A Short History of Economic Thought
Hans-Walter Lorenz
FSU Jena

Winter 2012/13

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

1 / 93

Outline, Relevance, and Contents

Outline, Relevance, and Contents Outline
Very brief overview of a few dominant authors (starting around 1700 and ending in our times) Due to time restrictions: selection is to some extent arbitrary Emphasis on authors with a major influence on the development of economics

Note: Empty entries are open for students’ presentations

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

2 / 93

Outline, Relevance, and Contents

Outline, Relevance, and Contents

Relevance: Reasons for concentrating on the history of thought
General historic interest (assumed!) Developing a sense for connections between political/technical history and the emergence of new economic ideas Many recently discussed topics in economics have ancestors in previous decades and centuries; many ‘brand-new’ approaches actually possess long beards (however often forgotten).

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

3 / 93

Outline, Relevance, and Contents

Outline, Relevance, and Contents

Contents
The Classics – Quesnay, Smith, Ricardo, Say, Malthus, Marx The Neoclassics – Marshall, Walras, Menger, Gossen The Keynesian Revolution The Neoclassical Synthesis and the New Classical School Strategic Behavior and Game Theory Evolutionary Economics

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

4 / 93

The Classics

The Classics

The Most Influential Classical Writers: Francois Quesnay (1694 - 1774) ¸ Adam Smith (1723 - 1790) David Ricardo (1772 - 1823) Jean-Baptiste Say (1767 - 1832) Robert Malthus (1766 - 1834) Karl Marx (1818 - 1883)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

5 / 93

The Classics

Francois Quesnay (1694-1774) ¸

The Classics

Francois Quesnay (1694 - 1774) ¸

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

6 / 93

The Classics

Francois Quesnay (1694-1774) ¸

Originally: Animal surgeon (for horses at the court of Louis XV, sponsored by Mdm Pompadour Most prominent member of the so-called Physiocratic School (others include Jacques Turgot (1727-1781)) Basic idea: circular flow of goods (or money) 3 “poles” (something like ‘classes’, ‘sectors’ or ‘production factors’:
Landlords: owners of farmland, lent to farmers for a fixed rent Farmers: production of agricultural goods by means of the use of farm lands, agricultural work, and handcrafted goods (bought from merchands) Merchands and artisans: production of handcrafted goods; sold to farmers and landlords.

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

7 / 93

The Classics

Francois Quesnay (1694-1774) ¸

The agricultural sector is the only productive sector Consequence: Taxing of the landlords as the most ‘unproductive’ sector Graphical illustration: ´ Tableau Economique (often called: ‘zig-zag-scheme’)

Figure 1: The ‘Zig-Zag’-Scheme of the ´ Tableau Economique

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

8 / 93

The Classics

Adam Smith (1723-1790)

The Classics

Adam Smith (1723 - 1790)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

9 / 93

The Classics

Adam Smith (1723-1790)

Originally: chair in logic and later chair in moral philosophy at the University of Glasgow (1751) Friend of David Hume (1711-1776), representative of the British variant of J.J. Rousseau’s enlightenment ideas Main works: Theory of Moral Sentiments (1759) and The Wealth of Nations (1776) Gives up his professorship in 1764 and becomes teacher and companion of the Duke of Buccleuch in France. Later: Commissioneer of Customs in Scotland

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

10 / 93

The Classics

Adam Smith (1723-1790)

Three basic, interelated fields of interest: Division of labor Famous example: pin production Assume a worker who produces a number of pins in 18 production steps every day. 18 workers would produce 18 times as much of the original single worker by means of the same technique. Alternative: occupy 18 workers, each of whom concentrates on a single production step. Smith’s claim: the result is more than 18 times the amount of a single worker

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

11 / 93

The Classics

Adam Smith (1723-1790)

Invisible hand Coordination of individual actions is not due to eternal forces but happens as a result of individual actions according to their own interests. “It is not from benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

12 / 93

The Classics

Adam Smith (1723-1790)

Free international trade
Basically same argument as for division of labor Countries should concentrate on the production of goods which can be produced cheaper than in other countries (absolute cost advantages) Welfare increases due to international trade Political consequence: basically no tariffs, no non-tariff barriers

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

13 / 93

The Classics

David Ricardo (1772 - 1832)

