Universit

1
Università degli Studi di TorinoDOTTORATO IN
ECONOMIA DELLA COMPLESSITA E DELLA CREATIVITA

• LECTURES ON
• THE HISTORY OF ECONOMIC THOUGHT
• ECONOMIC THEORY IN THE XXth CENTURY
• ROBERTO MARCHIONATTI
• (University of Torino)

2
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY INTRODUCTIONTHE CURRENT STATUS OF
H.E.T. AMONG MAINSTREAM ECONOMISTS

• MAINSTREAM THE IDEAS THAT ARE HELD BY THOSE
  GROUPS WHO ARE DOMINANT IN THE LEADING ACADEMIC
  INSTITUTIONS AND JOURNALS AT ANY GIVEN TIME
• NO HISTORY OF IDEAS, PLEASE, WERE ECONOMISTS
• THE RESULT OF THE CONCEPTION OF ECONOMICS
  PREVAILING AFTER 1945
• A PECULIAR KIND OF HISTORIOGRAPHY
• G. STIGLER THE EFFICIENT MARKET OF IDEAS
• P. SAMUELSON A WHIG HISTORY OF SCIENCE
• H.E.T. AS A RATIONAL RECONSTRUCTION

3
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY INTRODUCTION SCHUMPETERS
SOPHISTICATED PERSPECTIVE ON THE ROLE OF H.E.T.
WHY DO WE STUDY THE HISTORY OF ECONOMICS ?
4
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY INTRODUCTION SCHUMPETERS
SOPHISTICATED PERSPECTIVE ON THE ROLE OF H.E.T.
WHY DO WE STUDY THE HISTORY OF ECONOMICS ?

• WE STAND TO PROFIT FROM VISITS TO THE LUMBER
  ROOM PEDAGOGICAL ADVANTAGES, NEW IDEAS, AND
  INSIGHTS INTO THE WAYS OF THE HUMAN MIND
• FIRST, THE PROBLEMS AND METHODS THAT ARE IN USE
  AT ANY GIVEN TIME EMBODY THE ACHIEVEMENTS THAT
  HAS BEEN DONE IN THE PAST THE SIGNIFICANCE AND
  VALIDITY CANNOT BE FULLY GRASPED WITHOUT A
  KNOWLEDGE OF THE PREVIOUS PROBLEMS AND METHODS TO
  WHICH THEY ARE THE (TENTATIVE) RESPONSE
• SCIENTIFIC ANALYSIS IS NOT SIMPLY A LOGICALLY
  CONSISTENT PROCESS THAT STARTS WITH SOME
  PRIMITIVE NOTIONS AND THEN ADDS TO THE STOCK IN
  A STRAIGHT-LINE FASHION. RATHER IT IS
• AN INCESSANT STRUGGLE WITH CREATIONS OF OUR OWN
  AND PREDECESSORS MINDS AND IT PROGRESSES, IF
  AT ALL, IN A CRISS-CROSS FASHION AS THE IMPACT
  OF NEW IDEAS , AND AS THE TEMPERAMENTS OF NEW
  MEN, DICTATE
• SECONDLY, OUR MINDS ARE APT TO DERIVE NEW
  INSPIRATION FROM THE STUDY OF THE HISTORY
• THIRD, THE STUDY OF THE HISTORY TEACHES US MUCH
  ABOUT THE WAYS OF THE HUMAN MIND

5
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY INTRODUCTION A NEW CONCEPTION OF
ECONOMICS and A NEW CONCEPTION OF THE HISTORY OF
ECONOMICS

• THE MAINSTREAM PERSPECTIVE HAS BEEN RECENTLY
  CHALLENGED BY A CONCEPTION OF ECONOMICS AS A
  SCIENCE OF SOCIAL COMPLEXITY IN WHICH HISTORY
  MATTERS
• IN THIS PERSPECTIVE, THE HISTORICAL
  RECONSTRUCTION OF THE ECONOMIC THEORIES
  RE-ASSUMES AN IMPORTANT ROLE
• MY APPROACH. KEY POINTS
• THE SPECIFICITY OF THE THEORIES TO THE HISTORICAL
  PERIOD
• THE CULTURAL MATRIX AND CONVENTION OF DISCOURSE
  OF THE COMMUNITY OF SCHOLARS UNDER FOCUS
• THE IMPORTANCE OF THE BIOGRAPHICAL DATA
• ECONOMICS PROFESSION AS A DYNAMIC ENTITY WHICH
  GENERATES AN EVOLVING SYSTEM OF INTERACTING IDEAS
• THIS APPROACH PERMITS
• TO ACCOUNT FOR THE NON-RECTILINEAR EVOLUTION OF
  THE THEORIES
• TO EMPHASIZE CHANGE AND INNOVATION IN THIS
  EVOLUTION

6
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY INTRODUCTION THE SUBJECT OF THESE
LECTURES THE EVOLUTION OF THE ECONOMIC THEORY
IN THE TWENTIETH CENTURY

• PHASES OF THE ECONOMIC THEORY IN THE TWENTIETH
  CENTURY
• 1890-1914 THE CLASSIC AGE OF MARGINALISM
• 1919-1939 THE YEARS OF HIGH THEORY
• THE POST-WAR II PERIOD
• 1940s - 1970s
• 1980s 1990s
• MEN, SCHOOLS INSTITUTIONS, CENTRES AND
  PERIPHERIES
• (IDEAS HAVE ORIGIN AND GROW BETTER IN SOME
  ENVIRONMENTS THAN IN OTHERS)

7
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY INTRODUCTION THE EVOLUTION OF THE
ECONOMIC THEORY IN THE TWENTIETH CENTURY
PRESENTED IN THE QJE

• WHAT DO ECONOMISTS KNOW NOW THAT MARSHALL AT HIS
  TIME DID NOT?
• (BAUMOL,2000, STIGLITZ,2000, BOWLESGINTIS, 2000)
• Two types of answers. They focus
• On the relation between theory and empirical
  research (Baumol)
• On the anticipations and intuitions of
  post-Walrasian economics (Bowles,Gintis,
  Stiglitz)
• Questions
• What is the relation between the orthodox and the
  eterodox side of M?
• Why did M. adopt a loose attitude towards
  empirical work?
• Why did twentieth-century economics take the
  Walrasian path ?
• Is M. to be considered a precursor of
  contemporary post-Walrasian economics ?

