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Mar 20

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

Lope Gallego

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

Lope Gallego

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“.

Mar 18

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Classical Economics: Karl Marx

Karl Marx

Karl Marx was a German politician, philosopher, economist, and sociologist (1818-1883). He studied law and it was in his famous “Thesis on Feuerbach”, where he formulated the proposition that the philosopher must not be contented with the contemplation of life, but must contribute in changing it. Marx’s early contributions to Economics were as editor of the “Rheinische Zeitung”, whose radical content made him face Prussian authorities. In 1847, along with Friedrich Engels, he wrote the Communist Manifesto, true synthesis of his thinking. However, his most important work is “Capital: Critique of Political Economy”.

Although he is the one who gave name to the Classical school of Economics, and he might not be considered a part of it because of his different conclusions on theory of value, we consider he should be considered part of this school, mainly because he worked on the same issues as other classical authors.

Mar 18

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Classical Economics: John Stuart Mill

John Stuart Mill

John S. Mill was an English economist, (1806-1873), son of the also economist James Mill, who gave him a rigorous education. His “Principles of Political Economy”, which is considered one of the most important contributions made by the Classical school of economics, did not think of prices from a Theory of value perspective, but as a result of the intersection of supply and demand, with references to international trade concepts, such as reciprocal demand and the terms of international exchange, or as we know the term nowadays, terms of trade. In fact, it was Mill’s work on “International values” which made possible further graphical analysis by Francis Y. Edgeworth. Individualistic in the first part of his life, showed in the second a certain proclivity for socialist ideas without ever losing its high appreciation of freedom and even religious values.

He also made contributions to the quantity theory, by developing David Hume‘s work on the subject. In his book “Principles of Political Economy”, he explained the difference between money and price, often used for the same idea by other classical economists, and made clear the relation between money quantity and prices. However, it was Irving Fisher who finally stated the equation of exchange.

Mar 18

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Classical Economics: Thomas Robert Malthus

Thomas Robert Malthus

Malthus was an English reverend (1766-1843), who in his book “An Essay on the Principles of Population,” wrote an argument against his contemporary Mr. Godwin, who believed in unlimited population growth. Malthusian population theory warned of the possibility, that while the population grew geometrically, food resources grew only in arithmetical proportion, thus creating the conditions for a shortage in the long term that would require an adjustment in the birth rate. This law of Malthus’s population was severely criticized by Karl Marx, another heterodox economist from the Classical school of economics, who called the parish of Albury “advocate of the bourgeoisie.” The principles of Malthus had great influence on the thinking of Darwin and Wallace about the struggle for life as the source of the natural selection of the strongest.

In his “Principles of Political Economy”, Malthus explained how he was against Say’s Law, by considering demand as an aggregate. Thus, if wages were to be mantained at a subsistence level, aggregate demand would drop. Therefore there would be a production surplus, idea that would be used by J.M. Keynes in his “The General Theory of Employment, Interest and Money”.

Mar 18

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Classical Economics: David Ricardo

David Ricardo Ricardo, an English economist (1772-1823), from Dutch-Sephardi origins, became rich at a very young age on the stock market and devoted the rest of his life to the study of mathematics and natural sciences and, from 1799, Economics. He became known with his pamphlet “The high price of bullion” on economic issues, and ended his work with his “Principles of Political Economy and Taxation.” Ricardo took the major step in the process of deductive abstraction of what later became known as the Classical school of economics in the path initiated by Adam Smith. His theories of comparative advantage, which were firstly stated in 1815 by Col. Robert Torrents (Ricardian trade theory), rent of land (Ricardian distribution theory) and the steady state, were some of their major contributions to economic science.