History of Economic Thought - I

Ararsa A.

November 2024

Email: ararsaabera@gmail.com

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OUTLINE

1. Introduction

2. Methodological issues of Economics

3. Ancient/Pre-classical Economic Thoughts

4. Classical School of Economic Thoughts

5. Rise of Socialist Thoughts

6. Marginalist Revolution

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CHAPTER 1: INTRODUCTION

1.1. Definition of History of Economic Thought

History of Economic Thought(HET):

 shows the development of various economic thinking

 is a historical account of the development of economic ideologies

 consults economic history to understand and interpret economic

thinking in the past and present

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History of Economics, Economic History and History of Economic

Thought – Difference? Similarity?

 Economic history – tells us about various economic activities
Objective study of development of economic life of particular
society
Focuses on fact
 History of economic thought and History of economics – are
subjective study which evaluates the facts in economic history
 History of economics is the subcomponent of history of economic
thought
focus on development of intellectual efforts to understand and interpret
4 economic thinking in the past
 Scope and Significance of HET
 Scope of HET – Very wide
 provides a general picture of the development of economic thinking
 the study of human thinking from the time man started formulating and
expressing their ideas through times
 HET evolved considerably over time

 Why Study of the History of Economic Thought?

 Enhances our understanding of contemporary economic thought

 Provides closer check on irresponsible generalizations

 Useful in solving unanswered questions in the discipline

 Helps us as a source of inspiration for a new ideas

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CHAPTER 2: CONTROVERSIES IN AND EVOLUTION OF VARIOUS
METHODOLOGIES
 methodological decisions concerns about what and how economists know
what they know
 There are varieties of methodologies in economics

b) Positive vs Normative Economics method

 Positive Economics - concerns the forces that govern economic activity

 purpose of these inquiries is to obtain understanding for the sake of
understanding
 How does the economy work? What are the forces that determine?
 methodology of positive economics is formal and abstract;
 it tries to separate economic forces from political and social forces.
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  Normative economics - enter into the analysis as little as possible rather
than simply only understanding it.
 explicitly concerns questions of 'what should be?’
 is the philosophical branch of economics that integrates economics with
ethics.
 Verification – is the integration of reason with empirical observation

 Involves three methodologies

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 a) Inductive reasoning: is the reasoning proceeding from sensory perceptions

to general concepts
b) deductive reasoning (logic): applies certain clear and distinct general ideas
to particular instances
 most philosophers believe that knowledge derives from a mix of these,

 the debate usually centers on the nature of the optimal mix.

 philosopher Charles Peirce gave to a particular mix of the inductive and

deductive approaches, the name Abductive.

c) Abductive Reasoning: uses both deduction and induction to tell a
reasonable story of what happened
 It combines history, institutions, and empirical study to gain insight
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 The Evolution of Methodological Thought
1. Logical Positivism

 Describe economics as a positive science whose goal is to devise theories that

can be empirically tested.

 Purges normative discussions from economics as unscientific.

 linked with deductive reasoning which is a positivist desire to let the facts

speak for themselves

 argued that scientists develop a deductive structure (a logical theory) that

leads to empirically testable propositions

 Deductive theory – is accepted as true only after empirically tested and

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verified
 2. Falsificationism

 best expressed in the writings of Karl Popper, who argued in the 1930s that

empirical tests do not establish the truth of a theory, only its falsity

 States that it is never possible to “verify‛ a theory, since one cannot perform all

possible tests of the theory

 goal of science ---- should be to develop theories with empirically testable

hypotheses and then to try to falsify them, discarding those that prove false

 Progression of science ---- depends upon the continuing falsification of theories

 There can be only a science of falsification not verification.

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 3. Paradigm

 The approach and body of knowledge built into researchers’ analyses that

conforms to mainstream scientific thought at any given time

 As to Kuhn, most scientific work is normal science in which researchers try

to solve puzzles posed using the framework of the existing paradigm

 Once a superior paradigm is developed, a scientific revolution becomes

possible.

