History of Economic Thought Test #2

Utopian Society was his bread and butter. Invested in New Harmony, MA

Robert Owen

Associate with Pierre-Joseph Proudhon (1809-1865) Opposed to all government and private property.

Anarchism

(1807-1877) French Mathematician Noted for amongst other things, developing a theory of monopoly pricing behavior that is the one used today, and a theory of duopoly that was a predecessor to the game theoretic models of duopoly that have come into prominence during the 20th century. He was the first to use precise mathematics (calculus) to derive profit maximization. Duopoly Model:He assumes that the price ( buyer determined) is the same for each of the two producers (also assumed for simplicity to have no cost of production). The reaction curves of the two producers show, for each producer, what level of output would maximize profit for that producer given what the other produces. Only at one point will an equilibrium be reached. Today we call that point a "Nash Equilibrium" after the Nobel Laureate. Later development of duoploy theory realized the limitation of Cournot's assumption that firms react to rival's output (instead of a rival's price). Later game theorists developed models where reaction was to any of a number of rival's decisions.

Antoine Augustin Cournot

Austrian economics stresses that the value of everything is subjective, not objective . (i.e value lies in the subject of analysis, not the object of analysis) Whereas Marginalists had a marginal utility theory of value, classicals had a cost of production theory of value (Later neo-classical economists e.g Marshall, combined both.)

Conclusion on Value Theory

(1840-1921) Simultaneously with Jevons, developed the application of MARGINAL UTILITY TO VALUE THEORY. Menger is famous for the theory of Imputation. Whicle connection of marginal utility to the value of consumer goods is apparent, what determines value of inputs such as machinery, raw materials, and land? Their value is determined by what they contribute to creating value in consumption of which Menger called final utility. The market mechanism works such that an input witha number of uses will have the same marginal value in each of those potential uses. The same idea applies to labor

Carl Menger

English and German movements associated with Charles Kingsley starting after 1848. Attempted to provied a religious foundation to socialism, promoted co-operatives and legislative initiatives, but opposed class struggle.

Christian Socialism

What Marx thought would eventually arise once the capitalist class and its influences were eradicated -the "withering away of the state"

Communism

(1851-1914) His claim to fame was the analysis of interests( and with it, the role of time in economic processes.) His theory of interest established 3 reasons for its existence 1. Present Orientation: discounting of the future. Present consumption is preferred to future consumption mostly out of impatience but also because the present is more certain. 2.Expectation of Rising Wealth: In the normal course of things, people may smooth borrowing in anticipation of eventually rising income and wealth. This idea is behind Modigliani's life-cycle hypothesis and Friedman's permanent income hypothesis. 3. Roundabout Production: the use of more capital goods in production lengthens the production process (making it more "roundabout". Because more roundabout methods are more productive, entrepreneurs can profitably pay interest in order to obtain those capital goods.

Eugen von Bohm-Bawerk

(Also called Revisionism) Associated with Sidney(1859-1947) and Beatrice Webb(1859-1947). Made up in large measure of "converts" from more militant brands of socialism who gave up on class struggle. Very influential in the development of the British Labour Party.

Fabian Socialism

(1845-1926) Strong advocate for using mathematics in economic analysis. Much more influential in this regard than Dupuit and Cournot. Responsible for introductin the tool known as INDIFFERENCE CURVE He also developed the concept of the contract curve, which is important to the development of welfare economics. (mostly at the hand of Pareto) On Duopoly theory, he changed the assumptions of Cournot, but did not in this area make a lasting contribution other than to get other economists to think about the issue. -Marginal Product -Average Product -Total Product -Indifference Curves

Francis Edgeworth

.(1789-1846) Promoted free trade within Germany (customs union) but was protectionist (for manufacturing) when it came to trade with nations outside of Germany. Strongly influenced American protectionist politicians from Alexander Hamilton to "Fritz" Hollins of South Carolina.

Friedrich List

(1851-1926) Austrian Economist Theory of Imputation: Thus value of inputs is determined by its contribution to utility in consumption (the Theory of Imputation)

Friedrich von Weiser

Major Tenets -Evolutionary approach to economics: What is relevant economic theory in place and time is not so in another. Hence there are no universally valid economic generalizations or laws. -Emphasis on the state as the prime organism of society: Very nationalistic, whereas classical economics was individualistic and cosmopolitan. In their view, only a powerful state could "bring Germany into the 19th century". -Inductive method: Among older schools, history or induction is valued as more important than theory. Among the younger schools, induction was not the most important thing, but rather then only thing. -Advocacy of conservative reform: a la Bismark, they favored beating more radical socialists to the punch by instituting aspects of the welfare state. They did not see state ownership as conducive to building a powerful nation-state.

German Historical School

The state should represent consumer interests, but ownership and management of industry would be left to worker's guilds. Basically a British academic movement that did not get anywhere.

Guild Socialists

(1838-1917) Criticized older historical school because it used any theory at all. Because he was so influential with German powers, he practically controlled the appointment of all economists, ridding German universities of all economic theorists. He is famous for his argument with Carl Menger over methodology. While once a free trader, became a protectionist.

