Neoclassical Schools (1871-today)

In Economics the period which begins with the Marginalist Revolution (1871) and extends until today is called the period of the Neoclassical Schools.

The Marginalist Revolution

Marginalist Revolution was the name given to a movement which took place (almost) simultaneouly and independently during the end of the XIX century led by a series of works which lay the foundation for a new concept of Economics and which contributed to transform it into an exact science.

This programatic goal -- to transform Economics into an exact science -- find in the books of Carl Menger (1871) William Stanley Jevons (1871) and Léon Walras (1874) its decisive moments and it is exactly to designate this multiple explosion the that name "Marginalist Revolution" has been coined.

History

Adam Smith (1776), David Ricardo (1817) and the Classicals (which adopted a cost of production theory of value) struggled to understand what came to be called the paradox of "value in use" versus "value in exchange", usually exemplified as the "paradox of diamond and water". Water is essential, diamonds are frivoulous. But the price of diamonds is far higher than that of water. Smith and the Classical School had failed to distinguish between "total utility" and "marginal utility" . The elaboration of this insight transformed economics in the late nineteenth century, and the fruits of the marginalist revolution continue to set the basic framework for contemporary microeconomics.

The creation of the Theory of Marginal Utility

The creation of the marginal utility's concept, which flourished during the end of the XIX century, brought the answer to the paradox and has been the theoretical basis for the economic analysis of demand.

The value of marginal utility is defined as "the additional utility perceived by the consumer by the addition of one extra unit of a good".

For example: a hungry consumer finds an enourmous utilitity by eating a first loaf of bread. This utility declines as he keeps eating more units. The 10th loaf of bread represents for him an utility far smaller than the first one. And the 100th loaf might represent no utility at all.

The creators of the concept

Demand analysis became possible by the theory of utility, the mathematical tools of which were first developed by Hermann Heinrich Gossen (1810-1858) in Germany. However, due to its abstract and mathematical nature, Gossen's work was dismissed by the all- powerful German Historical School; his work was only uncovered and graciously acknowledged by Jevons in 1878. Grossen is considered a pro-marginalist.

Almost simultaneously Carl Menger in Austria (1871), Léon Walras in France (1874-77) e William Stanley Jevons in England (1871) published their works and became the fathers of the Marginalist Revolution .

Later Alfred Marshal in England, on his book Principles of Economics , greatly extended the concept and recognized that prices are determined simultaneoulsy by factors of cost and factors of demand. Marshall's analysis also analyses the complexes phenomena ocurring in a price system, with various goods interacting among themselves and affecting each other's prices.

Carl Menger founded the Austrian School (a.k.a Viena School), which was later joined by Eugen von Böhm-Bawerk, Ludwig von Mises and Friedrich von Hayek; Léon Walras worked with the Lausanne School while William Stanley Jevons led the Anglo-American Marginalists ("Jevonians") .

Anglo-American Neoclassicism (1871-Today)

Anglo-American Marginalists ("Jevonians")

The Anglo-American Marginalists ("Jevonians") refer to early English and American writers between the 1870s and the 1930s who strayed from the Marshallian and Institutionalist schools. Many could thus be deemed "followers" of W.S. Jevons; they adopted the "mathematical" method of reasoning and/or the radical "subjectivism" inherent in Jevons's revolutionary marginalism.

Clark and the American Apologists

John Bates Clark (1847-1938) is best known for developing the "marginal productivity" concept and the "product exhaustion" thesis behind the [[Marginal Productivity Theory of Distribution, which he was the first to develop in 1889. He also developed the theory of marginal utility-based demand independently in 1885. As one of few American economists of the Marginalist school and a prominent apologist for the capitalist system, John Bates Clark was a great opponent of the Institutionalist School.

The "American Apologists" is the term used to describe late XIX Century and early XX Century American arch-conservative economists and social scientists. Theoretically they hoovered between Classical and Neoclassical economic theory; they distinguished themselves in their applied work and policy stance. The most important American Universities system were dominated by strict apologists for the status quo. Simon Newcomb at Johns Hopkins, John Bates Clark at Columbia, J. Laurence Laughlin at Chicago, Charles Dunbar and Frank Taussig at Harvard, Arthur T. Hadley and William Graham Sumner at Yale, all defendeded the new industrial age and condemned the unions and populist causes.