The Classics

David Ricardo (1772 - 1823)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

14 / 93

The Classics

David Ricardo (1772 - 1832)

Born in London, son of a Portugese, jewish family from Amsterdam Son of an exchange broker; Ricardo himself won a fortune by speculating on the victory of Britain and the Continental Coalition against Napoleon the day before the battle of Waterloo ´ 1797: Suspension of the duty to redempt cash in exchange for gold in the banking system. Ricardo acts as a prominent participant in the ‘Bullion Controversy’ Participates also in the taxing debate over corn imports 1819: Member of Parliament

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

15 / 93

The Classics

David Ricardo (1772 - 1832)

2 most relevant items of interest Free Trade (Comparative Cost Advantages) Product\Land per unit o f wine per unit o f clothes Consequence: Exclusive production
England: 2 units of clothes (2 x 100 = 200 working hours, savings: 20 hours Portugal: 2 units of wine (2 x 80= 160 working hours, savings: 10 hours

Portugal England 80 90 120 100

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

16 / 93

The Classics

David Ricardo (1772 - 1832)

Value Theory
So-called ‘Corn model’ ‘Fundamental law of income distribution’ Example: Necessary for the production of, say, 1000 kg corn: 500 kg corn for the (natural goods) payment of agricultural workers) 250 kg corn for the use as seed 250 kg corn: ‘surplus’ Profit rate: 1/4 Amount of used labor in the production of different goods as a common base for evaluating surpluses, profit rates etc.: ‘labor value theory’

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

17 / 93

The Classics

Jean-Baptiste Say (1767-1832)

The Classics

Jean-Baptiste Say (1767-1832)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

18 / 93

The Classics

Jean-Baptiste Say (1767-1832)

Originally: politician during the French revolution Employed by Mirabeau, leader of the Jacobian party; later: member of the National Garde of Lafayette and in 1799 member of the tribunate in Napoleon’s finance commission; ´ controversies with Napoleon over trade restrictions in the trade ´ with Great Britain (Continental Barrier) Most famous theoretical result: ‘Say’s Law’: ‘Every supply generates its own demand’ (somewhat trivial form)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

19 / 93

The Classics

Jean-Baptiste Say (1767-1832)

Sketch of Say’s Law in modern terms: n goods i = 1, . . . , n (including ‘money’) pi : price of good i; zi (p1 , p2 , . . . , pn ): ‘excess demand’ for good i Basically: n pi zi (p1 , p2 , . . . , pn ) = 0, i=1 (actually known as ‘Walras’ Law’) n−1 i=1

i = 1, . . . , n

Let i = n denote ‘money’ such that pn = 1 pi zi (p1 , p2 , . . . , pn−1 ) = −zn (·), i = 1, . . . , n − 1 zn (·) = 0: ‘Say’s Law’ No general excess demand for or excess supply of goods

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

20 / 93

The Classics

Robert Malthus (1766-1834)

The Classics

Thomas Robert Malthus (1766-1834)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

21 / 93

The Classics

Robert Malthus (1766-1834)

Born as the son of Daniel Malthus, a friend of J.-J. Rousseau and David Hume 1805: ‘Professor for general history, politics, trade and finance’, East India College. Later denoted as ‘Professor for History and Political Economy’, i.e. first professional chair in economics. Mainly known as the founder of a new ‘population economics’. Previously dominating attitude: attempts to justify a high population growth rate: the higher the population, the higher the political power of the sovereign and the overall tax revenue

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

22 / 93

The Classics

Robert Malthus (1766-1834)

Major work: Essay on the Principles of Population (1798) Population dynamics: exponential growth due to more or less constant growth rate Nutrition dynamics: maximally linear growth (decreasing growth rates) Consequence: Critical point at which population growth cannot be supported by the available food production Political and social consequences:
Claim: reduction of population growth rates, birth control etc. High labor supply leads to a tendential fall in wages towards wage miminum

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

23 / 93

The Classics

Robert Malthus (1766-1834)

Intense discussion in the public and in academics
Marx: Malthus is a person without any intellectual format Darwin: Example for typical forms of the behavior of species in the natural world

Further research topics:
Value theory (statements in contrast to Ricardo) ‘Effective demand’ as a demand backed up by purchasing power (as a precursor to Keynes)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

