox

price theory based on marginal products and the theory of income determination based on IS-LM.

Theory of Post Keynesian Growth