Transcript Neoclassical Economists and Beyond

Neoclassical Economists
and Beyond
ECON 205W
Summer 2006
Prof. Cunningham
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Neclassical School
World view
 Values
 Goals
 Assumptions
 Methodology
 At the core
 Concepts developed
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Alfred Marshall
(1842-1924)
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Background
23 years at Cambridge
Established the Royal Economic Society
and was its first president
Founded the Economic Journal
Founded the Cambridge School of
Economics
Introduced the diagrammatic
methodology to economics
Legacy through Pigou, Robinson, Keynes
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Marshall (2)
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Assumed free competition, mobility of productive
resources, rational pursuit of economic
objectives.
Tried to make his theoretical models realistic.
Built on Classical Theory.
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“Natura Non Facit Saltum”
Kept utility theory in the background
Expanded the concepts of supply and demand
Focused more on the firm than on the consumer
or GE.
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Marshall (3)
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Usual interpretation of his work is as a
bridge from the classics to modern
economics. –Marshall rejected that view.
Favored partial equilibrium over general
equilibrium
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Ceteris Paribus
1890, Principles of Economics with Mary
Paley. 8 editions, last in 1920.
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Marshall (4)
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Demand Theory
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Identifies different kinds of industries—increasing cost,
decreasing cost, increasing returns to scale, decreasing, etc.
Footnote on imperfect competition.
Monetary Theory: Cambridge tradition.
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Q = f(P)
Friedman on Marshall’s demand curve
Considers income and substitution effects
M = kPy
Develops concepts of economic time—market run (immediate
present), short-run, long-run
Theory of quasi-rents.
Internal and external economies.
Tendency to focus on a single industry.
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Marshall (5)
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On labor and wages
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Wages are not determined by marginal productivity alone, but
also by supply and demand for labor.
Four laws of Derived Demand
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Cet. Par., the greater the substitutability of other factors for
labor, the greater will be the elasticity of demand for labor.
Cet. Par., the greater the price elasticity of product demand,
the greater will be the elasticity of labor demand.
Cet. Par., the larger the proportion of total production costs
accounted for by labor, the greater will be the elasticity of
labor demand.
Cet. Par., the greater the elasticity of the supply of other
inputs, the greater the elasticity of demand for labor.
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Irving Fisher (1867-1947)
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1911, Purchasing Power of Money
Quantity Theory
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No micro foundations, only macro
Long run
MV=PT
In percentage form p% = m% + v% - t%
For long-run stability, p% = 0
Therefore, m% = t% - v%
V%  0 over time, so m% = t%
To convert to income (GDP), T = cy
P% = y% for price stability
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Fisher (2)
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Very Monetarist
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Transmission mechanism
Creates detail in the equation of exchange by including
different forms of money with separate velocities.
Make currency redeemable for whatever quantity of
gold that would represent constant purchasing power.
I.e., the exchange rate for gold would vary.
Believed that business cycles were caused by erratic
changes in the money supply.
Saw debt as the cause of deflation in the Great
Depression.
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Recommended requiring 100% reserves on deposits.
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Ralph George Hawtrey
(1879-1975)
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British treasure official
Develops a theory of business cycles
caused by fluctuations in credit.
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Changes in the money supply cause interest
rate shifts that exert powerful effects on
wholesale merchants.
Suggested discretionary policy through
OMOs, changes in the re-discount rate,
and variations in the reserve
requirements of commercial banks.
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Swedish School
Most prominent thinker was Knut
Wicksell
 Keynes draws heavily on Wicksell
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Natural rate of interest
 Money rate of interest
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Anticipates Hicks and Robinson
 Common features of the Swedes
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Knut Wicksell (1851-1926)
Background
 Principal works available only in
German until 1930s
 Exponent of pure theory
 Examined a wide variety of social
and political problems
 Degrees in Math and Law
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Need Law degree to get econ. prof. job
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Wicksell (2)
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1900 (age 49) joins faculty of Univ. of Lund
1893, Value, Capital and Rent, translated into
English 1954
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Submitted to Upsalla Univ as dissertation, but not
accepted.
1896, Theory of Incidence of Taxation, accepted
as dissertation.
1898, Interest and Prices (English, 1934)
Lectures in Political Economy (two vols. 1901,
1906; English 1934-35)
Superior mathematician
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Wicksell (3)
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Contributions were mostly highly technical
refinements
Malthusian
Opposed to Socialism
Monetary Theory
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Not purely a quantity theorist
Anticipates Keynes in many areas
Discusses imperfect competition, sticky prices
Natural and Bank rates of interest
Monetary equilibrium
Work extended by Ohlin, Myrdahl, Lindahl
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Joan Robinson
(1903-83)
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Background
Received her degree in 1921, the first
year that it had been allowed for women
After Joan Robinson’s publication of The
Economics of Imperfect Competition,
Mary Paley Marshall wrote to Joan
“thank you for helping to lift off the
reproach cast on the economic women.”
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Joan never view herself as a feminist.
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Joan Robinson (2)
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1932, pamphlet “Economics is a Serious
Subject”
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Dedication “To JMK. To the optimist who showed that
optimism can be justified.”
1934, a mother, an author of many important
articles and the book Economics of Perfect
Competition (1933), she was made a
“probationary faculty assistant lecturer in
economics” at Cambridge.
The “circus” was meeting around Keynes. Close
collaboration on many topics.
Cambridge, 1930, lunch: Richard Kahn and the
Robinsons.
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Joan Robinson (3)
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With regard to his Banking, Policy, and the
Price Level, Dennis Robertson write of
Keynes:
“so much of chapters V and VI are due to
Keynes that neither of us knows how much is
Keynes and how much is Robertson.”
Keynes wrote that Kahn put in weeks going
over his manuscripts.
According to Paul Samuelson,
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Kahn may have contributed extensively to the
geometry and algebra in Joan Robinson’s book.
Kahn may have written parts of Keynes’ General
Theory.
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Joan Robinson (4)
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Imperfect Competition: the book
Shackle argues that Robinson essentially
provided for the “veritable destruction” of
traditional microeconomics.
Introduced monopsony. Argued for trade
unions or trade board to regulate.
Challenged marginal productivity theory.
Joan thought she had initiated a
revolution.
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Joan Robinson (5)
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Chamberlain
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Joan sent him the book in 1933, same year
that his book was published.
Thought Joan had stolen his work, possibly
even lifted whole sentences and paragraphs.
He had been working on the theory for about
10 years.
The key to monopolistic competition is
product differentiation.
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Piero Sraffa (1898-1983)
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Background
1927, moves to Cambridge, joins
Keynes’ “circus”.
1931, Prices and Production.
Wrote Works and Correspondence of
David Ricardo.
1960, Production of Commodities by
Means of Commodities: A Prelude to a
Critique of Economic Theory.
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Neo-Ricardian Theory.
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Sraffa (2)
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1960, Production of Commodities
Attempts to “purify” Keynesian theory
of any residual marginal elements.
 Distinguishes changes in relative prices
resulting from distributional changes
vs. changes in production techniques.
 Leads to Post Keynesian capital
controversies.
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Nicholas Kaldor (1908-86)
Background
 An Expenditure Tax (1955)
 The Scourge of Monetarism (1982)
 Completely opposed to orthodox
price theory based on marginal
products and the theory of income
determination based on IS-LM.
 Theory of Post Keynesian Growth
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