24 / 93

The Classics

Karl Marx (1818 - 1883)

The Classics

Karl Marx (1818-1883)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

25 / 93

The Classics

Karl Marx (1818 - 1883)

Dissertation thesis (Epicurean Ethics) submitted to the University of Jena in 1841 Editor of the Rheinische Zeitung in Cologne and (critical) member of the pre-1848 group of opponents of the dominant political parties (Vor-Marz-group) ¨ Friedrich Engels (1820-1895) as the wealthy son of an industrial manufacturer in Wuppertal acted as a life-time friend and sponsor Together with Engels: Manifest der Kommunistischen Partei in 1847/1848 Major work: Das Kapital, Bd. I, (1867); Volumes II and III published by Engels after Marx’ death according to his hand-written notes

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

26 / 93

The Classics

Karl Marx (1818 - 1883)

Philosophy: Variant of G.F.W. Hegel’s dialectic approach: every ‘thesis’ possesses its ‘antithesis’ and result in a new ‘synthesis’. Marx: ‘productive forces’ imply certain ‘production relations’ (property rights). When history proceeds new productive forces emerge which are incommensurate with existing production relations. Consequence (synthesis): new property rights emerge wich are compatible with existing productive forces. End of the process: communist society

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

27 / 93

The Classics

Karl Marx (1818 - 1883)

Law of the falling rate of profit c: fixed capital used in the production of goods v: wages (labor value) paid to the employees : value of employees’ work > v =⇒ surplus of employees’ s work over the cost of employment: m w = c + = c + v + m: value of the new product m v m profit rate: r = = c+v c +1 v m/v: surplus rate; c/v: rate of organic capital composition if m/v is constant, r decreases if c/v increases.

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

28 / 93

The Classics

Karl Marx (1818 - 1883)

Johann Heinrich v. Thunen ¨ (1783-1850)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

29 / 93

The Classics

Karl Marx (1818 - 1883)

Figure 2: Thunen’s Rings ¨
Hans-Walter Lorenz (FSU Jena) A Short History of Economic Thought

Winter 2012/13

30 / 93

The Classics

Karl Marx (1818 - 1883)

Y I II III IV

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

¢

¡

∅Y N Y
Winter 2012/13
31 / 93

The Neoclassics

Classics Social Needs — Long-term Price Determination — Macroeconomic Perspective — Supply-side Determination of Prices — Concentration on Production

Neoclassics Individual Optimization — Short-term Price Determination — Microeconomic Perspective — Demand-side Determination of Prices — Concentration on Consumption

Table 1: A few elementary differences between classical and neoclassical authors

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

32 / 93

The Neoclassics

The Neoclassics
The Most Relevant Neoclassical Writers: Johann Heinrich Gossen (1810-1858) Leon Walras (1834-1910) ´ Carl Menger (1840-1921) Vilfredo Pareto (1848-1923) Francis Edgeworth (1845-1926) Alfred Marshall (1842-1924) August Cournot (1806-1873)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

33 / 93

The Neoclassics

Hermann Heinrich Gossen (1810-1858)

The Neoclassics

Hermann Heinrich Gossen (1810-1858)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

34 / 93

The Neoclassics

Hermann Heinrich Gossen (1810-1858)

Vita
Born as the son of a tax collector in the occupied (by Napolean troops) Duren near Cologne ¨ Education as a lawyer at the University of Bonn No distinctive education in economics Employed as a civil servant in Cologne until his early retirement at the age of 37

Bibliography
“Entwicklung der Gesetze des menschlichen Verkehrs, und der daraus fließenden Regeln fur menschliches Handeln” (1854) ¨ Virtually no organization of the book in the form of chapters, sections etc.
Hans-Walter Lorenz (FSU Jena) A Short History of Economic Thought

Winter 2012/13

35 / 93

The Neoclassics

Hermann Heinrich Gossen (1810-1858)

(originally: no publisher found. In 1854, published by Friedrich Vieweg in Braunschweig on Gossen’s own account. No financial success, only a few copies sold. Gossen’s consequence: Buying of the remaining copies and burning them in his garden) The “Entwicklung . . . ” was later recognized by Jevons in 1979 in a letter to Walras as the first source containing a subjective utility theory Gossen viewed himself as a person who can be compared to Copernicus and Newton in astronomy!