 Those who disagreed with mainstream theory quickly adopted Kuhn’s

analysis, as the paradigm they preferred might prove to be superior to, and
thus able to supplant, the mainstream view.
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 4. Research Programs

 Was raised by Imre Lakatos during the late 1960s and 1970s

 Integrates falsificationism of Popper with scientific paradigms of Kuhn.

 view that the existing theory might not embody the truth

 observed that scientists are engaged in the development of competing research

programs, each of which involves analyzing and attempting to falsify a set of

data but also involves unquestionably accepting a set of hard core logical
postulates.

 Theories – has hard core (adherents do not attempt to falsify) and protective

belt which may be adjusted to defend hard core

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 5. Sociological and Rhetorical Approaches to
 question the Platonic vision of truth as absolute

 refuse to assume the existence of an ultimate and inviolable truth –

 they searched out other reasons to explain why people believe what they

believe
 rhetorical approach to methodology - emphasizes the persuasiveness of

language, contending that a theory may be accepted not because it is

inherently true but because its advocates succeed in convincing others of its
value by means of their superior rhetoric.

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 Sociological approach - examines the social and institutional constraints
influencing the acceptability of a theory
 these two theories most notably share is skepticism about one’s ability to

discover truth, or even whether truth exists at all.

 theory has not necessarily evolved because it is the closest to the truth; it may

have evolved for a variety of reasons, of which truth—if it exists—is only one

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 5. Post-rhetorical Methodology

 combine insights such as Feyerabend’s (anything goes) with more workable

approaches and emphasize abduction rather than deduction or induction

 post-rhetorical economists will be more skeptical of their knowledge, less

likely to dismiss an argument as false before they have closely considered it,

 will be much more likely than a logical positivist or a falsificationist to follow

Bayesian, rather than classical, statistics

 Bayesians believe one can discover higher or lower degrees of truth in

statements, but not ultimate truth

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 Approach to the History of Economic Thought

i) Relativist and Absolutist Approaches

 Relativist historians concern with the historical, economic, sociological, and

political forces that brought to examine certain economic questions, with the
ways in which these forces shape the content of emerging theory.
 Says history plays a part in the development of every economic theory.

 Absolutist writers stress internal forces, such as the increasing

professionalism in economics, to account for the development of economic

theory

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  Progress of theory does not merely reflect historical circumstances but

depends on the discovery and explanation of unsolved problems or

paradoxes by trained professionals reacting to intellectual developments
within the profession.
 it is possible to rank theories absolutely according to their worth; the most

recent theory is likely to contain less error and be closer to the truth than
earlier theories

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 ii) Orthodox and Heterodox Economists
 Orthodox writers - largely focused on the four problems of allocation,

distribution, stability, and growth.

 have taken as given (something they are not interested in explaining) the
specific social, political, and economic institutions and have studied
economic behavior in the context of these institutions
 Heterodox writers – rather- studied the forces that produce changes in the

society and economy.

 Often, what orthodox writers take as given, heterodox writers try to explain;
and what heterodox writers take as given, orthodox economists try to
explain.
 Thus, the differences between heterodox and orthodox economists are often

18 differences in focus, not diametrically opposed theories.

 CHAPTER THREE: PRE-CLASSICAL ECONOMICS
 Classified as ancient (as Greeks, Romans,..) and medieval economic ideas.

 dominated with Economic ideas in connection to concerns for justice,

fairness, equality and non-market methods of resource allocation.

Ancient Economic Ideas

1. Hebrews
 dates back to 2500 B.C.

 Believed to be the origin of Western Civilization

 Economics, Politics, Ethics and Philosophy were interconnected

 importance to agriculture
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  Prohibited:

 false weights and measures and adulteration of articles of consumption

 interest taking or usury (high rate of interest)

 export of food grains (in times of scarcity and famine), hoarding of food

grains

 Labour wage payment – was in kind

 Seventh and Jubilee year – land fertility, prevent inequality in wealth (land,

debt).

