RH351
Rhetoric of Economic Thought
Transparencies
Set 5
Marshal, Marginalism,
& Alternative Voices:
Economics Comes of Age
Economic Analysis – Key Contributors, 19th century
Adam Smith
(1723 – 1790)
1900
1800
David Ricardo (1772 – 1823)
John Stuart Mill (1806 – 1873)
Mill
Karl Marx (1818 – 1883)
August Cournot (1807 – 1877)
Johann von Thünen (1793 – 1850)
Hermann Gossen (1810 – 1858)
Cournot
Stanley Jevons (1835 – 1882)
Leon Walras (1834 – 1910)
Carl Menger (1840 – 1921)
Jevons
Walras
Alfred Marshall (1842 – 1924)
Marshall
Marshall’s Inaugural Lecture, Cambridge, February 1885
“It is vain to speak of the higher authority of a unified social science. No doubt if that existed
Economics would gladly find shelter under its wing. But it does not exist; it shows no signs of
coming into existence. There is no use in waiting idly for it; we must do what we can with our
present resources.
“There is wanted wider and more scientific knowledge of facts: an organon stronger and more
complete, more able to analyze and help in the solution of the economic problems of the age.
To develop and apply the organon rightly is our most urgent need: and this requires all the
faculties of a trained scientific mind. Eloquence and erudition have been lavishly spent in the
service of Economics. They are good in their way; but what is most wanted now is the power
of keeping the head cool and clear in tracing and analyzing the combined action of many
combined causes.
Alfred Marshall
1842 - 1924
“… that part of economic doctrine, which alone can claim universality, has no dogmas. It is not a body of concrete truth,
but an engine for the discovery of concrete truth, similar to, say, the theory of mechanics.
“… why are so many lives draggled on through dirt and squalor and misery? Why are there so many haggard faces and
stunted minds? Chiefly because there is not wealth enough; and what there is, is not well distributed, and well used …
“Never was there an age so full of great social problems as ours; surely they are not unworthy of the best efforts of the best
minds among us. …
“It will be my most cherished ambition, my highest endeavor, to do what with my poor ability and my limited strength I
may, to increase the numbers of those, whom Cambridge, the great mother of strong men, sends out into the world with
cool heads but warm hearts …”
Precursors to marginalism: Cournot
Economists understand by the term
Market, not any particular market place
in which things are bought and sold,
but the whole of any region in which
buyers and sellers are in such free
intercourse with one another that the
prices of the same goods tend to
equality easily and quickly
q1
P = a - bQ, where Q = q1 + q2
 a  c1  1
q1*  
  q 2 
 2b  2
 a  c2  1
q 2*  
  q1 
 2b  2
.
 a  c1 


 2b 
Competitive Outcome
Cournot Outcome
q1*
1
August Cournot
1803 - 1877
q 2*
2
q2
Precursors to marginalism: Gossen’s 1st & 2nd “laws”
Hermann Gossen,
1810-1858
The Development of the Laws of Exchange among Men
and of the Consequent Rules of Human Action (1854)
First Law
"... the magnitude of a given
pleasure decreases continuously
if we continue to satisfy this
pleasure without interruption
until satiety is ultimately
reached."
Second Law
"The magnitude of each single
pleasure at the moment when its
enjoyment is broken off shall be
the same for all pleasures."
The marginalist “revolution”: Jevons
We may state as a general law that the degree of utility
varies with the quantity of commodity, and ultimately
decreases as that quantity increases.
Stanley Jevons
1832 – 1882
"Brief Account of a General Mathematical Theory of Political
Economy", 1866
The Theory of Political Economy , 1871.
The marginalist “revolution”: Menger
Carl Menger
1841 -- 1921
Grundsätze (Principles of Economics , 1871)
Never was there an age that placed economic interests higher than does our own. Never was
the need of a scientific foundation for economic affairs felt more generally or more acutely.
And never was the ability of practical men to utilize the achievements of science, in all fields
of human activity, greater than in our day. If practical men, therefore, rely wholly on their
own experience, and disregard our science in its present state of development, it cannot be
due to a lack of serious interest or ability on their part. Nor can their disregard be the result
of a haughty rejection of the deeper insight a true science would give into the circumstances
and relationships determining the outcome of their activity. The cause of such remarkable
indifference must not be sought elsewhere than in the present state of our science itself, in the
sterility of all past endeavors to find its empirical foundations.
The marginalist “revolution”: Walras
Leon Walras
1834 -- 1910
Elements of Pure Economics (1874)
“Facts of the
Universe”
Natural Phenomena:
Those which result
from the blind forces of nature
Pure Natural Science
Human Phenomena:
Those which result
from the exercise of the human will
(a force that is free and cognitive)
Pure Moral Science
Science “observes, describes, and explains”
Art or Ethics
Art “advises,
prescribes
and directs”
The marginalist “revolution”: Walras
General Equilibrium
Marshall on method
I never read mathematics now; in fact I have
forgotten how to integrate a good many things…
But I know I had a growing feeling in the later years
of my work at the subject that a good mathematical
theorem dealing with economic hypotheses was very
unlikely to be good economics: and I went more
Alfred Marshall
1842 - 1924
and more on the rules – (1) Use mathematics as a
shorthand language, rather than as an engine of
inquiry. (2) Keep to them until you have done. (3) Translate into
English. (4) Then illustrate by examples that are important to real life.
