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Neoclassical Schools (1871-today)
From Citizendium, the Citizens' Compendium
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 the attempt 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.
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", a conundrum that confounded the great economist Adam Smith (1723-1790), known as the "diamond-water paradox". Smith explained in Chapter 4 of Book I of Wealth of Nations:
- Nothing is more useful than water: but it will purchase scarce anything. . . . A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it."
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 "diamond-water paradox" and has been the theoretical basis for the economic analysis of demand.
For example: a hungry consumer finds an enormous 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)  (1810-1858) in Germany. However, due to its abstract and mathematical nature, Gossen's work was dismissed by the all-powerful German Historical School ; Schmoller  dismissed him as an "ingenious idiot". "Gossen's law of the saturation of wants" ("first law of Gossen") stated: "The continuance, increase or repetition of the same kind of consumption yields a continuously decreasing satisfaction or pleasure up to a point of satiety". "Gossen second law" or "the law of diminishing marginal utility", which was his most original contribution, presaged the Marginalist Revolution of 1871-74. These laws were first propounded in 1854 by Gossen, in a rare and little known German book  and was only rediscovered more than twenty years later by Robert Adamson (1852-1902), a Scottish Professor of Logic and Philosophy, and reported to the eminent English economist, William Stanley Jevons who brought it to the attention of the economic profession. Gossen's work was graciously acknowledged by Jevons in 1878.  Grossen is considered a proto-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  (1890), greatly extended the concept and recognized that prices are determined simultaneoulsy by factors of cost and factors of demand. Marshall's theory 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 explained in "Real Business Cycle" theory.
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.
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.
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 Austrian School and Carl Menger
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.
The Swedish School and Knut Wicksell
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 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 .
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.
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.
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 
- ↑ 1.0 1.1 1.2 1.3 The Marginalist Revolution
- ↑ Neoclassical Theory of Value: Basic Elements
- ↑ MENGER, Carl. Principles of Economics. New York: New York University, 1976).
- ↑ JEVONS, William Stanley. Principles of Political Economy. London: 1871
- ↑ WALRAS, Léon. Éléments d'économie politique pure ou Théorie de la richesse sociale Paris: Editor Librairie générale de droit et de jurisprudence, 1976 ISBN 2275012850 First published 1874
- ↑ The Classical School. in: The History Of Economic Thought Website
- ↑ 7.0 7.1 7.2 Marginal Utility and Optimization
- ↑ Hermann Heinrich Gossen
- ↑ German Historical School
- ↑ Gustav von Schmoller, 1838-1917
- ↑ GOSSEN, Hermann Heinrich. The Laws of Human Relations and the Rules of Human Action Derived Therefrom.Translated by Rudolph C. Blitz; introduction by Nicholas Georgescu-Roegen. Cambridge, MA: MIT Press, 1983. ISBN 0262070901
- ↑ Gossen's law of the saturation of wants; In: GREAVES JR., Percy L. Greaves Jr. Mises Made Easier
- ↑ Alfred Marshall
- ↑ MARSHALL, Alfred. Principles of Economics (1890)
- ↑ Austrian School
- ↑ 16.0 16.1 16.2 16.3 Lausanne School
- ↑ Anglo-American Marginalists
- ↑ Anglo-American Marginalists ("Jevonians")
- ↑ John Bates Clark (1847-1938)
- ↑ "American Apologists"
- ↑ Marshalians
- ↑ London School of Economics and Political Science
- ↑ Fabian Socialists
- ↑ 24.0 24.1 Friedrich A. von Hayek
- ↑ 25.0 25.1 "Chicago School"
- ↑ KNIGHT, Frank H. Risk, Uncertainty and Profit
- ↑ Milton Friedman
- ↑ The Inflation Acceleration Controversy
- ↑ The Hicks-Hansen IS-LM Model
- ↑ The Monetarist Transmission Mechanism
- ↑ The Quantity Theory of Money
- ↑ "Phillips Curve"
- ↑ 33.0 33.1 "New Classical school"
- ↑ Robert Lucas
- ↑ Neo-Keynesian
- ↑ "New Institutionalist Schools"
- ↑ Léon Walras (1834-1910)
- ↑ Vilfredo Pareto (1848-1923)
- ↑ 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
- ↑ François Perroux
- ↑ The Austria School
- ↑ Marginalist Revolution
- ↑ Carl Menger
- ↑ Eugen von Böhm-Bawerk
- ↑ Ludwig von Mises
- ↑ Joseph Schumpeter
- ↑ "Paretians"
- ↑ John Hicks
- ↑ Paul Samuelson
- ↑ Abba Lerner
- ↑ Oskar Lange
- ↑ Maurice Allais
- ↑ Harold Hotelling
- ↑ The "Vienna Colloquium"
- ↑ John von Neumann
- ↑ Abraham Wald
- ↑ Kurt Gödel
- ↑ GÖDEL, Kurt et al. Ergebnisse eines mathematischen Kolloquiums. Unter Mitwirkung von K. Gödel und G. Nöbeling herausgegeben von K. Menger. Heft 1 (1931), Heft 2 (1932). B. G. Teubner, Leipzig und Wien. Preis RM 2 Journal Monatshefte für Mathematik Publisher Springer Wien
- ↑ "Cowles Commission for Research in Economics"
- ↑ 61.0 61.1 61.2 61.3 Neo-Walrasian General Equilibrium Theory
- ↑ Econometrics
- ↑ Tjalling Koopmans
- ↑ James Tobin
- ↑ Convex Structures
- ↑ Separating Hyperplane Theorem (SHT)
- ↑ Kenneth Arrow (1951)
- ↑ Gérard Debreau (1951. 1954)
- ↑ "Edgeworthian revival"
- ↑ "Edgeworth's conjecture"
- ↑ Robert Aumann
- ↑ Competition and the Edgeworthian core
- ↑ Walrasian equilibria
- ↑ Perfect Competition
- ↑ ARROW, K. J. Arrow, INTRILIGATOR, M.D., HILDENBRAND, W., and SONNENSCHEIN, H., editors. Handbook of Mathematical Economics
- ↑ Basic Lyapunov theory
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- Extended Bibliography Rose-Hulman Institute of Technology / Department of Humanities and Social Sciences / K. Christ RH351, Rhetoric of Economic Thought
- GOSSEN, Hermann Heinrich. The Laws of Human Relations and the Rules of Human Action Derived Therefrom.Translated by Rudolph C. Blitz; introduction by Nicholas Georgescu-Roegen. Cambridge, MA: MIT Press, 1983. ISBN 0262070901
- HANEY, Lewis H., Ph.D. History of economic thought: a critical account of the origin and development of the economic theories of the leading thinkers in the leading nations. New York: The Macmillan Company, 1920.
- 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)
- STIGLITZ, Joseph E. Prize Lecture: Information and the Change in the Paradigm in Economics. Joseph E. Stiglitz held his Prize Lecture December 8, 2001, at Aula Magna, Stockholm University. He was presented by Lars E.O. Svensson, Chairman of the Prize Committee.
- 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
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