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

36 / 93

The Neoclassics

Hermann Heinrich Gossen (1810-1858)

Gossen’s utility theory (in more recent terms) Standard (cardinal) utility function: U(x1 , x2 , . . . , xn ), associated prices: pi , i = 1, . . . , n, individual income: Y. 2 Gossen “Laws” 1 st Law The utility obtained from consuming a goods i in the quantity xi increases with an increasing quantity xi , but the utility increase decreases with this increased quantity. In more recent formal terms: U(x1 , x2 , . . . , xn ) > 0, Uxi (·) > 0, and Uxi xi (·) < 0.

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

37 / 93

The Neoclassics

Hermann Heinrich Gossen (1810-1858)

2 nd Law

Consider any two goods i and j entering the utility function. In the optimum, a given income Y is spent such that the marginal utilities of all goods, expressed in terms of the associated prices are equal in all allocations, i.e. Ux j Uxi = = λ > ∀ i, j = 1, . . . , n, i pi pj j (1)

with λ as the marginal utility of income, or, in more common terms Uxi pi = ∀ i, j = 1, . . . , n, i Ux j pj j, (2)

A long time later, Hicks (1939 established the term marginal rate of substitution for the l.h.s. of (2).

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

38 / 93

The Neoclassics

Hermann Heinrich Gossen (1810-1858)

Gossen’s own presentation: ‘Consumption’ (‘Genuss’) takes place in time. Denote by x1 the consumption of a particular ‘good’ at a point in time t. x1 (t1 ): total quantity of the good consumed from the beginning of the observation until the recent point t1 in time. x1 (t1 ), =⇒ U1 x(t1 ) =⇒ U1 (t1 ).

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

39 / 93

The Neoclassics

Hermann Heinrich Gossen (1810-1858)

U1 5 4 3 2 1 0 t1 0 1 2 3 4 5 t ∈ [T1 , T2 ] 5 4 3 2 1 0

U1 t ∈ [T2 , T3 ]

t1 0 1 2 3 4 5

Figure 4: Saturation during ‘consumption’ within two consecutive time intervals

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

40 / 93

The Neoclassics

Leon Walras (1834-1910) ´

The Neoclassics

Leon Walras (1834-1910) ´

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

41 / 93

The Neoclassics

Leon Walras (1834-1910) ´

Born as the son of Auguste W. who was strongly interested in economics, 2 volumes on Political Economy First attempts as a belletristic author, later intense studies of mathematics Unsuccessful attempt to find a professorship in economics in France; dominated by the orthodox school that concentrated more on policy advise 1870: Chair of Political Economy in Lausanne/Switzerland until his emeritation 1902: honory member of the newly founded American Economic Association 1909: celebration of his 40th jubilee (denoted as the founder of General Equilibrium Analysis)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

42 / 93

The Neoclassics

Leon Walras (1834-1910) ´

2 major topics Existence of a General Equilibrium in an exchange economy goods: i = 1, . . . , n individual agents: j = 1, . . . , m pi : price of good i zi j (p1 , p2 , . . . , pn ): excess demand of agent j for good i. m j=1

pizi j = pi zi (·): aggregated excess demand for good i

Question: Is it possible to find (p1 , p2 , . . . , pn ) such that n i=1

pi zi (p1 , p2 , . . . , pn ) = 0 ?

Answer: Yes, under certain continuity and convexity assumptions

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

43 / 93

The Neoclassics

Leon Walras (1834-1910) ´

Stability of a General Equilibrium
Problem: who is setting prices when an economy is characterized by price takers in a competitive scenario? No monopoly, no oligopoly, no administered prices! Educational answer: tatonnement process ˆ ‘Auctioneer’ as an artificial institution ‘cries’ out arbitrary prices and collects individual excess demands for each good.
In case of excess demand: prices will be increased In case of excess supply: prices will be decreased

Result: if dzi /dpi < 0 and certain continuity, convexity and monotonity assumptions hold, the price vector approaches its equilibrium value: equilibrium is stable. Standard critique: it is mandatory to forbid trade during the adjustment process

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

44 / 93

The Neoclassics

Carl Menger (1840-1921)

The Neoclassics

Carl Menger (1840 - 1921)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

45 / 93

The Neoclassics

Carl Menger (1840-1921)

