Transcript The Beginning of Microeconomics

Modern Microeconomics and
Macroeconomics
Several Paths
 Mathematical
• Partial Equilibrium
– Alfred Marshall
• General Equilibrium
– Leon Walras
• Distribution
– Wilfredo Pareto
Several Paths (cont.)
 Non-Mathematical
• Laissez-faire
– Austrian Economics
• Institutional
– Thorstein Veblen
Mathematical
M ath em atics an d M icroecon om ics
An o to in e
Au g u stin
C o u rn o t
A lfred M arsh all
L eon W alras
W ilfred o P areto
The Merging of Paths
 Paul
Samuelson combined Cournot, Jevons,
Pareto, Edgeworth and Fisher and
concluded that economics analysis had
primarily two concerns:
• Equilibrium
• Stability
• Problem is that such formalism lead to little
importance of partial equilibrium and more
emphasis on Walras general equilibrium
Paul Samuelson
 He
had two texts that basically shaped the
economic profession between the end of
WWII until about the early to mid 1970s
• The undergraduate book, Economics, used
graphs and was basically followed the
Marshellian model
• The graduate book, Foundations of Economics,
basically followed Cournot and Walras
Samuelson-Hicks
They took the geometry of the early 1900s and
after WWII converted to the mathematics of the
1960s and to the present
 To where Hal Varian suggests that models be built
using the KISS criterion:

• Keep it simple, stupid
• The idea being find a problem and find a simple model
and the generalized it
• However the emphasis remained strongly partial
equilibrium
The counterweight
 Milton
Friedman
• The approach became known as the Chicago
School
• Approach is Marshellian
• Economics as an engine of analysis rather than
an abstract work of economic modeling
 Gary
Becker
• Took the simple concept of maximization to
study a wide variety of issues
Modern Microeconomics
 Utility
still holds a strong position in the
undergraduate study but game theory is
slowly taking over at the graduate level
 Pedagogy has created two different world:
undergraduate and graduate….A Paul
Samuelson legacy
Empirical Economics
Econometrics is the merging of Mathematical
Economics and Statistics
 In other words, the formulation of hypothesis from
mathematical economics with statistics to formally
test those hypotheses
 Recall the earliest empirical work was the Gregory
King and Charles Davenant law of demand

Henry Moore
 Used
statistical procedures to test JB
Clark’s marginal productivity theory of
wages, which predicted that MP=w
 While there was problem with his analysis
the important aspect of it was the fact that
he used statistical tools
Henry Schultz
 Noted
that one got a different elasticity of
demand if we regressed quantity on price or
vice-versa
 The importance here is that statistical
measurement is not separate from theory
Macroeconomics
 Jevon’s
Sunspot Theory
• Related business cycles to the sunspot cycles
 Henry
Moore
• Trade cycles related to weather cycles
Heterodox Empiricist
 Wesley
C. Mitchell
• Institutionalist
• Saw statistics not as a way of testing economic
theories
• Instead he saw theories as the stories one would
give to explain empirical observations
• Initial approach of the National Bureau of
Economic Research (NBER)
Simon Kuznets
 Student
of Mitchell
• Developed the modern national income
accounting
 Wassily
Leontief organized data in the
development of input-output models
Econometrics
 E.
J. Working first discussed the
identification problem. If one correlates
price and quantity does one get demand or
supply
 Ragnar Frisch and Jan Tinbergen develop
first macroeconomic models
• System of equations
Trygve Haavelmo
Trygve Haavelmo is the first to argue that the use
of statistics in economics implied that one was
searching for probabilistic theories.
 In other words, the statistics were part of
understanding economic theory…

• Correlation between price and quantity does not explain
supply or demand
• Theory needs to be part of the statistical construct
Cowles Commission
 Alfred
Cowles, wealthy investment advisor,
sponsored a commission in 1932 to use
Trygve Haavelmo approach to examine
economic issues
 Commission was first set in Colorado
Springs, in 1937 moved to Chicago
 In 1950s moved to YALE
Other Issues
 Bayesian
Econometrics
 Experimental Economists