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 2. The Greeks
 laid the foundation of economics as a science

a) Plato (427-347 B.C.)

 gives the theory of an ideal state in his most celebrated book, ‘The Republic’

 finds the state as the more suitable place to discuss about the morality than

an individual (large is visible than small)

 Plato traced the origin of the State to economic considerations

 Gives more importance to education (to regulate crime)

 supports state regulated system of education

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  Defines division of labor (DL) as division of employments or professions as

an aid to social organization, a means of easier and better production

 As to Plato, DL determines the market, not determined by market as for

Adam Smith

 DL is beneficial to entire society, not only to employers as of Adam Smith.

 cause of DL - is the difference in skill and talent (Adam Smith division of

labour leads to differences in skill and talent).

 property should be collectively owned (including wives and children)

 advocated communism to eliminate the evils of caste system (to avoid class

22 conflict) but not strict communism.

  Plato’s communism did not stand for an absolute mechanical equality, but

recognised authority and class distinctions (two classes: the ruler comprising
of guardians and auxiliaries and the ruled called artisans)

 each citizen was to be given an in alienable plot of land with the right to

choose a single heir either by birth or by adoption

 the value of a product or factors of productions are determined by an

inherent quality of the product or factors

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  considered agriculture as the most desirable occupation.

 Plato money recognized as a medium of exchange (Cartal theory )

 not favour the idea of allowing gold and silver to be used by the common

man (as currency).

 prohibited interest taking for loans, but only for delayed loan.

 criticized riches and poverty

 the treatment of the slaves should be liberal

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 b) Aristotle (384-322 B.C.)
 was a student of Plato

 was the first analytical economist who laid the foundation of the science of

Economics
 analyses Economics according to ethical principles and examines it micro

economically and macro economically

 Needs, analyzed their nature, economic goods by which economic needs are

satisfied

 there should be no regulation to limit private property but also condemned the

pursuit of economic gains

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 Aristotle (384-322 B.C.) … continued

 Scarcity can be addressed by reducing consumption, by changing human attitudes

(the basis for utopians and socialists’ hopes of eliminating conflicts that are
inherent in scarcity and self-interested behavior).

 origin of the state - as an outcome of the natural instinct of man to associate

with his fellow beings not a result of economic needs and their satisfaction
 value - as an inherent quality of the commodity and depended upon its

usefulness
 Defined monopoly as a single seller and condemned it as unjust

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 Aristotle (384-322 B.C.) … continued

 recognized money as measure of value and implicitly as a store of value (metalist

theory); not suggested as standard of differed payments.

 condemned interest, as usury

 believed that poverty was the breeding ground of revolution and crime also

opposed too much concentration of wealth

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 c) Xenophon
 Was the third Greek writer
 the man of simple tastes and little substance is wealthy in comparison with
the man of great possessions on who excessive claims rest.
 known for his praise of agriculture

 law of diminishing returns (If anyone employs hands in excess of requirements, it

is reckoned (computed) as a loss.”)

 argues for the abolition of all regulations that inflict disabilities on foreign

residents as he saw them as a source of revenue

 associated a property of increasing returns with silver mining

 suggests something approaching to a joint stock method of operation to

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overcome the risks (interest in opening new cuttings, i.e., new silver mines)
 3) Romance

 Absence of analytic work in spite of expanded eco activities

 contribution of Rome to theory is meager to the extent of being negligible

 important - Roman law that recognizes private property and commerce

 Rome contribution to the discussion of economic topics falls under three

groups: philosophers, the agricultural writers, and the jurists.

a) philosophers (Cicero and Seneca)

 Cicero - condemned usury reasoning it incurs people’s ill will

• praise of agriculture and in dispraise of other occupations.

 Seneca - views money as the root of most evils.