Vita/Education 23.2.1840: Born in Neusandez (Poland/Austria) as Carl Menger von Wolfesgrun (abandoned his noble name already in his early ¨ years) Brothers: Anton (Professor of Civil Law, Vienna) and Max (member of parliament) 1859-1863: Law studies in Vienna and Prague; 1867: Dr. jur. University of Krakau (Poland) Academic Career 1873: Secretary in the Presidual Office of the Minister Council (Ministerratsprasiduum) ¨ 1873: (extraordinary) Professor of Law, University of Vienna

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

46 / 93

The Neoclassics

Carl Menger (1840-1921)

Academic Career (cont.) 1876-1886: private lecturer of the Austrian dauphin. Joint work: Kronprinzenwerk (1886-1902) 1879: Full Prof. of Political Economy, University of Vienna Major Publications 1871: Grundsatze der Volkswirthschaftslehre ¨ 1873: Untersuchungen uber die Methode der ¨ Socialwissenschaften und der Politischen Oekonomie 1884: Die Irrthumer des Historismus in der deutschen ¨ Nationalokonomie ¨

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

47 / 93

The Neoclassics

Carl Menger (1840-1921)

Scientific positions Founder of the so-called Austrian School in economics New emphases in price theory: concentration on the demand side instead of considering the supply side and production as the source of ’value’ (Ricardo, Marx etc.: labor value theory). Now: consumers’ utilities determine the price (value) of a product short term time horizon instead of long-term inquiries microeconomic instead of macroeconomic points of view

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

48 / 93

The Neoclassics

Vilfredo Pareto (1848-1923)

The Neoclassics

Vilfredo Pareto (1848-1923)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

49 / 93

The Neoclassics

Vilfredo Pareto (1848-1923)

Considered – together with Edgeworth and Marshall – as the most influential founder of modern microeconomics Born in Paris during the exile period of his father Studied mathematics and physics in Turin, later engineering, 1869 Ph.D. in engineering First job as an engineer in a railway construction firm (locomotives) Unsuccessful attempts to be elected as a member of the Italian parliament (opponent of protectionism and militarism)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

50 / 93

The Neoclassics

Vilfredo Pareto (1848-1923)

1890: first meetings with Maffeo Pantaleoni (1857-1924), Professor of Political Economy in Turin 1891: first meeting with Walras. Pantaleoni recommended Pareto as Walras’ successor in Lausanne. 1893: extraordinary professor, 1894 ordinary professor in Lausanne ´ Lectures contained in Cours d’Economie Politique; did not love teaching (eventually 6 students) 1911: emeritation after several attempts to retire earlier Late years: ‘Villa Angora’ in Celigny (Switzerland). Side story: ´ numerous cats as conversation partners

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

51 / 93

The Neoclassics

Vilfredo Pareto (1848-1923)

Major works:

Manuale di economia politica (1906) (mainly foundations of his economics) Trattato di sociologia generale (1916) (mainly sociological reflections)
Elements of Pareto’s economic œuvre Homo oeconomicus, utility, ophelemity, rational choice logical acts: identity of objective and subjective targets. Under same conditions: same behavior of an agent according to rational principles which reflect the scientific state of the art. non-logical acts: anything else, practical everyday behavior, perhaps irrational, traditionally motivated etc.

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

52 / 93

The Neoclassics

Vilfredo Pareto (1848-1923)

cont. ophelemity: subjective, internal welfare reveived from acting in a certain manner. Example: cigarette smoking as a subjective pleasure utility: objective, possibly external welfare (concerning others) derived from individual acts. Can include a negative ‘disutility’: example of cigarette smoking as disturbing others or destroying individual health homo oeconomicus: agent maximizing his ophelemity under objective restrictions indifference curves: adopted from Edgeworth. Utility (and ophelemity): not measurable, only ordinal statements (‘better’ or ‘worth’); no cardinal scale. Indifference curves and budget constraint suffice to determine rational choice

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

53 / 93

The Neoclassics

Vilfredo Pareto (1848-1923)

General equilibrium
Like Walras: GE as a state in which no agent has an incentive to leave the state GE described as a (relative) price system under which each agent acts according to his interests. Analoge to the mechanistic equilibrium concept No intrinsic objective ‘value’ of goods (like the ‘classics’ with objective production costs or the ‘neoclassics’ with subjective tastes).

