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Feb 26

Lope Gallego

Classical school of economics

Influenced by mercantilism and physiocracy theories, it took place from the late XVIII century to the late XIX century. It is considered that its main authors were Adam Smith, David Ricardo and John Stuart Mill, and the fourth, the unorthodox Robert Malthus, however, there is some evidence of previous contributions provided by French physiocrats and Spanish scholastics. They wrote especially about the theory of value, distribution theory and international trade.

The majority of the principles of the classical school of economics were set by Adam Smith in his work “An Inquiry into the Nature and Causes of the Wealth of Nations”, written in 1776. Smith defended free trade and free competition as the best way to make an economy grow, opposing his ideas to government intervention and the mercantilist theory that prevailed at that time.

David Ricardo developed the idea that every nation should specialize in the production of those goods in which they get an advantage towards other nations and produce it more efficiently. As for other commodities, instead of trying to be produced nationally, they should be imported.

Karl Marx studied the same matters, although with different conclusions and defending the working class, which makes him a classical economist in the eyes of some historians.

Thanks to these authors, the study of economics became more of a science, instead of just being some kind of philosophy.

Feb 26

Lope Gallego

Léon Walras, Marie-Ésprit

Léon Walras Léon Walras, a French economist (1834-1910), is considered, along with W. S. Jevons and Carl Menger, a co-founder of marginalism and theory of utility. He is regarded as the founder, along with Pareto, of the Lausanne School. On his “Elements of Pure Economics”, 1874, Walras made his major contribution to economics, general equilibrium theory, on which all demands are interrelated into a coherent set of relationships.

This general equilibrium was reached by means of a “tâtonnement”, changes in price that would gradually approximate supply and demand until a steady statewas reached. A few decades later, Alfred Marshall would present a different general equilibrium theory, on which the steady state would be reached by means of changes in quantities.

Feb 26

Lope Gallego

William Stanley Jevons

Jevons was a British economist (1835-1882), who is considered, along with Carl Menger and M.-E.-L. Walras, a co-founder of marginalism and theory of utility. Jevons is the author of the book “The Theory of Political Economy”, 1871, in which he devised the concept of marginal utility, from an additive and separable utility function, although it was not measurable on cardinal terms. These studies were possible thanks to Johann H. von Thünen’s works, who was the first economist to use the word “marginal”, which meaning Jevons adopted in his works using the term “final”. He is also considered as a precursor of Econometrics for his work on business cycle, index numbers and moving averages, topics on which he used his extensive knowledge of mathematics.

Although his works on marginal utility are considered pioneer during the marginal revolution, and important for the development of neoclassical economics, Jevons considered there would be only one possible solution when considering barter exchange. However, there are infinite solutions, as was demonstrated later on by Francis Y. Edgeworth, whose indifference curves are based on Jevons’ earlier work.

Feb 24

Lope Gallego

Carl Menger

Carl Menger, was an Austrian economist (1840-1921), who is considered to be, along with W. S. Jevons and M.-E.-L. Walras, a co-founder of marginalism and of the theory of utility, and was also founder of the Austrian School, where his main followers Wieser and Böhm-Bawerk were his disciples. In his “Principles of Economics”, 1871, Menger attacked as incorrect the labor theory of value, expressing his view that the factor determining the value of a good is not the amount of work nor other goods needed to produce it, but the importance we place on the basis of the satisfaction we believe that it can offer.

Feb 24

Lope Gallego

Marginal revolution

Marginalism is a method of analysis used in microeconomics, which seeks to explain economic phenomena through mathematical functions (production, consumption, etc..). The term “marginal” was first used by Johann H. von Thünen in his “The Isolated State”, in 1826. The Marginal revolution, which took place a few decades later, around 1870, brought the prevailing classical view of value theory to an end. Indeed, thanks to the work of three economists: W. S. Jevons, Carl Menger and M.-E.-Léon Walras. Even though these economists worked independently, they shared a few ideas which made their work the beginning of the utility theory:

–utility was measurable in cardinal units, such as monetary units;

-the utility function is additive and separable;

-they all use the Gossen’ laws.