8
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 INTRODUCTION

• THE PERIOD 1890-1914 GENERAL CHARACTERISTICS
• RAPID ECONOMIC GROWTH
• INCREASE OF THE STANDARD OF LIVING
• NEW WAVE OF INDUSTRIALIZATION
• THE LEADERS GREAT BRITAIN, THEN GERMANY AND
  UNITED STATES
• HIGH INTEGRATION OF THE WORLD ECONOMY AND THE
  GOLD STANDARD
• A GOLDEN AGE (J.M. Keynes)

9
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 INTRODUCTION

• THE ECONOMIC THEORY OF THE PERIOD MEN AND
  SCHOOLS
• CENTRES OF ECONOMIC THEORY MEN, SCHOOLS,
  INSTITUTIONS
• Cambridge Oxford in UK Marshall,
  Edgeworth the Cambridge School
• The Royal Economic Society, 1890
• The Economic Journal, 1891
• The Cambridge Ec.Tripos, 1903
• Lausanne Walras, Pareto and the
  Lausanne School
• Vienna (and Berlin) Bohm-Bawerk, Wieser the
• Austrian School, Marxism,
• Historical School,
• Neoricardism (Bortkievicz)

10
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 INTRODUCTION

• THE ECONOMIC THEORY OF THE PERIOD MEN AND
  SCHOOLS
• PERIPHERIES
  MEN, SCHOOLS, INSTITUTIONS
• IN EUROPE
• Sweeden Wicksell, Cassel
• Italy Roma and Torino Pantaleoni
  Barone Einaudi, Jannaccone Cabiati
• Il Giornale degli Economisti
• IN UNITED STATES
• Johns Hopkins
  S. Newcomb, R.T. Ely
• Columbia, New York J.B. Clark, W.C. Mitchell
• Yale I. Fisher
• Harvard F.W. Taussig
• The Quarterly Journal of Economics
• Chicago J.L. Laughlin
• The Journal of Political Economy

11
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 INTRODUCTION

• THE ECONOMIC THEORY OF THE PERIOD THE LEGACY AND
  SYSTEMATISATION OF MARGINALIST REVOLUTION
• THEORY MEN AND SCHOOLS
• CONSUMER DEMAND
• THE NATURE OF UTILITY
• Psychological Approach Marshall Edgeworth
  (Cambridge)
• Non-Psychological Approach Pareto,
  Fisher (Lausanne)
• MEASUREAMENT OF UTILITY
• Cardinal
  Marshall Edgeworth (Cambridge)
• Ordinal Johnson (Ca.), ParetoSlutsky (Lo.)
• UTILITY DEMAND
• Utility Function
  MarshallEdgeworthJohnson (Ca.)
• Pareto, Fisher (Lo.)
• Indifference Curves Edgeworth
  (Ca.), Pareto (Lo.)
• Non-Utilitarian Approach Barone, Cassel, Moore

12
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 INTRODUCTION

• THE ECONOMIC THEORY OF THE PERIOD
• THEORY MEN AND SCHOOL
• B. MARKET EQUILIBRIUM
• General Equilibrium WalrasParetoBarone
  (Losanna)
• Partial Equilibrium Marshall (Cambridge)
• Market Structure
• Competition Marshall (Ca.), Austrian school
• Monopoly Marshall (Ca.), Pareto (Lo.)
• Oligopoly MarshallEdgeworth (Ca.)
• C. DISTRIBUTION Wicksteed(UK),
  MarshallEdgeworth BerryFlux(Ca.)
  WalrasParetoBarone (Lo.), Wicksell (Stockolm)
• D.CAPITAL Marshall (Ca.), WieserBohmSchumpeter
  (Vi.), Wicksell, Cassel (Sv),
  Fisher,Clark(US)
• E.MONEY MarshallPigou(Ca.), Wicksell, Fisher
• F.TRADE CYCLE Marshall et al.(Ca.), Spiethoff et
  al.(Berlin),
• Mitchell (Columbia)

13
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 INTRODUCTION

• THE ECONOMIC THEORY OF THE PERIOD THE EMERGENCE
  OF A MATHEMATICAL SCHOOL
• A CHANGING ATTITUDE IN ECONOMICS THE ADOPTION OF
  THE MATHEMATICAL METHOD OF REASONING, 1871-1915
• The logic of the calculus may be expressed in
  terms of a small number of concepts such as
  variables, functions, limits, continuity,
  derivatives and differentials, maxima and minima.
  familiarity with these concepts and with such
  notions as systems of equations, determinateness,
  stability, all of which admit of simple
  explanations changes ones whole attitude to
  the problems that arise from theoretical schemata
  of quantitative relations between things
  problems acquire a new definiteness the points
  at which they lose it stand out clearly new
  methods of proof and disproof emerge
  (SCHUMPETER)

14
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 INTRODUCTION

• A PERIODIZATION OF THE CLASSICAL ERA OF
  MATHEMATICAL ECONOMICS
• THE EMERGENCE OF MATHEMATICAL REVOLUTION IN
  ECONOMICS, 1871-1881 (JEVONS, MARSHALL, WALRAS)
• SPREAD AND CONSOLIDATON OF THE MATHEMATICAL
  METHOD IN ECONOMICS, 1880s-1890s (LAUNHARDT,
  AUSPITZ AND LIEBEN, PANTALEONI, THE MARSHALLIANS,
  WALRASPARETO, FISHER, BARONE, BORTKIEVICZ,
  MOORE)
• THE ESTABLISHMENT OF THE MATHEMATICAL APPROACH IN
  ECONOMICS, 1901-1915 (PARETO AND THE PARETIANS)

15
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 INTRODUCTION

• AN APPRAISAL OF THE CLASSICAL ERA OF MATHEMATICAL
  ECONOMICS
• AT THE BEGINNING SOME ISOLATED PIONEERS
• IN 1915 MATHEMATICAL ECONOMICS IS AN ACCEPTED,
  BUT SMALL, SCHOOL IN ECONOMICS
• THE EARLIER SCEPTICISM ABOUT APPLYING MATHEMATICS
  TO ECONOMICS WAS LARGELY REDUCED
• SCIENTISTS AND THE USE OF MATHEMATICS IN
  ECONOMICS FROM SCEPTICISM TO (MODERATE) FAVOUR
• BUT THE GREAT EXPECTATIONS WERE STRONGLY REDUCED
  THE FIELD OF M.E. IS STATIC EQUILIBRIUM ITS
  DEFECT EXTREME ABSTRACTNESS AND UNREALITY OF
  ASSUMPTIONS