Alfred Marshall and The Cambridge Neoclassicals ("Marshallians")

The Marshalians was a group inspired on the work of Alfred Marshall which relied on practical, intuitive arguments rather than mathematical formalism, taking into account items such as historical time, institutional and industrial structure and real world phenomena, such as uncertainty, money and business cycles. Their main focus was on representative conditions. Their work emphasised partial market equilibrium, couching their arguments in terms of "representative" agents, firms, etc. rather than grand, idealized, multi-market general equilibrium systems.

London School of Economics (LSE) and Robbins

The London School of Economics and Political Science was set up as in 1895 by Sidney J. Webb and Beatrice Potter Webb, fabian socialists , but its early appointments were more conservative: W.A.S. Hewins (later a Tory MP) was its first director, Edwin Cannan, was to head the economics department, the technocratic Arthur L. Bowley headed statistics and liberal theorists L.T. Hobhouse headed sociology.

The L.S.E. from the very beginning aimed at being an academic teaching-and-research powerhouse. It was one of the group of "new universities" (like M.I.T., Johns Hopkins, Chicago, etc.) founded at the turn of century which eschewed the Oxbridge-Ivy League "gentlemanly education" approach in favor of a more serious academic and technical approach, akin to the Central European model. Like other "new universities", the L.S.E. was keen on raising its profile via academic research.

Lord Lionel C. Robbins, 1898-1984.

Lord Robbins was one Englishman who was not a Marshallian but rather a follower of Jevons and Wicksteed. He was one the few economists in England who cared to read the Continental European economists - Walras, Pareto, Böhm-Bawerk, Wieser and Wicksell. As a result of his Jevonian-Lausanne-Austrian-Swedish influence, Robbins helped to move Anglo-Saxon economics off its Marshallian rails and onto Continental ones.

His tools were the London School of Economics and a famous 1932 essay on economic methodology. He appointed Friedrich A. von Hayek , who in turn bred a new generation of English-speaking "continentals" such as Hicks, Lerner, Kaldor and Scitovsky.

The Chicago School and Knight

The "Chicago School" is perhaps one of the better known American "schools" of economics. The term "Chicago School" refers to the approach of the members of the Department of Economics at the University of Chicago (founded by the oil magnate John D. Rockfeller) over the past century. Also the term "Chicago School" may be associated with a brand of economics which adheres strictly to Neoclassical price theory in its economic analysis, "free market" libertarianism in much of its policy and a methodology relatively averse to much mathematical formalism. and willing to forego careful general equilibrium reasoning It favors results-oriented partial equilibrium analysis.

In recent years, the "Chicago School" has been associated with "economic imperialism", i.e. the application of economic reasoning to areas traditionally considered the prerogative of other fields such as political science, legal theory, history and sociology.

The "Chicago School" has had various phases with quite different characteristics. At present, under the term "Chicago School" we can identify various schools of thought: Monetarism in the 1960s, New Classical/Real Business Cycle macroeconomics from the 1970s until today, and more recently, the New Institutionalism, New Economic History and Law-and-Economics.

Frank H. Knight, 1885-1972.

Frank H. Knight, the "Grand Old Man" of Chicago, (irreducibly Neoclassical) was one of the century's the deepest thinker and scholar American economics has produced. With Jacob Viner, Knight presided over the Department of Economics at the University of Chicago from the 1920s to the late 1940s.

His famous dissertation Risk, Uncertainty and Profit (1921), where he made made the distinction between "risk" (randomness with knowable probabilities) and "uncertainty" (randomness with unkowable probabilities)is one of the most interesting reads in economics even today.

The Monetarists and Milton Friedman

The "Chicago School" , led by the influential economist Milton Friedman , a fierce opponent of the Keynesian economics, led the "Monetarist" movement against the Keynesian orthodoxy in the 1960s and early 1970s.

Friedman's criticisms of Keynesian theory began with his attack on the IS-LM dichotomy in his "restatement" of the Quantity Theory of Money in 1956 -- effectively, reminding Keynesians that "money matters".

Friedman (1968) exposed the apparent breakdown of the "Phillips Curve" relationship in the 1970s, proposing to replace it with a "Natural Rate of Unemployment" (NRU) - a concept later formalized in more detail by the "New Classicals" .