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 envy and greed are the sources of all injustice.
 b) The Agricultural Writers (Cato, Varro and Columella)

 concerned above all with the technique of agriculture and only incidentally

with the economics of agriculture

 They wrote in praise of agriculture

c) Jurists and the Roman law:

 represents the greatest legacy of Rome to the civilized world

 Jus gentium law - natural law, assumption that any rule of law common to all

nations must be fundamentally valid and just

 The law that promotes harsh individualism - belief that everyone has the

right to do what he likes with what is his own.

 This law states conception of private property necessarily includes the right
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not merely to enjoy, but also to abuse and destroy arbitrarily
 The Medieval Economics and Feudalism
 Ranges from fall of the Roman Empire [476 AD] to the late 15 Century
[discovery of America by Columbus in 1492]
 Scholastic writers were educated monks who tried to provide religious

guidelines to be applied to secular activities

 Intended to reconcile the philosophy of the ancient philosophers with medieval

Christian theology
 Medieval scholasticism was not philosophy or theology itself, but a tool and

method for learning

 more or less synonymous with the feudal system - society was held together by

mutual obligations and services (ranks or status – led to obligations and

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priviledges)
 The Medieval Economics and Feudalism …. continued
 small volume of trade and money transactions

 possibility of making gains, or laying up treasure on earth was excluded

 Church sought to regulate all human relationships

 Society was bound together by tradition custom and authority (not by market)

 Feudal system which rely on subsistence agriculture.

 One of medieval writer and theologian - St. Thomas Aquinas (1225-1274)

 influenced by Aristotle and Christianity

 men are equal in the sight of God

 inequality as part of the arrangement ordained by the almightily

32  dignity of work (industriousness), not mark of slave as for Greeks

 The Medieval Economics and Feudalism …. continued

 respecting each other’s rights and positions in life - Each should receive that to

which he is entitled

 Power of acquisition and administering and right to use property

 Justice implies equality, equality in exchange (selling at higher price or buying

it at a lower price than it is worth) is unjust

 just wage – is a wage which was required to enable the worker to live decently

in the station of life in which he was placed

 Money – as a measure of values

 Condemnation of usury (regard it as offense against justice)

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 MERCANTALISM
 appeared between the Middle Ages and the period of the triumph of Laissez-Faire

 owes importance to the merchant and trade (mercantile capitalist)

 promotion of nationalism

 strong government, economic and military expansion

 less importance attached to market forces

 gold and silver – the most desirable form of wealth

 restriction on export of raw materials and on import of manufactured goods

(fear of goods)

 Rise of trade and higher interdependence, Cities, use of money

 Navigation and discoveries

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 MERCANTALISM … continued

 Importance of a large, hard-working population (Idleness, begging by able-

bodied people and thievery were severely punished)

 Contended that Low wage- important to reduce idleness and enhance labor

force participation(emphasized the income effect only)

 Colonies, intensified rivalry between different nationalities

 benefited the merchant capitalist, the Kings, and the government officials (an

extreme example of rent seeking behavior).

 Sir Thomas Mun – is among well-known mercantilist
 Write ‚the means to enrich the Kingdom, and increase our treasure‛
 Export surplus – is the source of wealth (not production or accumulation of
capital goods)
35  Argues that trade at home could not enrich a country
 MERCANTALISM … continued

 Mun was sufficiently astute to include invisible items to the BoP

 the freight charges for shipping goods, ships lost at sea, insurance, money paid

out in supporting foreign wars,

 international payment of bribes and funds for espionage

 expenses of travelers, gifts to foreigners and ambassadors, interest on money,

 smuggling to evade tariffs, and contributions to religious orders

 Other mercantilists:

a) Gerard Malynes (1586–1641) - more money in a country would raise prices and

stimulate business
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 MERCANTALISM … continued

a) Charles Davenant (1656–1714) - an enlightened mercantilist,

b) Jean Baptiste Colbert (1619–1683) - represents the heart and soul of mercantilism,

 regarded commerce as a continual and bitter war among nations for economic

advantage.