16
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• Marshalls great work is the classical
  achievement of the period, that is, the work that
  embodies, more perfectly than any other, the
  classical situation that merged around 1900

17
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• LIFE
• Educated at St Johns College, Cambridge
• 1868 - lecturer in political economy in
  Cambridge
• 1877 - Professor of Political Economy at the
  Bristol University
• 1883 - Professor of Political Economy at the
  Oxford University
• 1885-1908 Professor of P.E. at the University
  of Cambridge
• 1890 founding member of the Royal Economic
  Association
• 1891 founding member of the Economic Journal
  (first editor F.Y. Edgeworth)
• WORKS
• 1879 - The Pure Theory of Foreign Trade The Pure
  Theory of Domestic Values
• 1879 - The Economics of Industry
• 1890 - Principles of Economics, first edition
  (1920, seventh edition)
• 1919 - Industry and Trade
• 1923 - Money, Credit, and Commerce

18
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• CAMBRIDGES CIVILISATION IN THE VICTORIAN AGE AND
  MARSHALLS CONCEPTION OF ECONOMICS
• The Victorian demand an authoritative social
  doctrine
• The two dominant figures in Cambridge H.
  Sidgwick and A. Marshall
• We are not at liberty to exercise ourselves on
  subtleties which lead nowhere
• Economics for Marshall applied ethics
• The mission to get economics in a position where
  it could serve as an engine for moral progress
  and instrument of social stability

19
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE INAUGURAL LECTURE, 1885
• THE PRESENT POSITION OF ECONOMICS
• REFUTATION OF THE HISTORICAL SCHOOL'S
  CRITICISMS "FACTS BY THEMSELVES ARE SILENT
• ON CLASSICAL POLITICAL ECONOMY CONTINUITY WITH
  THE CLASSICAL ECONOMISTS AS FOUNDERS OF ECONOMICS
  ON A SCIENTIFIC BASIS, BUT
• THEY REGARDED MAN AS A CONSTANT QUANTITY
  THEY DID NOT ALLOW FOR HUMAN PASSIONS,
  INSTINCTS AND HABITS ... THEY THEREFORE
  ATTRIBUTED TO THE FORCES OF SUPPLY AND DEMAND A
  MUCH MORE MECHANICAL AND REGULAR ACTION THAN THEY
  ACTUALLY HAVE
• MAN HIMSELF IS IN A GREAT MEASURE A CREATURE OF
  CIRCUMSTANCES AND CHANGE WITH THEM"
• ECONOMICS IS INDEBTED TO THE SCIENTIFIC MOVEMENT
  FOR THIS CHANGE, PARTICULARLY TO BIOLOGY
• THE FUNCTION OF ECONOMIC THEORY SUPPLYING A
  MACHINERY TO AID US IN REASONING ABOUT THOSE
  MOTIVES OF HUMAN ACTION WHICH ARE MEASURABLE
• THE ECONOMISTS WORKS IN THE LIGHT OF FACTS

20
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE ECONOMICS OF MARSHALL THE PRINCIPLES
• THE PRESENT TREATISE IS AN ATTEMPT TO PRESENT A
  MODERN VERSION OF OLD DOCTRINES WITH THE AID OF
  THE NEW WORK, AND WITH REFERENCE TO THE NEW
  PROBLEMS, OF OUR OWN AGE
• THE STRUCTURE OF THE BOOK
• Book I Preliminary survey
• Book II, Some fundamental notions
• Book III, On Wants and their Satisfaction
• Book IV, The Agents of Production. Land, Labour,
  Capital and Organization
• Book V, General Relation of Demand, Supply and
  Value
• Book VI, The Distribution of National Income
• Appendices

21
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• ON THE NATURE AND METHOD OF ECONOMICS THE
  PRINCIPLES
• The subject of Economics a study of men as they
  live and move and think in the ordinary business
  of life
• Economics as a science
• "The methods required for this work are not
  peculiar to economics they are the common
  property of all sciences. All the devices for
  the discovery of the relations between cause and
  effect, described in treatises on scientific
  method, have to be used .. by the economist
  there is no any one method of investigation
  which can properly be called the method of
  economics"
• However, economics differs from the harder
  sciences
• Every cause has a tendency to produce some
  definite result if nothing occurs to hinder it ..
  The law of gravitation states how any two things
  attract one another .. they will move towards
  one another if nothing interferes to prevent
  them. The law of gravitation is therefore a
  statement of tendencies. It is a very exact
  statement Now there are no economic tendencies
  which act as steadily and can be measured as
  exactly as gravitation can and consequently
  there are no laws of economics which can be
  compared for precision with the law of
  gravitation

22
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• ON THE NATURE AND METHOD OF ECONOMICS THE
  PRINCIPLES
• ECONOMICS IS A SCIENCE OF SOCIAL COMPLEXITY
• Progress or evolution, industrial and social,
  is not mere increase and decrease. It is organic
  growth, chastened and confined and occasionally
  reversed by decay of innumerable factors, each of
  which influences and is influenced by those
  around it and every such mutual influence varies
  with the stages which the respective factors have
  already reached in their growth
• THIS COMPLEXITY HAS SEVERAL FACETS
• The forces of which economics has to take into
  account are more numerous, less definite, less
  well known, and more diverse in character than
  those of mechanics while the material on which
  they act is more uncertain and less homogeneous
• LAWS OF ECONOMICS AND LAWS OF BIOLOGY
• Economics, like biology, deals with a matter,
  of which the inner nature and constitution, ...
  are constantly changing

23
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• ON THE NATURE AND METHOD OF ECONOMICS THE
  PRINCIPLES
• HOW DOES THE ECONOMIST HAVE TO DEAL WITH
  COMPLEXITY ?
• "The work to be done is so various that much of
  it must be left to be dealt with by trained
  common sense
• Economic science is but the working of common
  sense aided by appliances of organised analysis
  and general reasoning, which facilitate the task
  of collecting, arranging, and drawing inferences
  from particular facts
• IMPLICATION FOR THE LANGUAGE OF ECONOMICS
  EVERYDAY LANGUAGE MAKES IT POSSIBLE TO MAINTAIN
  THE SHADES OF MEANING THAT IN COMMON USE EVERY
  WORD HAS, WHICH CAN BE INTERPRETED BY THE
  CONTEXT
• The economist must make the terms in common
  use serve his purpose in the expression of
  precise thought, by the aid of qualifying
  adjectives or other indications in the context.
  If he arbitrarily assigns a rigid exact use to a
  word which has several more or less vague uses in
  the market place, he confuses business men, and
  he is in some danger of committing himself to
  untenable positions

