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Week 10: Neoclassical and Modern Economics - Coggle Diagram
Week 10: Neoclassical and Modern Economics
Note
Neoclassical
= neoclassical microeconomics
Modern microeconomics
= modern economics and modern microeconomics in unity
Neoclassical synthesis
= neoclassical microeconomics with Keynesian macroeconomics (next week)
Brief History:
Recap
Ancien Régime (before Double Revolution): Mercantilism
Revolution: Political Economy (aka CPE)
Counter-Revolution: Anti-Smithianismus, List, German Historical School
Counter-Counter Revolution: Marginalists, Neoclassical economics
Leon Walras
: General Equilibrium (1834-1910)
General Equilibrium theory: the analysis of an economy in which all sectors are considered simultaneously
Consider direct, indirect and cross-market effects
Unknowns determined by the market and given by general equilibrium solution are:
Prices of final goods
Factor prices
Quantities of final goods supplied and demanded
Quantites of factors supplied and demanded
Derives prices and quantities of goods and factors of production
But
doesn't explain how general equilibrum will be formed
Alfred Marshall (1842-1924):
Partial Equilibrium
Partial equilibrium:
Equilibrium in a single market - piece of the puzzle of general equilibrium
More held constant than in GE
Real world and practical issues
"Practical Issues": The Condition of England
Harriet Martineau (1802-1876)
Thomas Carlyle (1795-1881)
Henry Mayhew (1812-1887)
Charles Booth (1840-1916)
Writers interested in same questions as Marshall and about the poverty of England
Marshall: interested in putting economics on a more solid scientific footing and rigorous forms of academic analysis
but
also what economics can do for society
Gives government recommendations in various Royal Commissions
Context
:
1842: Born London; dad clerk to Bank of England
1865: St John’s College, Cambridge University
1860s-70s: Cambridge—new “tripos” in Philosophy, Political Economy, Logic
1875: Influential visit to USA, resigns post in 1881
1884: Appointed Chair of Political Economy at Cambridge University
3 aims professionally:
1) Writing of a central text in economics
2) Establishment of economic journal at Cambridge
3) Creation of a 1st 3rd yr degree in economics
The Exclusion of Mary Paley Marshall
(1850-1944) and Women from Cambridge Economics
Among first women to sit Moral Sciences Tripos
Lecturer at Cambridge at 25
Co-authored
Economics of Industry
(1879) but taken out of print by Afred Marshall in 1890
Alfred Marshall opposes admitting women to Economic Tripos - despite having relied on Mary and being an advocate for secondary education of women
What Is Economics
according to Marshall
“Economics has then as its purpose firstly to acquire knowledge for its own sake, and secondly to throw light on practical issues.”
“Economics is…a Science of Wealth…which deals with [man’s] Efforts to satisfy his Wants, in so far as the efforts and wants are capable of being measured in terms of wealth, or its general representative, i.e. money.”
Principles of Economics
(1890)
Principles of Economics
(1890)
Methods and Approach
Decades of testing
Focus on 'ordinary business of life'
Mathematics as shorthand - blend theoretic and mathematic approaches
Focus on activities rather than wants - more interested in supply than demand
Equilibrium
An abstraction - LR equilibrium is more an abstraction than reality as economic forces are constantly changing
Partial equilibrium - use assumptions and think of the influence of one variable and manipulating it on others
Ceteris paribus
Stable - any displacement of a stable equilibrium will produce forces that return the market to equilibrium
Time Horizon
Market period - supply is fixed
Short run - variable costs can be changed but not fixed costs
Long run - all costs are variable
Secular period - technology and population are variable as well
Supply and Demand
Supply:
Influence of time on supply curve (utility or costs of production determine supply)
Against Jevons' idea that cost of production → supply → marginal utility → price analysis
Marshall this this ignores interrelationships between these elements
Supply curve can be backwards bending
Demand:
Price elasticity - measure of sensitivity of quantity demanded to price
Presumes additive utility function which ignores substitution and complementarity of goods
Downward sloping curve
Ignores substitution and income effects
Consumer surplus to understand consequences of tax (deadweight loss)
Marshall and Rent
Classical economists: payments to factors of production other than land are price determining
Marginalists: Payments to factors of production are price determined
Marshall: Rent is not a cost of production for the economy as a whole but for an individual firm it is a cost of production and it is price determining because you compete with others for scarce resources
But for the economy as a whole land is inelastic
Marshall in
History of Economics
Marshall vs. Walras
Marshall - quantity is the independent variable
Walras - IV is price but follows Marshall in putting price on the x axis
Focused on micro but influences macro too through analysis of monetary influences on price
Also contributions in micro to increasing and diminishing returns to scale, and in understanding the representative firm
From Neoclassical to Modern (20th century) Economics
Jump towards modelling:
By the 1930s Marshallian economics is starting to have problems in terms of micro questions of partial equilibrium analysis
Ends up in crisis from all quarters (from formalist to historical school folks)
Story doesn't end with counter-counter revolution - it continues
No textbook on modern micro as it hasn't been consolidated in the same way as neoclassical
Paul Samuelson
1915-2009
Context
:
1915: Born, Gary, Indiana
1930s: Studies University of Chicago under economists Frank Knight and Henry Simons
1941: Receives MA, PhD, Harvard
1946: Foundations of Economic Analysis
1947: Becomes Professor at MIT
1970: Nobel in economics
“To a person of analytic ability, perceptive enough to realize that mathematical equipment was a powerful sword in economics, the world of economics was his or her oyster in 1935. The terrain was strewn with beautiful theorems waiting to be picked up and arranged in unified order.”
Mathematical foundations of modern economic theory
His static model was replaced with dynamic equilibrium in 1990s
Assumptions: equilibrium and stability
Relationships between prices and constraints allows shadow price discovery by LaGrange multipliers
i.e. much more sophisticated mathematics
Kenneth Arrow
(1921-2017)
Rediscovery of Edgeworth
Social Choice and Individual Values (1951)
Arrow’s Impossibility Theorem (1951) - impossible to produce a voting system order in which there are orderings that satisfy the following three criterion
Gloomy hypothesis for social choice (Sen improves this slightly)
General Equilibrium (with Debreu) (1954) - provides solution of how to get general equilibrium