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Nov 25

Friedrich von Wieser

Friedrich von Wieser Friedrich Freiherr von Wieser, 1851-1926, is one of the founding trio of the Austrian school along with Carl Menger and Böhm-Bawerk. He taught in the largest Austrian universities, mainly in Vienna. Amongst his students, there were well-known would-be economists such as Friedrich A. von Hayek and Joseph A. Schumpeter, who were strongly influenced by the thoughts of their professor.

Wieser’s main works include “On the Origin and the Main Laws of the Value of Factors”, 1884, where he develops the concept of marginal productivity valuation of factors and his cost theory; “Natural Value”, 1889, where Wieser further develops his previous work, but giving it normative distributional content; and “Social Economics”, 1914, which is considered the definitive textbook of the Austrian school.

Oct 7

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Friedrich A. von Hayek

Friedrich A. von Hayek Friedrich August von Hayek, 1899-1992, was an Austrian-Hungarian economist, philosopher and Professor from 1931 to 1950 at the London School of Economics and from 1950 to 1962 at the University of Chicago. He won the Noble Prize in Economic Sciences jointly with Gunnar Myrdal in the year 1974 for their pioneer work regarding theory of money and economic fluctuations, and for their research on the interdependence of economic, social and institutional phenomena.

Hayek was disciple of Joseph Schumpeter, Ludwig von Mises, Gottfried Haberler and Fritz Machlup and became a follower of the ideas of the Austrian school. For many, he has been regarded as the father of modern liberalism. His ideas inspired the School of Chicago’s neoliberal monetarism.

Hayek has been one of the greatest critics of the planned and socialist economy, as he considers it inevitably leads to totalitarianism and to the absence of individual freedom. He reflects this issue in his “The Road to Serfdom”, 1944. He believes the economy has its own way of working and describes the cycles of the economy, in what is seen as his greatest contribution to economics, in his work “Pure Theory of Capital”, 1941.

He perceived the economy as a coordination problem, and all maladjustment in the economy are due to the improper coordination between agents, however this disorders would serve to achieve a correct and efficient coordination between them. Any economic policy that attempts to correct the economy would, nevertheless, create an artificial patch that would in the long term aggravate the situation.

Oct 2

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Frank P. Ramsey

Frank Plumpton Ramsey, 1903-1930, was an English mathematician who applied his knowledge and interest to the disciplines of philosophy and economics, resulting in remarkable contributions. Regarding his works on Economics, he produced three master pieces which were, however, disregarded for many years.

His first economic paper “Truth and Probability”, 1926, covers subjective probability and utility. Ramsey argues Keynes’ point of view on the importance of subjective probabilities. Keynes believed in the relation between knowledge and probability, being knowledge common and available for all individuals and thus implying that everybody would have the same probability distribution. Ramsey argued that each individual would have its own knowledge resulting in different probability distributions. For him there was a difference between the notions of probability in physics and logic.

In his second paper “A Contribution to the Theory of Taxation”, 1927, Ramsey centred in optimal taxation so that revenue and utility are maximised and produced the concept of Ramsey pricing used to calculate the price a monopolistic firm should set in order to maximise social welfare subject to profit constraint.

Finally, in his third paper “A Mathematical Theory of Savings”, 1928, Ramsey tries to determine the optimal amount of savings for an economy in order to maximise its future utility. This would result in the infinite horizon growth model. His mathematical background is strongly noticed due to the use of calculus of variations and he laid the bases for the development of optimal accumulation theory or theory of optimal path of accumulation. His model was later adapted by Tjalling C. Koopmans and David Cass to maximise household’s utility function.

Feb 22

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Frank Knight

Frank Knight Frank Hyneman Knight, 1885-1972 was an American economist and Professor at Cornwell University, the University of Iowa, and the University of Chicago, where he is considered as one of the founding fathers of the Chicago School. Knight is considered one of the greatest contributors to the economic science. In his most important work, “Risk, Uncertainty and Profit”, 1921, Knight makes the distinction between risk and uncertainty and their relation with profit.

He described risk as having an unknown outcome, but from which a reliable estimate of its possibilities can be calculated, and where a maximising expected utility can be applied for decision making.

Uncertainty is characterized by an unknown outcome and from which no reliable estimates can be made for its different possibilities, which explains why it’s usually analysed in game theory. The difference, therefore, is subject to outcome probability calculation. Knight defines uncertainty as the true explanation for profit and where the entrepreneur’s role is to foresee the future, and thus paying in advance for factors of production, in order to achieve a future profit.

Mar 22

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François Quesnay

François Quesnay Quesnay was a French physician (1694-1774), who also studied economic issues, and was the true founder of the economic doctrine known as Physiocracy. His early works were written in the Encyclopédie of Diderot and d’Alembert (1756,1757). However, his most important contribution to economics was his famous Tableau Économique, 1758, the first circulatory diagram, allowing a further understanding of how an economy works. He did it by comparing the income flow of a given country to the blood in the human body.