24
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• ON THE NATURE AND METHOD OF ECONOMICS THE
  PRINCIPLES
• WHAT IS THE ROLE OF ABSTRACT REASONING IN
  ECONOMICS?
• There is a fairly close analogy between the
  earlier stages of economic reasoning and the
  devices of physical statics. But is there an
  equally serviceable analogy between the later
  stages of economic reasoning and the methods of
  physical dynamics ? I think not. I think that in
  the later stages of economics better analogies
  are to be got from biology than from physics and
  consequently, that economic reasoning should
  start on methods analogous to those of physical
  statics, and should gradually become more
  biological in tone
• The most helpful applications of mathematics to
  economics are those which are short and simple,
  which employ few symbols and which aim at
  throwing a bright light on some small part of the
  great economic movement rather than at
  representing its endless complexities

25
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• ON THE NATURE AND METHOD OF ECONOMICS THE
  PRINCIPLES
• WHAT IS THE ROLE OF ABSTRACT REASONING IN
  ECONOMICS?
• It is obvious that there is no room in economics
  for long trains of deductive reasoning It may
  indeed appear at first sight that the contrary is
  suggested by the frequent use of mathematical
  formulae in economic studies. But on
  investigation it will be found that this
  suggestion is illusory The mathematician
  takes no technical responsibility for the
  material
• While a mathematical illustration of the mode of
  action of a definite set of causes may be
  complete in itself, and strictly accurate within
  its clearly definite limits, it is otherwise with
  any attempt to grasp the whole of a complex
  problem of real life, or even any considerable
  part of it, in a series of equations. For many
  important considerations, especially those
  connected with the manifold influences of the
  element of time, do not lend themselves easily to
  mathematical expression

26
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE ECONOMICS OF MARSHALL THE PRINCIPLES
• THE THEORY OF COMPETITIVE EQUILIBRIUM
• A COMBINED ANALYSIS OF OF BOOKS IV AND V
• BOOK IV
• COMPETITION AS A PROCESS IT RESTS ON THE
  OPENNESS OF MARKETS NOT ON ATOMISTIC
  PRICE-TAKING BEHAVIOUR
• THE ANALYSIS OF COMPETITION GOES ALONG WITH THE
  THEORY OF THE FIRMS GROWTH
• BOOK V "GENERAL RELATIONS OF DEMAND, SUPPLY AND
  VALUE"

27
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE ECONOMICS OF MARSHALL THE PRINCIPLES
• THE THEORY OF COMPETITIVE EQUILIBRIUM
• BOOK V
• IT IS THE THEORETICAL BOOK OF THE VOLUME The
  word Theory applies to the title of that book
  alone. It deals with abstractions
• MECHANICAL EQUILIBRIUM
• a simpler balancing of forces which corresponds
  rather to the mechanical equilibrium of a stone
  hanging by an elastic string, or of a number of
  balls resting against one another in a basin

28
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE ECONOMICS OF MARSHALL THE PRINCIPLES
• THE THEORY OF COMPETITIVE EQUILIBRIUM
• BOOK V
• THE THEORY OF VALUE IS STUDIED WITH REGARDS TO
  THE NORMAL COST OF PRODUCTION OF A COMMODITY
  UNDER THE CETERIS PARIBUS HYPOTHESIS
• FIRST STEP EQUILIBRIUM OF NORMAL DEMAND AND
  SUPPLY OF A COMMODITY THAT OBEYS THE LAW OF
  DIMINISHING RETURNS
• SECOND STEP EQUILIBRIUM WITH REFERENCE TO SHORT
  AND LONG PERIODS
• THIRD STEP LONG TERM EQUILIBRIUM THE
  REPRESENTATIVE FIRM
• IT MUST BE ONE WHICH HAS A FAIRLY LONG LIFE,
  AND FAIR SUCCESS, WHICH IS MANAGED WITH NORMAL
  ABILITY, AND WHICH HAS NORMAL ACCESS TO THE
  ECONOMIES, EXTERNAL AND INTERNAL, WHICH BELONG TO
  THAT AGGREGATE VOLUME OF PRODUCTION
• EQUILIBRIUM "AS RESEMBLING A BALANCING OF
  FORCES OF LIFE AND DECAY"

29
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE ECONOMICS OF MARSHALL THE PRINCIPLES
• THE THEORY OF COMPETITIVE EQUILIBRIUM
• DIFFICULTIES
• The difficulty of assuming the ceteris paribus
  condition reach their highest point in
  connection with industries which conform to the
  law of Increasing Returns
• Long-term supply curves in relation to such
  industries are irrealistic They are
  fascinatingly clear and vivid, but they are made
  too clear and vivid to be at all near to reality
  
• Abstract reasoning as to the effects of the
  economies in production, which an individual firm
  gets from an increase of its output are apt to be
  misleading, not only in detail, but even in their
  general effect. This is nearly the same as
  saying that in such case the conditions governing
  supply should be represented in their totality.
  They are especially troublesome in attempts to
  express the equilibrium conditions of trade by
  mathematical formulae

30
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE ECONOMICS OF MARSHALL THE PRINCIPLES
• THE THEORY OF COMPETITIVE EQUILIBRIUM. FROM
  MECHANICAL EQUILIBRIUM (BOOK V) TO BIOLOGICAL
  EQUILIBIRUM (BOOK IV)
• Starting point the Smithian division of labour
  concept
• the chief advantage of d.l. machinery supplants
  purely manual skill
• the chief effect of improvement of machinery to
  cheapen and make more accurate the work which
  would anyhow have been subdivided
• d.l. generates increasing returns
• d.l. tends to increase the scale of manufactures
  and to make them more complex .. therefore to
  increase the opportunities for d. l. of all
  kinds
• The economies of production permitted by the
  division of labour
• internal economies those dependent on the
  resources of the individual houses of business
  engaged in it, on their organisation and the
  efficiency of their management
• external economies those dependent on the
  general development of the industry