Friedman argued that government discretionary "fine-tuning" of the economy, as had been proposed by Keynesians, ought to be replaced with iron "rules" of policy - notably his famous "money supply growth" rule. He also wrote several books advocating laissez-faire.

New Classical Macroeconomics and Robert Lucas

The "New Classical school" , the "modern" version of the Chicago School, is led by Robert Lucas based on the concept of "rational expectations" of the 1970s which helped to decisively bury the Neo-Keynesian orthodoxy and inaugurated a new era of macroeconomics relying on the Neoclassical concept of supply-determined equilibrium expalined in "Real Business Cycle" theory.

Lucas also became famous for the "Lucas Critique" (1976) of the use of econometric models for policy purposes.

The New Institutionalist Schools

The "New Institutionalist Schools" to refer to the schools of thought that seek to explain political, historical, economic and social institutions such as government, law, markets, firms, social conventions, the family, etc. in terms of Neoclassical economic theory. New Institutionalist schools can be thought of as the outcome of the Chicago School's "economic imperialism" -- i.e. using Neoclassical economics to explain areas of human society normally considered outside them.

Continental Neoclacissism

The Lausanne School and Léon Walras

The "Lausanne School" , also called the Mathematical School or the Italian School refers to the Neoclassical school of thought led by the Frenchman Léon Walras (1834-1910) and the Italian Vilfredo Pareto (1848-1923). It developed the general equilibrium theory, generalizing and extending the applicability of the Neoclassical approach to economics.

One can distinguish between the early "Walrasian" and the later "Paretian" stages of the "Lausanne School" . The core of their theories were identical but their emphasis and mode of analysis were different.

Walras fundamental tool of analysis was a system of simultaneous market demand and supply equations. He was mainly interested in analyzing grand themes: the existence of an equilibrium solution to a this system, the stability of that equilibrium, the incorporation of capital and growth and the introduction of money.

Vilfredo Pareto, Enrico Barone and Giovanni Antonelli, his Italian disciples, were particularly interested in the "microfoundations" of general equilibrium systems, the relationship between decision-making households and firms and the resulting general equilibrium. Consequently, the research focus of the Lausanne School moved in a different direction.

As this new direction was announced most prominently in Vilfredo Pareto's Cours d'Économie politique (1896-7) and in his Manual of Political Economy (1906) this was the "Paretian" phase.

The Paretians saw the problem as one of ensuring the compatibility of the individual incentives and constraints of consumers and producers in equilibrium. Their tools were the differential calculus and Lagrangian multipliers. Using advanced mathematics, they constructed a rather grand "Paretian general equilibrium system", a system of equations, where the agent-theoretic microfoundations were starkly brought to the fore. They replaced all the grand themes of Walras with a single new one of their own: the efficiency and social optimality of equilibrium.

The Lausanne School evolved over time to a third phase which focused on the overlap of sociology and economics, along the lines of François Perroux .

The Austrian School and Carl Menger

The Austria School (a.k.a Viena School) emerged around the pioner of the Marginalist Revolution , Carl Menger , at the University of Vienna.

The "First" Generation of the Austrian School was composed by the Austrian professors Friedrich von Wieser and Eugen von Böhm-Bawerk . They spread the Austrian School theories throughout the Austro-Hungarian Empire and trained the next two generations which would count with their disciples Ludwig von Mises and Friedrich von Hayek . Joseph Schumpeter became a Walrasian. The Austrian School maintained its base in Vienna until the 1930s Before the second World War most of its members moved or were exiled to Great Britain and the United States.

Paul Samuelson, John Hicks and the Paretian Revival (1930-40)

The "Paretians" are the Neoclassical general equilibrium theorists of the period 1910-1950 who concentrated on the themes outlined by Vilfredo Pareto's Manual of Political Economy (1906): namely, the analysis of individual optimization, market efficiency and social optima via classical programming techniques (differentiable calculus, Lagrangian multipliers, etc.).

The Paretian Revival reached its apex during the 1930s and 1940s. John Hicks , Paul Samuelson , Abba Lerner , Oskar Lange , Maurice Allais and Harold Hotelling led the way.

The Paretian Revival represents the first time that the work of the "Lausanne School" began breaking the English-language barrier.

=The Vienna Colloquium

The "Vienna Colloquium" was a symposium run by the mathematician Karl Menger (son of the economist Carl Menger) in the 1930s to bring together many different minds from mathematics but also the physical sciences, philosophy, statistics and economics, that set in motion modern general equilibrium theory from its early roots in the Lausanne School.