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

54 / 93

The Neoclassics

Vilfredo Pareto (1848-1923)

Efficiency Adopted from Edgeworth: concept of “contract curve’ Consideration of the ‘ophelemity’; no interpersonal comparison of these indexes. Perfect competition: ‘nobody’s situation can be improved without a disadvantage to someone else. (Type I). No maximum welfare (since compensation requires utility comparison) Other frameworks (like monopoly): historic reasons for income distribution (Type II); various ways to improve welfare

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

55 / 93

The Neoclassics

Vilfredo Pareto (1848-1923)

Pareto’s distribution ‘law’ Popular formulation: ‘20% of a population are responsible for 80% of an event’ More precise: linear relation between the logs of income and the logs of the number of persons with an income equal to or larger than x According to Pareto: can be found in many socio-economic processes N = by−α or, in logs, log N = b − α log y. (4) (3)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

56 / 93

The Neoclassics

Vilfredo Pareto (1848-1923)

log N 4 3 2 1 0 −1 −2 −3 −4

log y 3 4 5 6

Figure 5: A Pareto line

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

57 / 93

The Neoclassics

Francis Edgeworth (1845-1926)

The Neoclassics

Francis Edgeworth (1845-1926)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

58 / 93

The Neoclassics

Alfred Marshall (1842-1924)

The Neoclassics

Alfred Marshall (1842-1924)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

59 / 93

The Neoclassics

Augustin Cournot (1806-1873)

The Neoclassics

Antoine Augustin Cournot (1806-1873)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

60 / 93

The Keynesian Revolution

The Keynesian Revolution

Intellectual Environment Knut Wicksell as a pioneer in monetary economics and interest rate theory Cambridge colleagues (predecessor A.C. Pigou; biograph Roy Harrod, immediate followers J. Hicks, J. Robinson) Intellectual followers: P.A. Samuelson, James Tobin

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

61 / 93

The Keynesian Revolution

Knut Wicksell (1851-1926)

The Keynesian Revolution

Knut Wicksell (1851-1926)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

62 / 93

The Keynesian Revolution

Knut Wicksell (1851-1926)

Education: 1869: University of Upsala, mathematics and physics 1887: scholarship for European universities abroad; attended classes of C. Menger in Vienna completely turned towards economics in later years Academic Career 1899: Assistant Prof. in Law at the University of Upsala 1900: Full professor at Lund University

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

63 / 93

The Keynesian Revolution

Knut Wicksell (1851-1926)

Major Publications 1896: Finanztheoretische Untersuchungen 1898: Geldzins und Guterpreise ¨ Basic Results interest rate as a means for price-level stability vision of a limited welfare state (so-called ”Svedish model”)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

64 / 93

The Keynesian Revolution

Arthur Cecil Pigou (1877-1959)

The Keynesian Revolution

Arthur Cecil Pigou (1877-1959)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

65 / 93

The Keynesian Revolution

J.M. Keynes (1883-1946)

The Keynesian Revolution

John Maynard Keynes (1883-1946)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

66 / 93

The Keynesian Revolution

Paul A. Samuelson (1915-2009)

The Keynesian Revolution

Paul Anthony Sameulson (1915 - 2009)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

67 / 93

The Keynesian Revolution

James Tobin (1918-2002)

The Keynesian Revolution

James Tobin (1918 - 2002)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

68 / 93

The Neoclassical Synthesis and the New Classical Economics

The Neoclassical Synthesis and the New Classical Economics

This section deals with three basically distinct, but conceptually similar fields: Performing regiorous mathematical analyses of generalizations of neoclassical microeconomics Approaches in order to combine neoclassical elements with Keynesian economics Re-introducing classical/neoclassical equilibrium elements into macroeconomics

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

69 / 93

The Neoclassical Synthesis and the New Classical Economics

Arrow (1921-)

The Neoclassical Synthesis and the New Classical Economics

Kenneth Arrow (1921-)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

70 / 93

The Neoclassical Synthesis and the New Classical Economics

Debreu (1921-2004)

The Neoclassical Synthesis and the New Classical Economics

Gerard Debreu (1921-2004) ´

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

71 / 93

The Neoclassical Synthesis and the New Classical Economics

Solow (1924-)