31
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE ECONOMICS OF MARSHALL THE PRINCIPLES
• THE THEORY OF COMPETITIVE EQUILIBRIUM. EXTERNAL
  AND INTERNAL ECONOMIES
• EXTERNAL ECONOMIES (discussed in connection with
  the concentration of specialised industries in
  particular localities)
• internal to the industry
• inter-industrial
• Typology
• dissemination of skill and know-how in the
  district-areas
• diffusion of inventions and improvements in
  machinery and in the general organisation of
  business
• growth of subsidiary trades in the neighbourhood
  
• increasing availability of entrepreneurial
  ability
• a local market for special skill
• Moreover, Marshall stresses that
• The e.e. are by their own nature essentially
  inter-industrial
• They are partial irreversible

32
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE ECONOMICS OF MARSHALL THE PRINCIPLES
• THE THEORY OF COMPETITIVE EQUILIBRIUM. EXTERNAL
  AND INTERNAL ECONOMIES
• INTERNAL ECONOMIES
• economy of skill
• economy of machinery
• the capability to exploit economies of buying and
  selling

33
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE ECONOMICS OF MARSHALL THE PRINCIPLES
• MARSHALL VERSUS COURNOT
• Cournot Exploiting increasing returns a firm
  becomes a monopoly
• Marshall I. R. and competition can co-exist
• MARSHALLS REASONING
• as much as factors such as skill, inventiveness
  and entrepreneurial energy, needed to exploit
  potential internal economies, exist, a firm can
  growth rapidly
• Yet, the tendency to monopolisation is not
  inevitable because the rise of diminishing
  returns in the life cycle of the firm opposes it
• Monopolisation of the market on behalf of a firm
  can at the most be partial and temporary limited

34
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE ECONOMICS OF MARSHALL THE PRINCIPLES
• THE TYPICAL CYCLE OF LIFE OF A FIRM
• An able man, assisted perhaps by some strokes of
  good fortune, gets a firm footing in the trade,
  he works
• hard and lives sparely, his own capital grows
  fast, and the credit that enables him to borrow
  more capital
• grow still faster he collects around him
  subordinates of more than ordinary zeal and
  ability ...
• Corresponding to this steadily increasing economy
  of skill, the growth of his business brings with
  it similar
• economies of specialised machines and plants of
  all kinds every improved process is quickly
  adopted and
• made the basis of further improvements success
  brings credit and credit brings success credit
  and success
• help to retain old customers and to bring new
  ones the increase of his trade gives him great
  advantages in
• buying and thus diminish his difficulty in
  finding a vent for them. The increase in the
  scale of his
• business increases rapidly the advantages, which
  he has over his competitors, and lowers the price
  at which
• he can afford to sell. This process may go on as
  long as his energy, his inventive and organising
  power retain
• their full strength and freshness and he and
  one or two others like him would divide between
  them the
• whole of that branch of industry in which he is
  engaged But here we may read a lesson from the
  young
• trees of the forest as they struggle upwards
  through the benumbing shade of their older
  rivals. Many
• succumb on the way, and a few only survive those
  few become stronger with every year, they get a
  larger
• share of light and air with every increase of
  their height, and at last in their turn they
  tower above their
• neighbours, and seem as though they would grow on
  for ever ... But they do not. One tree will last
  longer in
• full vigour and attain a greater size than
  another but sooner or later age tells on them
  all. Though the taller

35
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924)

• THE CONCEPT OF BIOLOGICAL EQUILIBRIUM
• A business firm grows and attains great
  strength, and afterwards perhaps stagnates and
  decays and at the turning point there is a
  balancing of equilibrium of the forces of life
  and decay
• this business firm is typical, or
  representative, from a biological point of
  view it represents the typical growth path of a
  firm
• With the representative firm, M. brings together
  the equilibrium of the industry and the
  disequilibrium of the individual firms of the
  industry, in which some firms are rising and
  others are declining
• a fine distinction between theory and real
  life in Marshalls economics is impossible to
  draw because Marshall himself did not draw it,
  and never tired of warning others against drawing
  it (Chamberlin)
• THE LESSON
• the abstract reasoning, the chain of theoretical
  deductions, has to be limited absolute rigour
  means neglecting time and irreversibilities and
  so come to the wrong conclusions

36
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE MARSHALLIANS

• Within the English-speaking world, Marshallian
  economics was the dominant form of Neoclassicism
  from the 1890s to the 1920s. 
• It relied on practical, intuitive arguments
  rather than mathematical formalism - taking into
  account items such as institutional and
  industrial structure and real world phenomena,
  such as uncertainty, money and business cycles. 
  Its main focus was on  representative conditions,
  rather than idealized conditions.
• It was a leading force in the professionalization
  of economics and its establishment as an
  independent entity in academia. The Marshallian
  formula was exported to the United States in the
  hands of Frank Taussig at Harvard and to Italy by
  Maffeo Pantaleoni.
• Cambridge Marshallians
• H.H. Cunynghame (1848-1935)
• John Neville Keynes (1852-1949)
• A.W. Flux (1867-1942)
• Sir John H. Clapham (1873-1946)
• Arthur Cecil Pigou (1877-1959)
• Ralph G.Hawtrey (1879-1971)
• Frederick Lavington (1881-1927)
• John Maynard Keynes (1883-1946)
• Walter Layton (1884-1966)
• Dennis H. Robertson (1890-1963)
• Gerald F. Shove (1887-1947)

37
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE MARSHALLIANS

• Cambridge Marshallians
• J.N. Keynes Pigou Hawtrey
  J.M. Keynes Robertson

38
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• WALRASS LEGACY
• Léon Walras (1934-1910)
• Professor of political economy at Lausanne
  (1870-93)
• Works
• Eléments déconomie politique pure (1874-77,
  1889, 1900)
• Etudes déconomie sociale, 1896
• Etudes déconomie politique appliquée, 1898

39
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• WALRASS LEGACY
• The idea of the general economic equilibrium
  Walrass claim to immortality
• The origin of W.s formulation of G.E.T. Louis
  Poinsot, Eléments of statistique, 1803
• W.s analysis of G.E.E. a step-by-step process
• The case of two-person, two-commodity barter of
  given stock of consumer goods
• The case of multi-person, multi-commodity
  exchange of given stocks of consumer goods
• The case of the production of new consumer goods
  and the market for factor services
• The case of saving, investment, and the use of
  money and credit