(5) Burn the mathematics. (6) If you can’t succeed in (4), burn (3).
“Second Generation” Marginalists / Neoclassical Economics
Francis Edgeworth (1845 – 1926)
 Contemporary of Marshall’s; Oxford chair
 Utility theory, indifference curves, “Edgeworth box”
…Now, it is remarkable that the principal inquiries in
Social Science may be viewed as maximum-problems…
Since, then, Social Science, as compared with the Calculus
of Variations, starts from similar data – loose quantitative
relations – and travels to a similar conclusion –
determination of maximum – why should it not pursue the
same method, Mathematics?
Mathematical Psychics, (1881)
“Second Generation” Marginalists / Neoclassical Economics
Vilfredo Pareto (1848 – 1923)




Successor to Walras at Lausaunne
Pioneer in the area of welfare economics
Manual of Political Economy (1906)
Pareto optimality
“Second Generation” Marginalists / Neoclassical Economics
John Bates Clark (1847 – 1938)
 Teacher at Columbia University
 Marginal productivity theory of distribution
John Bates Clark
1847 - 1938
…The distribution of income to society is controlled by a natural
law, and this law, if it worked without friction, would give to every
agent of production the amount of wealth which that agent creates.
Distribution of Wealth (1889)
“Second Generation” Marginalists / Neoclassical Economics
Irving Fisher (1868 – 1947)
 Professor of Economics at Yale
 Proponent of the Quantity Theory of Money
 The Theory of Interest (1907)
“Stock prices have reached what looks like permanently
high plateau.”
October 17, 1929
“Second Generation” Marginalists / Neoclassical Economics
Arthur Cecil Pigou (1877 – 1959)
 Successor to Marshall at Cambridge
 Pioneer in the area of welfare economics
 Keynes’s foil in The General Theory
Alternative voices in the history of economic thought
German
Romanticism
Adam Muller (1779 – 1829)
Early German
Historical School
Wilhelm Roscher (1817 – 1894)
Friedrich List (1789 – 1846)
Karl Knies (1821 – 1898)
Early American
Economists
Richard Ely (1854 – 1943)
John Bates Clark (1847 – 1938)
Later German
Historical School
Gustov Schmoller (1838 – 1917)
Werner Sombart (1863 – 1941)
Early American
Institutionalism
Wesley Mitchell (1874 – 1948)
John Kenneth Galbraith (1908 – 2006)
(“Debate over
Method”)
Austrian School
Carl Menger (1840 – 1921)
Friedrich von Wieser,
(1851 -- 1926),
Eugen von Böhm-Bawerk
(1851 -- 1914)
Ludwig von Mises (1881 – 1973)
Joseph Schumpeter (1883 – 1950)
Richard Ely (1854 – 1943)
John Bates Clark (1847 – 1938)
Old Institutionalism
Methodenstreit
New Institutionalism
Ronald Coase
Oliver Williamson
Friedrich von Hayek (1889 – 1992)
Oscar Morgenstern (1902 – 1976)
Institutionalism in Economic Thought
A complex organism cannot be understood if each segment
Thorestein Veblen
1857 - 1929
John Commons
1862 – 1945
Wesley Mitchell
1874 – 1948
is treated as if it were unrelated to the larger entity.
Economic activity is not merely the sum of the activities of
persons motivated individually and mechanically by the desire
for maximum monetary gain. In economics there are also
patterns of collective action that are greater than the sum of
the parts.
An institution is not merely an organization or establishment
for the promotion of a particular objective, like a school, a
prison, a union, or a federal reserve bank. It is also an
organized pattern of group behavior, well-established and
accepted as a fundamental part of the culture. It includes
customs, social habits, laws, modes of thinking, and ways of
living … Economic life, said the institutionalists, is regulated
by economic institutions, not by economic laws.
Stanley Brue, The Evolution of Economic Thought
Veblen and neoclassical analysis
In all the received formulations of economic theory,
whether at the hands of English economists or those of the
Continent, the human material with which the inquiry is
concerned is conceived in hedonistic terms; that is to say,
in terms of a passive and substantially inert and immutably
given human nature … The hedonistic conception of man
is that of a lightning calculator of pleasures and pains who
Thorestein Veblen
oscillates like a homogeneous globule of desire of happiness
1857 - 1929
under the impulse of stimuli that shift him about the area,
but leave him intact. He has neither antecedent nor consequent. He is an isolated
definitive human datum, in stable equilibrium except for the buffets of the impinging
forces that displace him in one direction or another. Self-imposed in elemental space,
he spins symmetrically about his own spiritual axis until the parallelogram of forces
bears down upon him, whereupon he follows the line of the resultant. When the
force of the impact is spent, he comes to rest, a self-contained globule of desire as
before. Spiritually, the hedonistic man is not a prime mover.