The Neoclassical Synthesis and the New Classical Economics

Robert Solow (1924 - )

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

72 / 93

The Neoclassical Synthesis and the New Classical Economics

Friedman (1912-2006)

The Neoclassical Synthesis and the New Classical Economics

Milton Friedman (1912-2006)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

73 / 93

The Neoclassical Synthesis and the New Classical Economics

Lucas (1937-)

The Neoclassical Synthesis and the New Classical Economics

Robert Emerson Lucas (1937 - )

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

74 / 93

Strategic Behavior and Game Theory

Strategic Behavior and Game Theory

Basically 2 variants Non-cooperative game theory Cooperative game theory Many topics in non-cooperative game theory already known from (neo-) classical writers such as A. Cournot and H. v. Stackelberg Cooperative game theory has also been the topic in basically non-economic treatments of human interaction (negotiations, search for common solutions etc.)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

75 / 93

Strategic Behavior and Game Theory

John von Neumann (1903-1957)

Strategic Behavior and Game Theory

John von Neumann (1903 - 1957))

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

76 / 93

Strategic Behavior and Game Theory

John von Neumann (1903-1957)

Vita Born in Budapest (Hungary) as Neumann Janos Lajos on ´ Dec/28/1903) as the son of the banker Neumann Miksa and Margaret Kann (the elevation to nobility was performed by the emperor Franz Josef in 1913). During the immigration procedure to the U.S. in 1937, the name was changed to ‘John von Neumann’ Education in Budapest. He attended the advanced calculus class of Gabor Szego in the age of 15; Ph.D. in mathematics from the ´ ¨ University of Budapest in 1925/26; simultaneous diplomas in chemical engineering from the ETH Zurich. Visit to Gottingen with ¨ a grand from the Rockefeller Foundation. Habilitation in Berlin 1927.

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

77 / 93

Strategic Behavior and Game Theory

John von Neumann (1903-1957)

Academic Career
1929/30: Privatdozent, Universitat Hamburg ¨ 1930: affiliation with the Princeton University, New Jersey. Switching between Princeton and Berlin in a half-year rhythm from 1930 to 1933 1933-1957: member of the Institute for Advanced Studies at Princeton.

Major contributions to Mathematics: probability theory (measure theory, ergodic theory, geometry). Physics: Quantum mechanics Information science and computer architecture Collaborator in the Manhattan Project in Los Alamos dealing with the construction of the first nuclear bomb in 1943/1945.

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

78 / 93

Strategic Behavior and Game Theory

John von Neumann (1903-1957)

Contributions to Game Theory Major publication: Theory of Games and Economic Behavior, (with Oskar Morgenstern), Princeton University Press 1944 Minimax-Theorem: minimization of maximal losses in ecpected utility function Application of the method of backward induction in searching for a solution

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

79 / 93

Strategic Behavior and Game Theory

John von Neumann (1903-1957)

Example: 2-Person-Zero-Sum-Game
2 players with strategies s1 , i = 1, . . . , m and s2 , j = 1, . . . , n. i j Payoffs: Π1 and Π2 when player 1 chooses strategy i and player 2 ij ij chooses strategy j Sum: Π1 + Π2 = 0 ij ij =⇒ Π1 = −Π2 ij ij Example payoff-matrixes for player 1 (rows: payoffs when player 1 chooses s1 and player 2 plays s2 , resp.) and player 2 (with negative i j entries due to the zero-sum character of the game: J1 = 2 1 4 −1 0 6 and J2 = −2 −1 −4 1 0 −6

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

80 / 93

Strategic Behavior and Game Theory

John von Neumann (1903-1957)

Assume that player 1 chooses strategy 1, i.e. row 1. Then, player 2 responds with his choice of strategy 2 because his payoff is maximized with the payoff −1 > −2 > −4. If player 1 chooses strategy 2, i.e. row 2, then player 2 responds with his choice of strategy 1 because his payoff is maximized with the payoff 1 > 0 > −6. Since player 1 is able to follow this choice of his partner, he is aware of his own remaining, reduced choice set given by 1 min Π1 = ij −1 j Player 1 then chooses the maximal element in this row vector, i.e. max min Π1 = 1 ij i j

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

81 / 93

Strategic Behavior and Game Theory

John von Neumann (1903-1957)

Player 1 therefore favors the strategy s1 with his own payoff of Π1 = 1 1 12 2 and the payoff Π12 = −1 of his competitor who is supposed to choose the strategy s2 . 2 Equivalently, player 2’s reflection leads to his prefered strategy max min Π2 = −1 ij j j

or

min max Π1 = 1 ij j i

The choice of both players is therefore consistent. The procedure is known as the search for a minimax strategy. Graphically, the minimization-maximization procedure reminds of a saddle. The common strategies are therefore called saddle-point strategies. Note that not all zero-sum-games exhibit the saddle-point property.