40
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• WALRASS LEGACY
• W.s procedure the static picture
• To write down the demand and supply equations on
  the assumption of perfect competition
• the demand functions of individuals are deduced
  by their utility functions)
• In the cost-supply equations price are equated to
  average costs
• To prove the existence of a general equilibrium
  solution for the set of simultaneous equations by
  counting the number of equations and unknowns
• If they were equal a general equilibrium solution
  was possible
• W.s procedure the realistic picture the
  tatonnement the automatic adjustment of price in
  response to excess of demand or supply

41
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• Life
• 1870 Degree in Engineering at the Polytechnic
  Institute of Torino
• 1870-1888 Engineer and manager in industrial
  firms
• 1889 Retirement from business
• 1893-1907 Professor of Political Economy at the
  University of Lausanne succeeding Léon Walras
• Works
• 1892-3 Considerazioni sui principi fondamentali
  delleconomia politica, Giornale degli
  Economisti
• 1896-7 Cours dEconomie Politique
• 1900 Sunto di alcuni capitoli di un nuovo
  trattato di economia pura, GdE
• 1906 Manuale di Economia Politica
• 1909 Manuel dEconomie Politique
• 1916 Trattato di Sociologia Generale

42
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

43
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• METHODOLOGICAL ISSUES PARETO VS. WALRAS, OR
  EXPERIMENTAL METHOD VS. RATIONAL METHOD
• Walras on method
• The pure theory of economics is a
  physico-mathematical science like mechanics
  Economists should not be afraid to use the
  methods and language of mathematics.
• The mathematical method is not an experimental
  method it is a rational method The
  physico-mathematical sciences, like the
  mathematical sciences, do go beyond experience
  as soon as they have drawn their type concepts
  from it. From real-type concepts, these sciences
  abstract ideal-type concepts which they define,
  and then on the basis of these definitions they
  construct a priori the whole framework of their
  theorems and proofs. After that they go back to
  experience not to confirm but to apply their
  conclusions

44
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• METHODOLOGICAL ISSUES PARETO VS. WALRAS, OR
  EXPERIMENTAL METHOD VS. RATIONAL METHOD
• Pareto on method vs. Walras
• Professor Walrass great contribution to
  economic discussion was his discovery of a
  general system of equations to express the
  economic equilibrium. I cannot, for my part,
  sufficiently admire this portion of his work, but
  I must add that I entirely disagree with him I
  am a believer in the efficiency of experimental
  methods to the exclusion of all others. For me
  there exist no valuable demonstrations except
  those that are based on facts
• (Pareto 1897)

45
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• METHODOLOGICAL ISSUES PARETOs
  LOGICAL-EXPERIMENTAL METHOD
• Political Economy is a natural science founded
  exclusively of facts
• Political Economys aim to find out the
  regularities of phenomena (i.e. their laws) on
  the guidance of experience and observation
• The laws are simple hypotheses, abstractions
  deduced by facts they are good as far as they
  agree with the facts (verifiable facts)

46
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• METHODOLOGICAL ISSUES PARETOs
  LOGICAL-EXPERIMENTAL METHOD
• Logical-experimental method. Phases
• Formulation of hypotheses on the basis of an
  inductive process of observation of facts (from
  concrete cases to general propositions)
• Deduction of theories from the principles
• Comparison of theoretical deductions with
  concrete facts in order to confirm or not the
  theory
• Statistics and history are the tools of
  verification of a theory

47
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• METHODOLOGICAL ISSUES MECHANICS, ECONOMICS AND
  MATHEMATICS
• The use of mechanical analogy
• Fisher (1891) a systematic representation, in
  terms of mechanical interaction, of the economic
  equilibrium
• Pareto (1896-7) mechanical analogy clarifies
  concepts in economics analogies are worthless
  as demonstration of a theory, they explain
  some statements which must be verified by
  experience
• Mathematics (according to Pareto)
• It is necessary in order to examine the general
  conditions of economic equilibrium
• It does not make demonstration more rigorous, but
  it permits us to treat problems far more
  complicated than those generally solved by
  ordinary logic
• To be used with caution

48
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• METHODOLOGICAL ISSUES THE SUCCESSIVE
  APPROXIMATION APPROACH
• Logical-experimental method. Levels of
  abstraction
• Pure economics, or first approximation the facts
  considered are the most fundamental (tastes and
  obstacles of homo oeconomicus)
• Applied economics, or second approximation the
  facts considered go beyond the homo oeconomicus.
  A mix of theory and applied research

49
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• CONCEPTUAL ISSUES FROM THE CARDINAL UTILITY TO
  THE ORDINAL UTILITY
• The neoclassical theory of value considers the
  perfect hedonist homo oeconomicus each force of
  a system works for the maximum utility of
  everyone
• Is such an abstraction permissible ?
• Pareto 1892-3 the hedonistic hypothesis as a
  first approximation
• But is utility a measurable quantity ?
• Pareto 1900 The rejection of hedonism
  economists are not interested in the reasons why
  a good is useful, only in the fact that it is
  useful

50
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• CONCEPTUAL ISSUES FROM THE CARDINAL UTILITY TO
  THE ORDINAL UTILITY
• Until now 1900, in order to establish
  economic doctrines we went back to choice.
  Choices have been explained as mans aim to
  achieve maximum pleasure. Between two things, man
  choses the one that provides more pleasure. The
  point of equilibrium is obtained by expressing
  the conditions mathematically which enable the
  individual to enjoy the maximum pleasure
  compatible with the obstacles he meets The use
  of this point of view forces us to consider
  pleasure as a quantity. And this is what the
  economists who have established pure economic
  theories have done, and what we ourselves have
  done in the Cours but we must admit that this is
  not a throughly rigorous method
• In order to examine general economic
  equilibrium, this measurement is not necessary.
  It is sufficient to ascertain if one pleasure is
  larger or smaller than another, This is the only
  fact we need to build a theory

51
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• CONCEPTUAL ISSUES FROM THE CARDINAL UTILITY TO
  THE ORDINAL UTILITY
• In reality and in most general ways, pure
  economics equations simply express the fact of a
  choice, and can be obtained independently of the
  notion of pleasure and pain. This is the most
  general point of view and also the most rigorous
  For us, it is sufficient to note the fact of
  individual choice, without investigating the
  psychological or metaphysical implications of
  such a choice We do not inquire into the causes
  of mens actions the observation of the fact
  itself is sufficient Pure economics equations
  and their consequences exist unchanged whether we
  start from the consideration of pleasure as a
  quantity, or we limit our investigation
  exclusively to the fact of choice