 favored a large, hard-working, and poorly paid population

c) Sir William Petty (1623 –1687) – velocity of money, division of labor;; Labor

theory of value ;

 rent as the surplus from land

 wrote that labor is the father, and land the mother of wealth
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 PHYSIOCRATIC SCHOOL OF THOUGHT
 The term physiocracy means the rule of nature

 appeared end of the Mercantilist epoch around 1756 and ended in 1776

 was a reaction to Mercantilism and feudalism in France

 emphasis on agriculture and laissez faire

 advance thinking (recognition of the role of the markets)

 Governments should never interfere in economic affairs

 natural order was an ideal order of things, which was arranged in conformity

with the laws of nature (laissez faire, emphasis on agriculture, taxation on land
owner and inter relatedness of the economy)
 economy was believed to be interdependent and the circular flow of goods and
38 money was analyzed. ‚Tableau economique
 PHYSIOCRATIC SCHOOL continued…
 Emphasized production rather than exchange as a source of wealth

 Were opposing obstacles to capitalistic economic development

Contributors
a) François Quesnay (1694–1774)
 favored large farms managed by entrepreneurs over the small farms
 Tableau Economique- circular flow of goods and money in an ideal, freely
competitive economy
 traces spending or revenue flows among three classes: farmers, landlords, and
manufacturers and merchants.
 first systematic analysis of the flow of wealth (a macroeconomic basis)

 foreshadowed national income analysis

39  predecessor of the input-output analysis

 PHYSIOCRATIC SCHOOL continued…
b) Anne Robert Jacques Turgot (1727–1781)
 became the finance minister of France in 1774

 introduced antifeudal and anti-mercantilist measures in keeping with

physiocratic ideas
 Freedom of internal grain trade introduced; guilds and privileged trading

corporations were abolished.

 He ended the oppressive corvée

 Turgot cut government spending drastically, opposed to their extravagance

 advocated a tax on the nobility, freedom of all people to choose their
occupations, universal education, religious liberty, and creation of a central
bank, which Napoleon would later establish in 1800.
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 Anne Robert Jacques Turgot - continued…
 Turgot dismissed from office because of the critics from those unprivileged
with his reforms and the intolerance of the regime to his reforms.
 his reforms were dismissed; but his downfall made the French Revolution

inevitable
 His theory of wage - competition among workers lowers the wage to the

minimum subsistence level (later called iron law of wages)

 Farmers - considered as sole source of the riches

 law of diminishing returns - Turgot’s greatest contribution in the realm of

economic theory
 when successive units of a variable factor of production are added to land
(the fixed factor), increasing returns may initially precede diminishing
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returns
 Chapter-4: Classical School

 The doctrine which came after physiocracy

 Founder – Adam Smith

 Celebrated for his laissez-faire ideology

 Superiority of the market mechanism and the invisible hand.

Other contributors

 Bentham - contribution on utility and the law of diminishing utility

 Malthus - population theory, population checks

 Ricardo - theories of value and international trade

 Baptist Say - law of the market which is known as ―Says law‖

 J.S. Mill - theory of distribution and relatively interventionist distribution ideologies

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 Chapter-5: The Rise of Socialist Thought

 arose as a reaction to the economic and social changes associated with the Industrial Revolution (in

England and French)

 against the abuses of the monarchy and oppressive authority; evils of factory system (such as

unemployment, long hours, unsanitary working conditions)

 Favor – public over private ownership – permits exploitation; co-operation over competition;

 State should direct the economy – achieve economic equality for all citizens

 Society should be classless

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 Pre-Marxian Socialist Thinkers:
 Thought to begun with Plato, in virtue of his advocacy of communism
Different types of early socialism
a) Utopian Socialism: developed their ideas at a time when the industrial workers were still weak and
unorganized.