The tableau allowed further developments in the matter, such as Léon Walras’ general equilibrium and Wassily W. Leontief’s input-output model.

Sep 9

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Franco Modigliani

Franco Modigliani, 1918-2003, was an American, Italian born economist, and Professor at the Massachusetts Institute of Technology. He has mainly worked in the fields of savings and financial markets, and his pioneering analyses in these subjects granted him the Nobel Prize in Economic Sciences in 1985.

The life-cycle hypothesis raised by Modigliani in his “The Life Cycle Hypothesis of Savings, the Demand for Wealth and the Supply of Capital”, 1966, tries to explain and rationalize the level of savings in the economy. As Modigliani explained, consumers seek for stable consumption levels throughout their lives; this is why they save during their working years since later, during their retirement, they will only have their savings. This proposition complements Friedman´s permanent income hypothesis, whereby consumers adjust their consumptions patterns when their income varies.

Modigliani also developed important theorems in the corporate finance area. The Modigliani-Miller theorem, formulated along with Merton Miller, demonstrates that under certain conditions, a firm´s value will remain unchanged, independently of weather equity or debt financing is used. Modigliani addresses this topic in his article “The Cost of Capital, Corporation Finance and the Theory of Investment”, 1958.

Mar 20

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Francis Ysidro Edgeworth

Edgeworth was an Irish economist (1845-1926), professor of Political Economy at the University of Oxford, whose most important contributions to economic science were statistical in nature, primarily in the area of index numbers, highlighting also the mathematical apparatus needed for the drawing of indifference curves and the contract curve, from the first analysis of W.S. Jevons. Although it would be Vilfredo Pareto, in 1906, who would draw an indifference map, as we know the representation of various indifference curves nowadays.

In his “Mathematical Psychics: an Essay on the Application of Mathematics to the Moral Sciences”, published in 1881, Edgeworth designed what is now known as an Edgeworth box, which basically allows us to compare two mathematical functions represented as curves using the same axis. However, it was also Pareto in 1906 who would depict this Edgeworth box as we know it, as a “box”. It was also in “Mathematical Psychics” where utility functions started to be written as F(x_n, y_n, z_n), closer to what we see in today’s textbooks. It must be said, as an anecdotical fact, that Edgeworth mentioned in a footnote this book, when interpreting an earlier book form J. J. Thomson, that “energy is the product of mass and the square of velocity”, which is generally attributed to Einstein or other physicists.

In 1894, Edgeworth published a diagram in “Theory of International Values” explaining the terms of trade from a geometrical perspective, basing this article on J. S. Mill‘s work on trade and his theory on reciprocal demand.

Nov 11

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Eugen von Böhm-Bawerk

Eugen von Böhm-Bawerk Eugen von Böhm-Bawerk, 1851-1917, was an Austrian economic theorist, a public servant and Professor in different Austrian universities. He is considered to belong to the Neoclassical school of economics and was a leading figure inside the Austrian school. Böhm-Bawerk’s work had a great influence in other Austrian economists, such as Joseph Schumpeter and Ludwing von Mises.

His studies focus in the nature of capital and interest, and wrote a three-volume work, “Capital and Interest”, whose three volumes where entitled “History and Critique of Interest Theories”, 1884, “Positive Theory of Capital”, 1889 and “Further Essays on Capital and Interest”, published after his death, in 1921.

In his main theory he distinguishes between three different types of goods: first order goods, for final consumption. Second order goods, that are intermediate or capital goods. Third order goods, which are the goods in their original state. The relation between capital and goods is that capital allows goods to reduce their order, turning third order goods into first order goods. Regarding interest, he justified its existence with technical and subjective reasons, being the second ones where he provided new theories. He assumed people have a preference for present consumption over future and thus underestimate future goods.

Nov 2

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Eugen Slutsky

Eugen Slutsky, 1880-1948, was a Russian mathematician, statistician and economist. In economics he is best known for his formulation of the Slutsky’s equation. Slutsky found an equation that splits income and substitution effects based on Hicksian and Marshallian demand curves. He developed this equation on his “On the Theory of the Budget of the Consumer”, 1915.

Slutsky did not produce any other significant contribution to economics, but he did produce fruitful works regarding mathematical statistics and probability theory. He took special interest in the concept of asymptotic convergence in probability.

Video – Income and substitution effects:

Nov 2

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Étienne Laspeyres

Etienne Laspeyres Ernst Louis Étienne Laspeyres, 1834-1913, was a German economist, statistician and Professor in various universities. His most notable contribution to economics was the development of the Laspeyres index, used for the formulation of weighted indexes, so that each product that are included in them, have their own weight according to their real importance in the production, consumption, etc. He wrote about it in his “Die Berechnung einer mittleren Warenpreissteigerung”, 1871.

Laspeyres also wrote quite an amount of papers in the fields of economic history, the history of economic thought and on economic issues concerning his time.

Video – Laspeyres index: