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Mar 22

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.

Mar 22

Lope Gallego

Alfred Marshall

Alfred Marshall was an English economist (1842-1924), and the true founder of the neoclassical school of economics, which combined the study of wealth distribution of the classical school with the marginalism of the Austrian School and the Lausanne School. Professor at Cambridge, he was the author of “Principles of Economics”, 1890, which became the most widely read manual in microeconomics in his time. This book, which is his major work, established a radical change on how economics were taught. Instead of just writing long pages, Marshall draw diagrams throughout the chapters, allowing a better understanding of economic theories and models, such as J. S. Mill’s reciprocal demand, or an analysis on the differences between fixed and variable cost, and the importance of time periods when analyzing these matters. In fact, Marshall is the precursor of today’s cost analysis.

Of unquestionable educational clarity and filled with profound social principles, Marshall contributed to economic science with concepts such as elasticity and the further development of other subjects, surpluses for instance. Although he did not invent the term nor did he initiate this theory, he did made a clearer separation and definition of different kind of surpluses, such as consumer’s and producer’s surplus.

Also in his “Principles of Economics”, he stated the differences between internal and external economies of scale, as well as a diagram which depicted the fluctuations in supply and demand that took place before arriving to a steady state, a general equilibrium. This equilibrium was reached by means of changing amounts, not prices, as Léon Walras stated.

He is also considered as founder of the Cambridge School, where he taught economics until his retirement. Other renowned economists belonging to this school are Arthur C. Pigou and J. M. Keynes.

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.

Mar 19

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Lausanne school

Name that comes from the university in this Swiss city, in which marginalist economist Léon Walras taught and developed its main contributions to economics. Vilfredo Pareto, also a supporter of marginal analysis methods, whose Pareto-optimal notion deeply contributed in the development of game theory and welfare economics later on, was also part of this school.

The Lausanne School contributions to economics, as well as the marginal revolution itself, influenced Alfred Marshall and the Neoclassical School in general.

Mar 19

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Austrian school

Named essentially after the work of three economists that taught the same course at the University of Vienna:

–Carl Menger, whose main contribution to economic science is the theory of marginal utility;

–Friedrich von Wieser, who formulated the idea of opportunity cost;

–Eugen von Böhm-Bawerk, who contributed to economics with his studies on the nature of capital and interest rates.

Ludwig H. Edler von Mises and Friedrich A. von Hayek are considered followers of this school, and also as links to the Chicago School.

Mar 19

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Vilfredo Pareto

Pareto was an economist and sociologist of Italian origin, born in Paris (1848-1923), who taught at the University of Lausanne, as well as previously did his mentor, Léon Walras. They both were part of the Lausanne School, which is considered, along with the Austrian School, as the birthplace of marginalism and neoclassical economics.

His chief works were “Course of Political Economy”, 1896-97, and “Manual of Political Economy”, 1906. Among Pareto’s contributions, we can highlight the graphical development of Edgeworth box, as well as an improvement on the way indifference curves are drawn, and studies on the personal distribution of income.

In his studies of the late nineteenth century, Pareto found some regularity in the personal distribution of income in different countries. From that regularity, he determined a series of economic and sociological conclusions, which became known afterwards as Pareto’s Laws. He also studied some regularities in businesses, where concentration was the explanation for the fact that many companies get 80% of their revenue from only 20% of its products.

Nowadays, however, he is mostly known for the Pareto optimal, a notion widely used in game theory and welfare economics.

Mar 19

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David Hume

David Hume was a British philosopher (1711-1776), Scottish as his friend Adam Smith. In economics, his main contribution is the quantity theory of money, a subject on which he reformulated what was previously enunciated by his predecessors on the subject, specially the School of Salamanca and John Locke. His ideas about the interest of money are based on the relative situations of supply and demand, as credit demand is heavily influenced by businesses’ expectations, thus relating the interest rate with the rate of profit.

Hume’s philosophy of self-interest and desire of accumulation as sources of economic activity had a great influence on Adam Smith and other classical economists.

Mar 19

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Irving Fisher

Irving Fisher was an American economist (1867-1947), professor of Political Economy at Yale University, known for his contributions to quantitative economics (works such as “The Nature of Capital and Income”, 1906, and “The Purchasing Power of Money”, 1911) and especially the development of index numbers. He also addressed interest rates, in his opinion governed by two interacting forces: the impatience of individuals in terms of exchanging future income for current income, and the principle of yield paid by doing so. In his “Appreciation and interest”, 1896, Fisher showed the relation between the nominal interest rate (i), the real interest rate (r) and inflation (Π) using an equation, known nowadays as the Fisher equation:

i ≈ r + Π

Although this relation derived from earlier works by Jacob de Haas, Irving Fisher’s formula is an easier way to represent this relation.

In the early autumn of 1929, shortly before the famous Black Thursday, Irving Fisher said, “stock prices have reached what looks like a permanently high plateau.” After the stock Crash, he lost his credibility, being this the reason why his work was not taken seriously until decades later.

Predecessor of monetarism, and following the works of bullionists, David Hume, the School of Salamanca and John Stuart Mill, he showed that prices vary depending on the volume of money in circulation, being this variation as shown by the equation of exchange, which he first depicted in his book “The Purchasing Power of Money“.

Feb 26

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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

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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.