 ideal socialist society where all could live happily, equality of all

 believed that education and improved working conditions could peacefully eradicate the worst

aspects of capitalism

 preached universal brotherly love rather than class struggle

 material equality for all men, but amount of work required from each man differed

 destroyed the work ethic; stunted the invention of new items

 Thinkers: Henri Comte de Saint Simon, Charles Fourrier, Robert Owen

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 b) State Socialism
 government ownership and operation of all or specific sectors for purposes of achieving overall social
objectives rather than profit
 can occur within a capitalist framework

c) Christian Socialism

 Workers offered the solace of religion to assuage their pain and to provide hope

 Bible was to form the manual to all

 Promoted mutual love and fellowship,

 Property owned by the rich was to be held in trust for the benefit of everybody

 advocated sanitary reform, education, factory legislation, and cooperatives.

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 d) Anarchism:

 all forms of government are coercive, corrupt and should be abolished

 Private property should be replaced by collective ownership of capital by cooperating groups

 Mutual understanding, cooperation, and complete liberty

e) Communism:

 the stage of society that eventually supersedes socialism( Marx)

 presupposes a superabundance of goods relative to wants

 devotion to society as selfless as a person‘s loyalty to his or her family

 ―From each according to his ability, to each according to his need.‖

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 f) Revisionism
 abjured the class struggle; denied that the state is necessarily an instrument of the wealthy class;
 pinned its hopes on education, electioneering, and gaining control of government through the ballot

 government was to regulate monopolies, control working conditions in factories, take over some

public utilities, and gradually extend its ownership of capital

g) Syndicalism
 were anti parliamentarian and antimilitarist
 believed that socialism deteriorates into bourgeois beliefs when it engages in political and
parliamentary activity
 workers require is one big union that will not play the bourgeois game of seeking social reform and
the amelioration of conditions
 relied exclusively on revolutionary unionism and the general strike for the overthrow of government

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 h) Guild Socialism

 accepted the state as a necessary institution for expression of the general interests of citizens as

consumers

 The government was to develop overall economic policy for the whole community, not merely for the

workers

i) Scientific Socialism (Marxian Socialism)

 dismissed the earlier socialists approach of dramatic reform against capitalist

 sought to show that capitalism had internal contradictions that would ensure its eventual demise

(first scientific reasoning)

 believed that social revolution was inevitable in capitalist countries.

 advocated that the workers of the world unite to hasten this event

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 Karl Marx‘s Society
 humans - are not motivated by grand ideas but instead by material concerns (materialistic
conception)
 men's economic activities are fundamental and they determine the general way the character of
everything else they do
 History is a record of class struggles (between haves and have nots)

 change occurs in the society because of the conflict of antagonistic elements which are ultimately

synthesized and transformed into a new and better concept (dialectical materialism)

 Origin of state - with the emergence of societal classes and private property and the need to

safeguard it – making laws

 Population – not a problem in socialism – but in capitalism because of the inequality created (wealth

accumulation in hands of few)

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 Karl Marx‘s Economic Ideas

 Value of the commodity - the socially necessary labor time embodied in the commodity, considering

normal conditions of production and the average skill and intensity of labor at the time.

 Surplus Value (s)– is the extra produce by a worker (in labor time) above the level of commodity

required for his/her subsistence (QS) that goes into the pockets of the capitalists.

 Surplus Labor - the number of hours during which the 'workman produces the surplus value

 Capital - divided capital into constant (raw materials and machinery ) and variable (amount spent on

purchasing the labor power)

 Rate of Surplus Value - is the proportion of the surplus value to the variable capital

 distinguished b/n simple rate of surplus value (s/v) and the annual rate of surplus value ( sn/v)

where n represents the number of turnovers of the variable capital in particular year.

