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Neoclassical Economists and Beyond

Neoclassical Economists and Beyond. ECON 205W Summer 2006 Prof. Cunningham. Neclassical School. World view Values Goals Assumptions Methodology At the core Concepts developed. Alfred Marshall (1842-1924). Background 23 years at Cambridge

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Neoclassical Economists and Beyond

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  1. Neoclassical Economistsand Beyond ECON 205W Summer 2006 Prof. Cunningham

  2. Neclassical School • World view • Values • Goals • Assumptions • Methodology • At the core • Concepts developed

  3. Alfred Marshall (1842-1924) • 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

  4. Marshall (2) • Assumed free competition, mobility of productive resources, rational pursuit of economic objectives. • Tried to make his theoretical models realistic. • Built on Classical Theory. • “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.

  5. Marshall (3) • 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 • Ceteris Paribus • 1890, Principles of Economics with Mary Paley. 8 editions, last in 1920.

  6. Marshall (4) • Demand Theory • Q = f(P) • Friedman on Marshall’s demand curve • Considers income and substitution effects • Identifies different kinds of industries—increasing cost, decreasing cost, increasing returns to scale, decreasing, etc. • Footnote on imperfect competition. • Monetary Theory: Cambridge tradition. • 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.

  7. Marshall (5) • On labor and wages • Wages are not determined by marginal productivity alone, but also by supply and demand for labor. • Four laws of Derived Demand • 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.

  8. Irving Fisher (1867-1947) • 1911, Purchasing Power of Money • Quantity Theory • 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

  9. Fisher (2) • Very Monetarist • 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. • Recommended requiring 100% reserves on deposits.

  10. Ralph George Hawtrey(1879-1975) • British treasure official • Develops a theory of business cycles caused by fluctuations in credit. • 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.

  11. Swedish School • Most prominent thinker was Knut Wicksell • Keynes draws heavily on Wicksell • Natural rate of interest • Money rate of interest • Anticipates Hicks and Robinson • Common features of the Swedes

  12. 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 • Need Law degree to get econ. prof. job

  13. Wicksell (2) • 1900 (age 49) joins faculty of Univ. of Lund • 1893, Value, Capital and Rent, translated into English 1954 • 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

  14. Wicksell (3) • Contributions were mostly highly technical refinements • Malthusian • Opposed to Socialism • Monetary Theory • 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

  15. Joan Robinson (1903-83) • 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.” • Joan never view herself as a feminist.

  16. Joan Robinson (2) • 1932, pamphlet “Economics is a Serious Subject” • 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.

  17. Joan Robinson (3) • 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, • Kahn may have contributed extensively to the geometry and algebra in Joan Robinson’s book. • Kahn may have written parts of Keynes’ General Theory.

  18. Joan Robinson (4) • 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.

  19. Joan Robinson (5) • Chamberlain • 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.

  20. Piero Sraffa (1898-1983) • 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. • Neo-Ricardian Theory.

  21. Sraffa (2) • 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.

  22. 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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