History of Economic Thought - I

Ararsa A.

October 2022

Email: [email protected]

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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
3 economic thought

 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

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

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;
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 it tries to separate economic forces from political and social
  Normative economics - enter into the analysis as little as
possible other than simply only understanding it.
 explicitly concerns questions of 'what should be?’
 is the philosophical branch of economics that integrates
economics with ethics.
 The art of economics - concerns with questions of policy
 relates the science of economics to normative economics
 address interrelationships among politics, social forces, and
economic forces
 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
7  It combines history, institutions, and empirical study to gain
 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

8 and 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
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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
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Kuhn’s analysis, as the paradigm they preferred might prove to
 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
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protective belt which may be adjusted to defend hard core
 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

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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

15 economic theory
  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
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are often 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

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 Economics, Politics, Ethics and Philosophy were interconnected
  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)

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 supports state regulated system of education
  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

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  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

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

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operation to overcome the risks (interest in opening new
 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
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 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
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the right not merely to enjoy, but also to abuse and destroy
 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

30 obligations and 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
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
 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
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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)
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 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

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prices and stimulate business
 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
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 wrote that labor is the father, and land the mother of wealth
 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
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economy)
 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)
38  foreshadowed national income 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

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occupations, universal education, religious liberty, and creation of a
central bank, which Napoleon would later establish in 1800.
 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

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to land (the fixed factor), increasing returns may initially precede
diminishing 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

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

 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 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 labour 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)

 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
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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 at

Lausanne, 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
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of a commodity
 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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