 The rate of surplus value expresses the degree of exploitation of labor by capital
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 Karl Marx‘s Economic Ideas
 The rate of profit - the ratio of the surplus value to the total capital (s/c+v)

 Organic composition of capital - ratio of constant capital to total capital (c/c+ v )

 Concentration of Capital - the tendency for capital as a whole to accumulate

 give rise to a severe competitive struggle among the producers

 ends in the ruin of many small capitalists (the strong either crushes or absorbs the weak one)

 Large-scale production - over-production – depreciation- concentration of rural population in

towns (rise in number of unemployed laborer)

 Industrial Crises

 Growth of Pauperism - poverty

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 Chapter – 6: The Marginalists Revolution
 Against 19th century Europe social problems – 3 approaches (promote socialism; to bolster trade

unionism; or to demand government action to ameliorate conditions by regulating the economy,

eliminating abuses, and redistributing income)
 Marginalists - opposed all three ‗solutions‘

 concluded that, although the value and distribution theories of the classical economists were

inaccurate, their policy views were correct

 focused its attention on the point of change where decisions are made (margin), incremental unit

 people act rationally in balancing pleasures and pains, in measuring marginal utilities of different

goods, and in balancing present against future needs.

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 Marginalists continued…
 individual person and firm take center stage (Microeconomic emphasis)

 use the abstract, deductive method

 Rejected the historical method in favor of the analytical method

 Assumes the pure competition

 demand became the primary force in price determination

 Emphasis on subjective utility

 believed that economic forces generally tend toward equilibrium—a balancing of opposing forces

 lumped land and capital resources together in their analysis

 continued the classical school‘s defense of minimal government involvement in the economy as the

most desirable policy

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 Forerunners of the Marginalist School

a) Antoine Augustin Cournot

 first economist to apply mathematics to economic analysis

 his analysis focused on the rates of change of total cost and revenue functions (MC &MR)

 firm can maximize its profits by setting a price at which MR=MC. This also applies to monopolistic

firm with positive MCs.

 first economist to analyze the conduct and performance of sellers in an oligopolistic market

structure with two firms competing (duopoly)

b) Jules Dupuit

 Was engineer

 Developed diminishing marginal utility concept (water)

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 Jules Dupuit …
 as the price of a good falls, people buy more of it to satisfy less pressing, lower marginal utility wants

(MU and demand r/p)

 Consumer Surplus - the sum of differences between each unit‘s marginal utility and its price

 Monopoly Price discrimination - can occur only where it is possible to segregate buyers into

identifiable groups and where resale of the product by customers is impossible or prohibitively
expensive.
 It converts consumer surplus to higher revenues

 can also increase total output and enhance total utility

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 c) Johann Heinrich Von Thünen
 founder of location theory and agricultural economics
 With increasing distance from the Town, the land will progressively be given up to products cheap to
transport in relation to value
 established a crude marginal productivity theory of wages and capital.

 employer should add units of labor until the MRPL = Wage

d) Herman Heindrich Gossen

 Two laws

 The law of diminishing returns, explain how voluntary exchange produces mutual gains in utility

 the rational person should allocate his/her money income so that the last unit of money spent on

each product bought yields the same amount of extra utility i.e MUx/Px = MUy/Py is a rational
consumption spending to secure maximum satisfaction

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 i) The First Generation Marginalists
 arisen almost simultaneously in different places at the time

 Were W. Stanley Jevons in England, Carl Menger in Austria, and Léon Walras, Switzerland

a) William Stanley Jevons

 Theory of diminishing marginal utility - utility cannot be measured directly, at least with the tools at

hand but only by observing human behavior and noting human preferences
 rejected any attempt to compare the intensity of pleasures and pains among different people

 But a single individual can compare utilities of successive units of a single good, and can compare

the MUs of several goods

 used graphical analysis to illustrate his ―law of variation of the final degree of utility of a commodity

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 a) William Stanley Jevons continued…
 general theory of rational choice - equi-marginal rule - maximize utility allocation of money income in

such a way that the MU of the last dollar spent on all commodities is equal: MUx/Px = MUy/Py …
=MUn/Pn
 Cost of production determines supply; Supply determines final degree of utility; Final degree of utility

determines value.
 favored free public museums, concerts, libraries, and education.