Why is Economics not an Evolutionary Science? (1898)
Veblen’s Style: Theory of the Leisure Class
Generally, as industrial activity further displaces predatory
activity in the community’s everyday life and in men’s
habits of thought, accumulated property more and more
replaces trophies of predatory exploit as the conventional
exponent of prepotence and success.
Conspicuous consumption of valuable goods is a means
of reputability to the gentleman of leisure.
Thorestein Veblen
1857 - 1929
Throughout the entire evolution of conspicuous expenditure, whether of goods or
of services or human life, runs the obvious implication that in order to effectually
mend the consumer’s good fame it must be an expenditure of superfluities. In order
to be reputable, it must be wasteful..
The Theory of the Leisure Class (1899)
Veblen’s Critique of Modern Capitalism
In more than one respect the industrial system of today is
notably different from anything that has gone before. It is
eminently a system, self-balanced and comprehensive; and it
is a system of interlocking mechanical processes … it lends
itself to systematic control under the direction of industrial
experts, skilled technologists, who may be called “production
engineers,” for want of a better term … technological
specialists whose constant supervision is indispensable to
the general staff of industry …
Thorestein Veblen
1857 - 1929
The captains [of industry] have per force continued to employ the technologists, to
make money for them, but they have done so only reluctantly, tardily, sparingly, and
with a shrewd circumspection; only because and so far as they have been persuaded
that the use of these technologists was indispensable to the making of money.
By settled habit, the technicians, the engineers and industrial experts, are a harmless
and docile sort, well fed on the whole, and somewhat placidly content with the “full
dinner-pail” which the lieutenants of the Vested Interests habitually allow them.
The Engineers and the Price System (1921)
Institutionalists and Business Cycle Studies
Mitchell's life work was the
documentation of the U.S.
business cycle.
Wesley Mitchell
1874 – 1948
Kuznets's life work was the
collection and organization of
the national income accounts
of the United States
Simon Kuznets
1901 – 1985
Galbraith’s “New Industrial State”
The Affluent Society (1958)
The New Industrial State (1967)
From The New Industrial State, chapter 31:
“Viewing the whole economy in purely technical
terms, no natural superiority can be assumed either
for the market or for planning. In some places
market responses still serve. Over a very large area
such responses cannot be relied upon; the market
must give way to more or less comprehensive
planning of demand and supply. Here, if the
industrial system does not plan, performance will be
poor and perhaps appalling … The error is in basing
action on generalization. There is no natural
presumption in favor of the market; given the
growth of the industrial system the presumption is, if
anything, the reverse. And to rely on the market
where planning is required is to invite a nasty mess.”
John Kenneth Galbraith
1898 – 2006
Schumpeter’s contradictory views
Schumpeter turned Karl Marx on his head
… Hateful gangs of parasitic capitalists
become, in Schumpeter’s hands, innovative
and beneficent entrepreneurs.”
Thomas K. McCraw, Prophet of Innovation:
Joseph Schumpeter and Creative Destruction
Major Publications:
The Theory of Economic Development (1911)
Capitalism, Socialism and Democracy (1942)
History of Economic Analysis (1954)
Joseph Schumpeter
1883 – 1950
Schumpeter’s contradictory views
Capitalism, Socialism and Democracy (1942):
Can capitalism survive? No. I do not think it can.
But this opinion of mine, like that of every other
economist who has pronounced upon the subject,
is in itself completely uninteresting. What counts
in any attempt at social prognosis is not the Yes
or No that sums up the facts and arguments which
lead up to it but those facts and arguments themselves.
They contain all that is scientific in the final result.
Everything else is not science but prophecy …
The thesis I shall endeavor to establish is that the
actual and prospective performance of the capitalist
system is such at to negative the idea of its breaking
down under the weight of economic failure, but that
its very success undermines the social institutions which protect it, and “inevitably” creates
conditions in which it will not be able to live and which strongly point to socialism as the
heir apparent.
Schumpeter’s “Creative Destruction”
The opening up of new markets,
foreign or domestic, and the
organizational development
from the craft shop and factory
to such concerns as U.S. Steel
illustrate the same process
of industrial mutation
that incessantly revolutionizes
the economic structure
from within, incessantly
destroying the old one,
incessantly creating
a new one.
This process of Creative
Destruction is the essential fact
about capitalism.”
Joseph Schumpeter
Capitalism, Socialism and Democracy
The Austrian School of Economics
“First” Generation:
Friedrich von Wieser (1851 -- 1926),
Eugen von Böhm-Bawerk (1851 -- 1914)
“Second” Generation:
Ludwig von Mises (1881 – 1973)
Joseph Schumpeter (1883 – 1950)
“Third” Generation:
Friedrich von Hayek (1889 – 1992)
Oscar Morgenstern (1902 – 1976)
 Radically "subjectivist" strain of marginalism
 Dedication to a priorism and an emphasis on




methodological individualism
Time-theoretic approach to capital theory
Monetary overinvestment business cycle theory
Analysis of markets in terms of disequilibrium
Stress on uncertainty and information in the
economy