Gustav Schmoller

(1810-1858) A low-level bureaucrat who spent four years working a book that no one read. (Did not influence a single economist) Jevons "discovered" Gossen after Jevons developed his own marginal utility analysis, and long after Gossen was dead. He independently discovered the law of marginal utility, and stated the modern conclusion. Total utility, given a budget constraint, is maximized where the ratio of Marginal Utility/ Price is the same for each good consumed.

Herman Gossen

(1783-1850) A German farmer who wrote about the subject matter today we call LOCATION THEORY and had some insights into marginal productivity theory. On LOCATION THEORY, he examined the relationship between transport costs and production costs. he examined the relationship between transport and production costs. In his analysis, costs of production per dollar of revenue differs from cost of transport, however cost of transport per mile is also different because of their different bulk of output per dollar of revenue. On marginal productivity theory, he concluded that the employer should hire labor up to the point where Marginal Revenue Product of Labor is equal to the Wage, and that it is the marginal productivity of the last worker worth hiring that determines the wage.

Johann Heinrich von Thunen

(1847-1938) Most renowned for his development of the MARGINAL PRODUCTIVITY THEORY OF LABOR. This theory was of wages, employment, and distribution all rolled into one. Clark recognized that firms maximize profit by hiring labor up to the point where the wage is equal to (the value of) the marginal product. But he also recognized that, holding constant the input of labor, the interest rate will be equal to the (value of) marginal product of capital. No economic profit in perfect competition. In Clark's argument, the result is exhaustion of the total product as each factor is paid marginal product. it was pointed out later (by Philip Wicksteed) that this conclusion was correct only under constant returns to scale (the adding up problem) But much later work by Cobb and Douglas during the 1930's and later tended to confirm that the distribution of income in the U.S does conform to the theory of Clark in the aggregate. Clark thought that the distribution of income according to marginal productivity had a strong ethical justification. It is generally agreed among contemporary economists that the development of the marginal productivity theory of wages was a great stage in the development of positive economic theory, but does not have any particular ethical content. Clark, unlike Jevons, took the supply of labor ( and for that matter the supply of capital) to be fixed (perfectly inelastic) at a given point in time.

John Bates Clark

(1804-1866) French Engineer Who, like Cournot used mathematics in his analysis. Dupuit's contributions include connecting marginal utility with demand, and in so doing laying the groundwork for the modern theories of consumer surplus and price discrimination. On demand, he confused marginal utility curves and demand curves themselves, in fact labeling the demand curve as the "marginal utility" curve. Note that he was using a model of a public provider (i.e water utility) which in fact is where most price discrimination takes place. In his explanation, he assumes the purpose of the public utility is to break even, not maximize profit. His analysis lead to the development of theory of consumer surplus, but he had nothing to say about producer surplus.

Jules Dupuit

The additional satisfaction a consumer gains from consuming one more unit of a good or service.

Marginal Utility

(1818-1883) Born in Prussia (modern Germany) Exiled to France, and in 1849 was exiled to England where (except for the Communist Manifesto of 1848) he did most of his writing. Among his intellectual influences, Ricardo and Hegel were the most important. -Phases of economic history Borrows the Hegelian dialectic: thesis and antithesis converge to form synthesis, which is the new thesis Saw the revolt of the proletariat(capitalists) and the emergence of communism as the final synthesis. Society passes through 6 stages 1. Primitive Communism 2. Slavery 3. Feudalism 4. Capitalism 5. State Socialism 6. Communism -------------------------------------------------------- Labor Theory of Value: value is determined by socially necessary labor time (average efficiency) Exploitation: Labor is paid its market value (subsistence wages) which is less than labor power( value of its output) The difference, surplus value, accrues to the capitalist. (Capital Congealed Labor) Laws of Capitalist Motion -The Law of Accumulation and the Falling Rate of Profit: Despite the fact that Marx's Labor Theory would logically predict that capitalists would seek to substitute labor for capital, since rate of profit = s/(c/). Marx predicts increasing substitution of capital for labor which drives down the rate of profit. -The Law of Increasing Concentration and Centralization of Industry: Increased substitution of capital for labor would lead to large scale economics of production which would in turn lead to survival of fewer and fewer large firms. -The Law of a Growing Industrial "Reserve Army of the Unemployed" : capital-labor substitution leads to growing unemployment -The Law of Increasing Misery of the Proletariat: Reserve army helps keep wages at subsistence. Additionally, because of the falling rate of profit, capitalists try to compensate primarily by lengthening work days to extract more surplus value, but also be increasing use of female and child labor as well as by colonizing. -------------------------------------------------------- -The transformation problem in Marx a. Constant Capital (C) = Fixed Capital b. Used Up Fixed Capital (C') = Charges on fixed capital (i.e depreciation plus raw materials) -Outlay (cost of production) c. Outlay(O) : Cost of Production (C' + V) d. Variable Capital (V) = Total wages paid to labor e. Surplus Value (S) : Contribution of workers for which they are not paid -Rate of exploitation/surplus value f. Rate of surplus Value (or rate of exploitation) = Ratio of surplus value to variable capital employed : S/V - The organic composition of capital g. Organic Composition of Capital (Q) : Ratio of capital to cost of production [ Q = C(C+V)] -------------------------------------------------------- -Marxian Socialism- a critique of capitalism based on the labor theory of value. Which grows out of the internal contradictions and subsequent collapse of capitalism, culmination in a revolt of the working classes. In the views of its adherents, the only "scientific socialism"

Marx

(1864-1920) Had the most long lasting influence of all the Historicists, mainly because of this thesis that the Protestant Revolution fostered the rise of capitalism.