Among the participants in the Colloquium, besides Karl Menger, was the banker Karl Schlesing Oskar Morgenstern, the polymath John von Neumann and the statistician Abraham Wald . Other participants included assorted Viennese physicists and mathematicians like Kurt Gödel .

During the 1930s Menger collected and published the proceedings of the Colloquium as the "Ergebnisse eines mathematischen Kolloquiums"

Tjalling Koopmans and the Cowles Commission

With the motto "Science is Measurement" the "Cowles Commission for Research in Economics" was dedicated to the pursuit of linking economic theory to mathematics and statistics. Its main contributions to economics lie in its "creation" and consolidation of two important fields: general equilibrium theory and econometrics .

The Dutch-born Tjalling Koopmans was the director of the "Cowles Comission from 1948 to 1954, a position he woud alternate with James Tobin

Kenneth Arrow, Gérard Debreu and the Neo-Walrasian General Equilibrium School

"Neo-Walrasian" economics refers to the "general equilibrium theory" (often referred to by its acronyms, G.E. or G.E.T.) that emerged in the post-war period. Rooted in the Lausanne School of Léon Walras and Vilfredo Pareto; it re-emerged in two forms in 1930s, one more "Walrasian", advanced by the Vienna Colloquium, and another more "Paretian" that was championed particularly at the L.S.E., University of Chicago and Harvard.

The Cowles Commission merged these two traditions and endowed it with a new mathematical apparatus of axomatic reasoning and convex structures (notably the "separating hyperplane theorem") , creating the "Neo-Walrasian" school in the 1940s and 1950s.

Kenneth Arrow (1951) and Gérard Debreau (1951 -1954) recast the Paretian theories of the consumer, production and the welfare theorems.

Robert Aumann and the Edgeworthian Revival

The "Edgeworthian revival" refers to the efforts to study the relationship between a Walrasian competitive equilibrium and the solutions obtained via alternative exchange process (notably those from game theory). The mathematical tools of choice that were introduced in this effort in the 1960s and 1970s (measure theory and non-standard analysis) -- were substantially more complex than the tools economists had been using.

The main goal of this group of economists was to try and prove the "Edgeworth's conjecture" .

Robert Aumann proved (1964) the equivalence of the Edgeworthian core and the Walrasian equilibria when we have a continuum (uncountably infinite number) of agents. This "new" definition of "perfect competition" brought measure theory

Edited by -- notably Lyapunov's Theorem -- into economics (Lyapunov's theorem asserts that the range of a non-atomic totally finite vector-valued measure is both convex and compact).

See also

• Classical economy
• Econometrics
• Economic Theory
• Econophysics
• History of Ancient Economics
• Keynesians
• Macroeconomics
• Microeconomics
• Neuroeconomics
• Supply and demand

Bibliography

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• PARETO, Vilfredo. Cours d'Economie Politique. F.Rouge, Lausanne, 1896.

• PARETO, Vilfredo. Manual of Political Economy; Translated By Ann S. Schwier; Edited By Ann S. Schwier and Alfred N. Page Pareto; Publisher: Augustus M. Kelley; 1971.

• RICARDO, David. The Principles of Political Economy and Taxation. 1815 (third ed. 1821). Hamilton, Ontario: McMaster University.

• RUBINSTEIN, Ariel. Lecture notes in microeconomic theory : the economic agent. Princeton: Princeton University Press, 2006.

• SMITH, Adam (1723-1790). An Inquiry into the Nature and Causes of the Wealth of Nations. London: Methuen and Co., Ltd., ed. Edwin Cannan, 1904. Fifth edition. (Downloadable)

• WALRAS, Léon. Eléments d'économie politique pure, ou Théorie de la richesse sociale. Lausanne: F.Rouge, Paris Guillaumin; Paris: Guillaumin & Cie [etc.], et al.; 1889.

• WALRAS, Léon.Economique e Mecanique. (1909). Bulletin de la Société Vaudoise de Sciences Naturelles, Vol. 45, p.313-325. Suivie d'une lettre de Henri Poincaré (1901), et avec une note introductive de G.H. Bousquet (1960). Transcription par Gonçalo L. Fonseca (History of the Economic Thought Website), Courtesy of Mme Paulette Taieb, Université de Paris