The Historical Background of the Marginalist SchoolSerious economic & social problems remained unsolved even a 100 years after the beginning of the industrial revolution.Poverty was widespread, although productivity was increasing dramatically.The extremely uneven distribution of wealth & income created much dissatisfaction even though the general std of living was rising. Business fluctuations affected many people adversely; individuals cld no longer depend exclusively on their own initiative & ability to overcome condition that were thrust upon them.

Farmers & farm laborers had their difficulties; many drifted to cities, lured by the better opportunities.Industrial accidents often brought serious hardships to workers & their families; long hours of labor, dangerous & unhealthy working conditions & the rise of monopolistic enterprises.

3 approaches of attack on pressing social problems (Europe) : i. to promote socialism ii. To bolster trade unionism iii. government action redistributing incomeThe marginalists opposed all 3 solutions. They argued that although the value and distribution theories of the classical economists were inaccurate, their policy views were correct.The marginalists defended market allocation and distribution, deplored g intervention, denounced socialism, & discouraged labor unionism.

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

SOME CRITICS

INSTITUTIONAL HISTORICAL AUSTRIAN CRITIQUE

MARGINAL ANALYSIS

Important writers:

1.Antoine Augustin2.Cournot3.H. H. Gossen4.W.S Jevons5.Carl Menger6.Leon Walras7.Friedrich Von Wieser8.Eugen von Bohm-Bawerk

MERCANTILISM

1500-1750PHYSIOCRACY

1750-1780MERCHANTINTERN. TRADEPROCTECT. POLICYINTERRELATEDNESS AGRICULTURE SECTORNATURAL LAWS

CLASSICAL

1776-1890sCAPITALISTINTERRELATEDNESSL PRODUCTIVITYNATURAL WORKING ECONOMIC FORCESSmith (1776-1820)Ricardo (1820-1850s)Mills (1850s-1890s)

1870sMARGINAL UTILITY1890sMARGINAL PRODUCTIVITYMARGINAL ANALYSIS1870-1930: microeconomics theorydeductive in approach & highly abstract models Theory of demandTheory of productionMarshall & Walrass P determines by SS & DD + interrelatedness ec activityVsClassical 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 contributionsThe basic of monopoly modelTheory of duopolyThe theory of diminishing MUThe theory of rational consumer choiceThe law of demandThe law of diminishing marginal returnsThe concept of returns to scaleWork-leisure choice analysisThe marginal productivity theory of factor returns& so forthThe choice-theoretic approach

Major TenetsFocus on Margin on the point of change, decisions are madeRational 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 Marginal Analysis (1870-1900).

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.

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 WALRASBetween 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.

Jevonss 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.

Developed new & powerful tools of analysis, especially geometric diagram & mathematical techniques; where economics became a more exact social science; *The beginning of the Marginalist School is dated at 1871 the year Jevons & Menger published their books on marginal utility theory.

*strongly disapprove (deplored)**W.S JEVONS -ENGLISH , CARL MENGER - GERMAN & LEON WALRAS- FRENCHMarginalist School Forerunners; some of the important writers were..**Physiocracy- thomas quesnay (1694-1774); synthesize to combine separate ideas or beliefsBenefited those who interests were simply maintaining the status quo, that is, those who resisted change;*The dominant drive of human action is to seek utility and avoid disutility (-ve utility); *The dominant drive of human action is to seek utility and avoid disutility (-ve utility); many buyers & sellers, homogenous product.Cost of production include the sacrifices and irksomeness of working, managing business, and saving money to form a capital fund.

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