52
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• CONCEPTUAL ISSUES FROM THE CARDINAL UTILITY TO
  THE ORDINAL UTILITY
• Pareto, Edgeworth, Poincaré and the late Walras
• To develop his theory of choice Pareto makes use
  of Edgeworths indifference curves
• Edgeworth assumes a measurable utility function
  from which indifference curves are derived,
  Pareto starts from the indifference curves
  themselves, provided directly by experience
• In Paretos mathematical formulation, a different
  index is associated with each indifference curve,
  with an increasing algebraic value for
  combination of goods chosen in preference to the
  initial one
• Paretos position is similar to the one affirmed
  by Poincaré in his letter to Walras, September
  30, 1901. In it Poincaré
• asserts the satisfaction is not a measurable
  quantity though it can be examined mathematically
• introduces the notion of preference
• preference is defined by means of an ordinal
  function
• Walras (1909) accepts Poincarés criticism

53
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924)
AND THE ECONOMICS IN LAUSANNE

• PARETOS GENERAL ECONOMIC EQUILIBRIUM
• The basic structure of the Paretian model of
  general equilibrium in the Manuale is similar to
  the static Walras model, although, unlike that
  system, everything is now cast in the tastes and
  obstacles structure rather than in the demand
  and supply functions
• The emphasis is entirely on the existence of
  some set of compatible optimizing choices The
  problem is no longer conceived as that of proving
  that a certain set of equations has a solution.
  It has been reformulated as one of proving that a
  number of maximizations of individual goals under
  interdependent restraints can be simultaneously
  carried out (Koopmans)

54
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 GREAT CONTROVERSIES.THE
CONTROVERSY EDGEWORTH-WALRAS ON MATHEMATICS IN
ECONOMICS, 1889-1891

• 1889
• Edgeworths review of Walrass second edition of
  the Eléments
• Edgeworths On the Application of Mathematics to
  Political Economy, Presidential Address to
  section F of the British Association for the
  Advancement of Science
• Two criticisms
• Walrass theory of the entrepreneur
• Walrass theory of tâtonnement
• Edgeworth agrees with Walras in his plea for the
  use of mathematical reasoning in economics, but
  adds that the French economist prejudices the
  case by his advocacy, because of his excessive
  use of symbols
• There is an excessive elaboration of
  mathematical reasoning in the Eléments, in such
  a manner as to justify the particular prejudice
  against it this is the factor that unifies
  Edgeworths criticism
• 1890 Walrass and Bortkieviczs reaction, Revue
  déconomie politique
• 1891 Edgeworths The Mathematical theory of
  supply and demand and the cost of production,
  Revue déconomie politique

55
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 GREAT CONTROVERSIES.THE
CONTROVERSY EDGEWORTH-WALRAS ON MATHEMATICS IN
ECONOMICS, 1889-1891

• The Protagonists
• Walras Edgeworth
  Bortkievicz

56
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE CONTROVERSY
EDGEWORTH-WALRAS ON MATHEMATICS IN ECONOMICS,
1889-1891

• The issues under discussion
• The concept of the entrepreneur who makes neither
  a profit nor a loss
• a characteristic of the Walrasian equilibrium in
  production
• in the state of perfect equilibrium, when there
  is equality in the quantities supplied and
  demanded and equality of price and average cost,
  profit does not exist since total profit is the
  difference between price and average cost
  multiplied by the number of units of output sold
• Hence, in equilibrium the Walrasian entrepreneur
  makes neither a profit nor a loss
• The process towards equilibrium - the so-called
  tâtonnement. This is the process through which
  Walras represents the determination of the
  equilibrium prices in a competitive market system
  

57
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE CONTROVERSY
EDGEWORTH-WALRAS ON MATHEMATICS IN ECONOMICS,
1889-1891

• EDGEWORTHS CRITICISM THE NOTION OF IDEAL
  ENTREPRENEUR VERSUS THE PRINCIPLE OF INDUSTRIAL
  COMPETITION
• The ideal entrepreneur who makes neither a
  profit nor a loss is an extreme abstraction
• Walras confines his attention to final utility.
• He does not use, among the factors which
  determine the equilibrium, the concept of the
  cost of production considered as importing
  sacrifice and effort
• Walrass representation is useful only to
  illustrate the operation of a simple market of
  free competition
• Walrass representation cannot be accepted
  when we advance from the simplest type of market
  to the complexities introduced by division of
  labour
• Edgeworths criticism is a criticism of Walrass
  mode of conceiving competition

58
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE CONTROVERSY
EDGEWORTH-WALRAS ON MATHEMATICS IN ECONOMICS,
1889-1891

• WALRASS AND BORTKIEVICZS REPLY
• Walras left cost of production out of his theory
  of exchange in which the quantities of the
  several products were designated as parameters.
• Walras introduced the cost of production into his
  theory of production where these quantities
  became variables to be determined by a two-fold
  condition that cost of production must equal
  price and that the quantities demanded of
  productive services must equal the quantities
  offered.
• Hence Walras did not make abstraction of the cost
  of production considered as importing sacrifice
  and effort.

59
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE CONTROVERSY
EDGEWORTH-WALRAS ON MATHEMATICS IN ECONOMICS,
1889-1891

• EDGEWORTHs REPLY
• The concepts of commercial and industrial
  competition
• Commercial competition the system of markets
  .. is that which would arise if all the articles
  of exchange were periodically rained down like
  manna upon several proprietors economic
  equilibrium does not include the cost of
  production explicitly
• Industrial competition the equilibrium is
  conceived as the result of the combined effect of
  utility and cost of production in order to deal
  with the industrial competition. It takes
  account of efforts and sacrifices
• In industrial competition two equations that
  of the final utility for different kinds of
  expenditure and that of the net advantages in
  different occupations may be considered the
  conditions of normal economic equilibrium
• Consequently industrial competition, which
  characterizes the modern economic world, may be
  represented only by considering the disutility of
  labour in an more explicit way than Walrass.
• Moreover the complexity of the mathematical
  problem of dealing with industrial competition

60
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE CONTROVERSY
EDGEWORTH-WALRAS ON MATHEMATICS IN ECONOMICS,
1889-1891