 He believed that child labor should be restricted by law and that health and safety conditions in

factories should be regulated.

 Labor: Its value must be determined by the value of the produce. When exchange value changes the

value of labor used to produce the good changes

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 b) Carl Menger
 published his pathbreaking treatise, Principles of Economics

 his theories of value and imputation were among his contributions.

 Menger’s Value Theory: based on the concept of utility, like that of Jevons with no use of

mathematics
 The basis for exchange value for Menger is the difference in relative subjective valuations of the

same goods by different individuals

 The Theory of Imputation: present value of the means of production is equal to the prospective value

(based on marginal utility) of the consumer goods they will produce, with two deductions: a margin
subtracted ―for the value of the services of capital‖ (interest) and a reward for entrepreneurial
activity (profit).

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 c) Friedrich Von Wieser
 introduced the term marginal utility to the economic lexicon, although Dupuit, Jevons, and Menger

had developed the concept before him

 famous for opportunity-cost principle, or the alternative-cost concept

 suggests that the value of a commodity is the value of the commodities forgone, but what

determined the value of those alternative goods is unclear.

d) Eugen von Böhm-Bawerk
 stands out for his analysis of the element of time—not time in relation to systematic changes in the

economy or in relation to economic growth, but time as a significant element in the normal course of
economic affairs, influencing all values, prices, and incomes.

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 Eugen von Böhm-Bawerk continued…
 Theory of Interest – clearly shows his incorporation of time in economic analysis

 Interest arises for three reasons: Present orientation (wish to enjoy life today rather than sacrifice for

the future); Expectation of rising wealth (prepared to borrow now); and Roundabout production
(more roundabout the process of production, the more productive and efficient it becomes)
 total utility of a good is its marginal utility times the number of units

e) Léon Walras
 developed and advocated general equilibrium analysis;

 emphasized the application of mathematics to economic analysis and

 is credited for calling economists attention to Cournot‘s earlier work.

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 f) The Austrian School
 known as the "Vienna school" and the "psychological school―

 Known for its belief that the workings of the broad economy are the sum of smaller individual

decisions and actions

 uses logic of a priori thinking—something a person can think on his/her own without relying on the

outside world
 whereas other mainstream schools of economics, like the neoclassical school, the new Keynesians

and others, make use of data and mathematical models to prove their point objectively
 Austrian school can be more specifically contrasted with the German historical school that rejects

the universal application of any economic theorem

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 ii) The Second Generation Marginalists
a) Francis y. Edgeworth
 accepted Bentham‘s notion that every person is a ―pleasure machine

 Consumers seek to maximize the utility from their limited income,

 workers seek to maximize the net gain from their labor, and

 entrepreneurs seek to maximize their profits

 Upheld differential calculus as the most fruitful tool for analyzing this economic behavior
 originated the idea of an indifference curve

 indeterminacy that we now generally associate with the pricing behavior of oligopolists

 elucidated the difference between average and marginal product

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 Second Generation Marginalists continued…

b) Francis y. Knut Wicksell (1851–1926)

 was deeply influenced by the Malthusian theory of population and wrote on:

 population and family planning, feminism, alcoholism, and the monarchy

 was much more the pure theorist

 wrote on a number of topics, including public finance, price theory, marginal productivity theory,

public choice theory

 economic instability - the basis of differences between the ―natural‖ (return on new capital) and

―market‖ (what banks charge) rates of interest

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 The Second Generation Marginalists continued…

b) John Bates Clark

 invented the term marginal productivity, and presented marginal productivity (MP) theory of

distribution
 distribution of the income of society is controlled by a natural law

 assigns to everyone what he has specifically produced

 his theory was based on the law of diminishing returns, which he applied to all factors of production

 MP of a factor alone cannot determine its rate of reward unless the quantity of a factor supplied is

assumed to be fixed

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