Max Weber

an economics controversy commenced in the 1880s and persisting for more than a decade, between that field's Austrian School and the (German) Historical School. The debate concerned the place of general theory in social science and the use of history in explaining the dynamics of human action. It also touched on policy and political issues, including the roles of the individual and state. Nevertheless, methodological concerns were uppermost and some early members of the Austrian School also defended a form of welfare state, as prominently advocated by the Historical School. When the debate opened, Carl Menger developed the Austrian School's standpoint, and Gustav von Schmoller defended the approach of the Historical School.

Methodenstreit

Fabian Socialism

Sidney Webb

Soviet Union and satellites are the clearest example. Literal state ownership of means of production, but some state socialism exists everywhere.

State Socialism

-Associated with Georges Sorel (1847-1922) in southern Europe and the IWW (Wobblies) in the U.S. Opposed any use of government by socialists as compromise, instead saw sabotage and general strikes as a means of overthrowing the government and then abolishing private property.

Syndicalists(ism)

Major Tenets: - Focus on the Margin: Marginalists extended the marginal principle that RIcardo and Classicals used for analysis of land rent to all economic analysis. - Rational Economic Behavior: They did not believe that all individuals acted rationally, but that 1. Only rational behavior is predictable 2. As long as mass behavior is predicted on the basis of the theory of rational individual behavior, the law of large numbers will result in irrational or random behavior largely cancelling each other out. - Microeconomics Emphasis: All analysis, including macroeconomic analysis, should be baaed on microeconomics analysis; aggregates don't make decisions. People do. - Use of the Deductive Method: The Marginalists rejected Historicism, not history. - Emphasis on Pure Competition: Unlike what text author implies, Marginalists used model of pure competition for simplicity and tractability, not because they believed that was all there was in the real world. In fact, one of the biggest points of separation between modern Austrian and mainstream approaches lies in the Austrian aversion to inappropriate uses of the mode of perfect competition and the policy conclusions derived from it. - Subjective Utility and Demand-Oriented Price Theory: Demand depends on utility, which is entirely subjective and hence not observable. Even costs of production are determined subjectively (utility in final demand, dis-utility of work, etc.) - Equilibrium Approach:Compared to Classicals, Marginalists saw equilibrium forces counteracting disequilibrium and thus puts an emphasis on equilibrium forces. But compared to Neo-Classical and especially New Classical economists, they emphasized equilibrium less. To Austrian Marginalists, including the modern Austrian school, equilibrium is a force like gravity that is always operating. However markets (micro and aggregate) are never actually in equilibrium) -------------------------------------------------------- Merger of Land with Capital Goods: For most analytical purposes, Marginalists considered it sufficient to simplify resources into just two. Labor and Capital Interest, rent, and profits were all returns to capital. Minimal Government Involvement: The Marginalist were more unified in this respect than the Classical economists.

The Marginalists

-1800s -Henri Comte De Saint-Simon -saw technological progress as a good thing -Charles Fourier -saw technological progress as a enemy of the working class -Robert Owen All of them regarded competitive markets as unjust and irrational, though they were very much against class struggle. Expected to win by persuasive example, they experimented with New Harmony, Indiana (Such experiments failed)

Utopian Socialists

(1863-1941) A historicists in all important respects, but he doubted the validity of Weber's thesis. He attributed the rise of capitalism to the Jewish religion, which he saw as giving capitalism its "impersonal, rational, and materialistic" characteristics. The most nationalistic of all the historicist and enthusiastic Nazi late in life.

Werner Sombart

(1817-1894) Trained as a classical economist, he nonetheless argued against deductive method as of lesser value than inductive-historical method.

Wilhelm Roscher

.(1835-1882) The first of the English economists to develop a MARGINAL UTILITY THEORY OF VALUE. This put him at extreme variance with the classical economists of whom he overlapped. The basis of his analysis was diminishing marginal utility. He developed equi-marginal principle of consumption (Equal Marginal Utility/Price for all goods), unaware that Gossen already had done so. He also pointed out that diminishing marginal utility could account for gains from trade, even in the absence of comparative advantage. Indeed, differential marginal utility is at the heart of gains from exchange. On labor, Jevons deduced that supply of labor, where variable, depended on the utility of income offsetting the disutility of work.

William Stanley Jevons