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

82 / 93

Strategic Behavior and Game Theory

John Nash (1928-)

Strategic Behavior and Game Theory

John Nash (1928-)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

83 / 93

Strategic Behavior and Game Theory

John Nash (1928-)

Vita and Academic Carrer Born June/13/1928 in Bluefield/West Virginia, as son of John and Margaret Nash Master in mathematics from Carnegie Mellon University Fellowship, mathematics department at Princeton University, Ph.D. in 1950 with a 28-page dissertation on non-coorperative games. Nobel prize in Economics 1994 (together with Reinhard Selten and John Harsanyi)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

84 / 93

Strategic Behavior and Game Theory

John Nash (1928-)

Mathematical contributions differential geometry advances in the solution of partial differential equations Contributions to Economic Theory Non-cooperative game theory. Basically the same economic problem as the one posed by A. Cournot in oligopoly situations. “Best-response” strategies lead to the well-known Cournot-Nash solution. Cooperative game theory

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

85 / 93

Strategic Behavior and Game Theory

Reinhard Selten (1930-)

Strategic Behavior and Game Theory

Reinhard Selten (1930-)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

86 / 93

Strategic Behavior and Game Theory

Reinhard Selten (1930-)

Vita and Academic Career 1969-1972: Freie Universitat Berlin ¨ 1972-1984: University of Bielefeld 1984-1995: University of Bonn 1994: Nobel Prize in Economics (together with J. Nash and J.C. Harsanyi) Major Publications 1957: General Equilibrium with Price-Making Firms (with T. Marschak) 1988: A General Theory of Equilibrium Selection in Games (with J.C. Harsanyi)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

87 / 93

Strategic Behavior and Game Theory

Reinhard Selten (1930-)

Basic Contributions

Chain Store Paradoxon Equilibrium concepts (refinements): ”subgame-perfect equilibria” Basic contributions to the concept of ’bounded rationality’ Considered as initiator of ’Experimental Economics’

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

88 / 93

Evolutionary Economics

Evolutionary Economics

Major topics Application of Darwinian ideas to questions of economic development Research in innovation activities in personal, subjective contexts (entrepreneurship) and network phenomena Business cycle research

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

89 / 93

Evolutionary Economics

Schumpeter (1883-1950)

Evolutionary Economics

Joseph Alois Schumpeter (1883-1950)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

90 / 93

Evolutionary Economics

Schumpeter (1883-1950)

Vita and Education Born Feb/8/1883 Triesch (now Czech rep.) Law student in Vienna; 1908 doctorate in law attended lectures by Bohm-Bawerk ¨ visits to Berlin/London/Cambridge universities marriage with G.L. Seaver 2nd and 3rd marriages (early death of 3rd spouse 1926) Academic Career Move to Egypt (Kairo); Habilitation 1908 in Kairo “Privatdozent” Wien; 1909: Franz-Joseph Universitat Czernowitz ¨ (today Ukraine)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

91 / 93

Evolutionary Economics

Schumpeter (1883-1950)

Academic Career (cont.) 1911: Karl-Franzens-Universiat Graz ¨ 1913/14: 6 months visit to Columbia University, NYC 1921-1932: activities in the political and business sectors (“Staatssekretar” and president of a private bank) ¨ 1932 Harvard University 1940/41: President Econometric Society 1948: President American Economic Association

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

92 / 93

Evolutionary Economics

Nelson (1930-) and Winter (1935-)

Evolutionary Economics

Richard R. Nelson (1930-)

Sidney Winter (1935-)

Hans-Walter Lorenz (FSU Jena)

A Short History of Economic Thought

Winter 2012/13

93 / 93