• EDGEWORTHs 1925 RI-EXAMINATION OF THE
  CONTROVERSY
• Economic theory ... does require the
  recognition of the ... industrial competition.
  ... Walrass peculiar doctrine ... cut him the
  entrepreneur from this industrial competition
  essential principle ... It is difficult to see
  how the equality .. of profits in different
  occupations can be reconciled with this favourite
  tenet of the Lausanne School. Of course it may be
  tolerated as an extreme abstraction, a
  simplification permissible to a path-breaker. But
  it seems to deserve pardon rather than praise

61
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE CONTROVERSY
EDGEWORTH-WALRAS ON MATHEMATICS IN ECONOMICS,
1889-1891

• WALRASS TÂTONNEMENT VERSUS EDGEWORTHS
  RECONTRACTING
• WALRASS TÂTONNEMENT
• Walras poses the problem of the relation between
  the theoretical solution of the exchange and the
  market solution - which is solved in practice in
  the market by the mechanism of free competition
• the upward and downward movement of market
  prices in conjunction with the effective flow of
  entrepreneurs from enterprises showing a loss to
  enterprises showing a profit is purely and simply
  a method of tâtonnement towards a solution of the
  equations involved in these problems
• Walras conceives the general market as an auction
  market and introduces an auctioneer who continues
  to change prices until supply and demand
  imbalances with respect to all commodities
  disappear
• Walras considers the tâtonnement as the way the
  mechanism of free competition solves his system
  of equations
• Walrass tâtonnement is an ideal simulation of
  the mechanism working in the actual markets if
  free competition were to prevail

62
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE CONTROVERSY
EDGEWORTH-WALRAS ON MATHEMATICS IN ECONOMICS,
1889-1891

• EDGEWORTHS CRITICISM
• Walrass lessons indicate a way, but not the
  way of descent to equilibrium
• Walrass account of tâtonnement lacks sufficient
  generality (its validity is restricted to
  competitive markets)
• Walras describes a way rather than the way
  by which economic equilibrium is reached. For we
  have no dynamical theory determining the path of
  the economic system from any point assigned at
  random to a position of equilibrium. We only know
  the statical properties of the position ...
  Walrass laboured description of prices set up or
  cried in the market is calculated to divert
  attention from a sort of higgling which may be
  regarded as more fundamental than his conception,
  the process of recontract ... The proposition
  that there is only one price in a perfect market
  may be regarded as deducible from the more
  axiomatic principle of recontract
• The problem is to present a conception
  appropriate for a certain kind of facts
• Edgeworth re-contracting hypothesis is not only
  an alternative mechanism but one more general
  than Walrass tâtonnement

63
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE CONTROVERSY
EDGEWORTH-WALRAS ON MATHEMATICS IN ECONOMICS,
1889-1891

• E. RE-CONTRACTING HYPOTHESIS IN MATHEMATICAL
  PSYCHICS
• Man as a pleasure machine
• The calculus of pleasure is divided into
  Economical and Utilitarian Calculus
• Economical Calculus investigates the equilibrium
  of a system of hedonic forces each tending to
  maximum individual utility
• Contract a type of action according to which a
  self-interested agent acts with the consent of
  others affected by his action
• E. inquires the degree to which a contract is
  indeterminate
• E. begins with a case of barter
• E. inquires into when the two individuals will
  reach equilibrium
• The contract does not supply conditions
  sufficient enough to determine the equilibrium
  solution
• Then E. introduces additional competitors into
  the field until the limit case of the perfect
  market is reached here the contract is
  determined
• Competition needs to be supplemented by
  arbitration
• Arbitration between self-interested contractors
  is based upon the greatest possible sum-total
  utility

64
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART I. ECONOMICS IN THE AGE OF
CERTAINTY, 1890-1914 THE CONTROVERSY
EDGEWORTH-WALRAS ON MATHEMATICS IN ECONOMICS,
1889-1891

• The controversy. Its meaning
• two different conceptions of the core of the
  theory of exchange Walrass competitive markets
  and Edgeworths fields of competition
• the controversy may be traced back to the issue
  of the role of abstract reasoning and the use of
  mathematics in economics, and ultimately to the
  two authorss difference about what economics is

65
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART II. ECONOMICS IN THE AGE OF
UNCERTAINTY, 1919-1939 INTRODUCTION

• THE PERIOD BETWEEN THE TWO WORLD WARS
• World War I the end of the yesterdays world
  and its main institutions gold standard and free
  markets
• Chief problems of European Governments
• Public Debt
• Inflation
• Unemployment
• Phases of economic growth
• 1920s crisis in Europe and rapid growth in the
  US
• 1929 the Wall Street great crash
• 1930-1937 world depression

66
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART II. ECONOMICS IN THE AGE OF
UNCERTAINTY, 1919-1939 INTRODUCTION

• THE ECONOMIC THEORY OF THE PERIOD MEN AND
  SCHOOLS
• CENTRES OF ECONOMIC THEORY MEN, SCHOOLS,
  INSTITUTIONS
• Europe
• Cambridge, UK
  Pigou, Hawtrey, Keynes, Robertson, Kahn,
• J. Robinson,
• Economic Journal
• LSE, UK
  Robbins, Hayek, Hicks
• Economica (1921), Rev. of Ec.
  Studies (1933)
• Vienna, Austria Mises, Hayek
  and the Neo-Austrians, Morgenstern,
  Zeitschrift fur Nationalokonomie (1921)
• Wiener Kries, Menger,
  Wald, vonNeumann
• Kiel Institute, Germany
  Lowe, Marschak, Leontief, Neisser,
  Weltwirtschaftliches Archiv (1913)
• North Europe Countries
• Stockolm
  Cassel, Myrdal, Ohlin, Lindhal (The
  Stockolm School)
• Oslo Frisch
• Rotterdam
  Tinbergen
• Econometrica (1933)
• Torino, Italy, an important periphery
  Einaudi, Cabiati and Jannaccone

67
Roberto Marchionatti , ECONOMIC THEORY IN THE
XXth CENTURY. PART II. ECONOMICS IN THE AGE OF
UNCERTAINTY, 1919-1939 INTRODUCTION

• THE ECONOMIC THEORY OF THE PERIOD MEN AND
  SCHOOLS
• CENTRES OF ECONOMIC THEORY MEN, SCHOOLS,
  INSTITUTIONS
• USA
• Harvard
  Young, Schumpeter, Leontief,
  Hansen, Chamberlin, Samuelson,