1. Marginalist Hall of Fame: Austrian School
Carl Menger,
Eugen von Böhm-Bawerk,
Friedrich von Wieser,

2. The Marginalist Revolution: The Austrian School
Friedrich von Wieser, On the Origin and Principle Laws of Economic Value, 1884
Marginal utility: Jevon’s “final degree of utility”  Grenznutzen  MU
Austrian cost theory/Pricing factor services
Cost = Utility of 1st order goods foregone…opportunity cost concept
Utility + Technology Values of goods in equilibrium
Essentially demand and supply, but awkwardly avoided
Joint determination of outputs and shadow prices, obscured by causal analysis
Anticipation of linear programming

3. Aside on Linear Programming
Leonid Kantorovich, Soviet “Economist”, Nobel Prize, 1975
Tjalling Koopmans, Yale Economist, Nobel Prize, 1975
George Danzig, Stanford Mathematician, No Prize
A linear programming problem: Optimize subject to constraints
Max 4 x1 + 5 x2 + 9 x x4
s.t. 1 x1 + 1 x2 + 1 x x4 = 15 Laborer-Days
7 x1 + 5 x2 + 3 x x4 = 120 Machine Hours
3 x1 + 5 x2 +10x x4 = 100 Lbs of Raw Material
Note: fixed coefficient technology…factor substitution not possible
Solution: Optimal program
how much x1, x2, x3 and x4 to produce
shadow prices of resources
 activities used in the solution operate at zero net profit
 activities not in solution would operate at a loss.

4. The Marginalist Revolution: The Austrian School
Friedrich von Wieser, On the Origin and Principle Laws of Economic Value, 1884
Marginal utility: Jevon’s “final degree of utility”  Grenznutzen  MU
Austrian cost theory/Pricing factor services
Cost = Forgone utility…imputed opportunity cost
Utility + Technology Values of goods in equilibrium
Essentially demand and supply, but awkwardly avoided
Joint determination of outputs and shadow prices, obscured by causal analysis
Anticipation of linear programming
B-B “loss principle”: price of commodity lost if factor withdrawn
Austrian methodology:
Step-by-step human action, not equilibrium of supply and demand
Market as information processor  price signals  learning
von Mises – Lange debate: could economic planning work?
Lange won on logic:
efficient market capitalism provides socialist planner with initial set of prices;
he just has to tweak them and tell managers to optimize
von-Mises won in fact … central planning didn’t work

5. Principles of Economics, 1890 (1st edition), 1920 (8th edition)
Student and teacher at Cambridge
Majored in math
Married Mary Paley, an economist
Teacher of teachers: Pigou, Keynes
…cool heads but warm hearts
Insecure in his writings: held back publication
Principles of Economics, 1890 (1st edition), 1920 (8th edition)
Neoclassical economics: marginalist – mathematical framework
Written for intelligent layman: graphs in footnotes; math in appendices
Account for the concrete: biological, not mechanical/mathematical, analogies
From Keynes’ eulogy:
[An economist] must be a mathematician,
historian, statesman, philosopher – in some
degree. He must understand symbols and
speak in words.
Keynes on Jevons – Marshall
priority: [Jevon’s final utility] lives
merely in the tenuous world of bright
ideas … Jevons saw the kettle boil
and cried out with the delighted
voice of a child; Marshall too had
seen the kettle boil and sat down
silently to build an engine.
Alfred Marshall,
Did Marshall crib from Austrians?
B-B and Wieser were at school
when I thought these things out.
Marshall

6. Marshall’s Principles of Economics: Themes and Contents
Economics…a study of mankind in the ordinary business of life
...pecuniary focus
Partial equilibrium analysis … representative agents and firms
Recognition of Walras’ general equilibrium framework…in Appendix
Focus on specific markets…constant MU of money…a “preliminary” analysis
Supply (costs) interact with demand (utilities)
Ceteris paribus  conservative tilt: “Nature does not leap” Marshall
Partial analysis is less elegant than general equilibrium
…but better for application
Supply and demand curves (the Marshallian cross)
Value determined by both blades of the scissors
Consumer and producer surplus
Reciprocal demand curves in trade (recall Mill)
Elasticity of demand
Price decline  increase in real income for elastic demand
Anticipates income and substitution effect analysis
value
quantity

7. Marshall’s Principles of Economics: Themes and Contents
Temporary, short-run and long-run supply – fixed and variable costs
Elasticity of supply increases with time as factors adjust
Value in short-run depends on demand
Value in long-run depends on supply
Quasi-rents: return of fixed capital (machines)
In short-period:
a rent determined by demand, as in classical econ.
not a cost-of-production
In long-period:
a measure of capital’s contribution to production
related to interest rate
Internal economies of scale  difficulties for competitive market paradigm
External economies (of industry scale): costs to all firms decline as industry expands

8. Economics of Welfare, 1920 … Reform, not Revolution
Arthur Cecil Pigou
Economics of Welfare, 1920 … Reform, not Revolution
Economies and diseconomies of production
Divergence between private and social costs and benefits
 Role for government
Make railroads liable for damage sparks do to forests
Subsidize smokeless smokestacks
Fine polluters
Adherent to Say’s Law
“Classical” foil for Keynes in General Theory
Pigou response:
Pigou effect = “Real Wealth” Effect
P down  (M/P) up
 Automatic adjustment to full employment (?!?)
Elaborated on externalities

9. Classical – Neoclassical Economics: An Aside
Marshallian economics
Gossen/Jevons/Edgeworth
Microeconomics
Concern: allocation of scarce resources
First Principles:
Decision at margin
Prices determined by interaction of supply (costs) and demand (utilities)
Distribution accords with marginal productivities
Classical Economics
Smith – Ricardo/Malthus – Mill
Labor theory of value
Malthusian population
Say’s law
Quantity theory of money
Physiocrats – Marx
Balanced growth/imbalance
Concern: consequences of capitalist accumulation
First Principles:
Price independent of demand
Natural (long-run) prices equalize rates of profit
Real wage = “subsistence”
Wage fund – Iron Law

10. Contributions to price theory
Consumption indifference curves/“utils” + Production possibilities frontier
Market equilibrium: MRT = dy/dx = px / py = MUx / MUy = MRS
Contributions to monetary economics
Ideal index numbers: geometric mean of Paasche and Laspeyres
Fisher effect: Nominal interest rate = Real rate + expected inflation (e)
Quantity Theory of Money: MV + M’V’ = PT
Velocity and Transactions independent of Money
If M up, P up, ceteris paribus
expectations lag  sticky nominal interest rate (stickier than Price)
gm up  π up  Real rate down  Investment spend up  EXPANSION
Intertemporal optimization, given interest rate (see diagram)
Rags – Riches – Rags (not quite)
Top Yale graduate (math) and Professor
Married rich  Europe tour – networking/New Haven house
Illness  Health fetish (corn flakes!)
Inventor (card index system) – merged into Remington Rand  $$$$
Merged into Sperry (UNIVAC) merged into Unisys
Stock market speculation  Crash  $
Crusader: stable money, League of Nations, calendar reform, spelling
reform, Esperanto, environmental protection, prohibition
Prohibition at its Worst  trick wets into reading it
Leading US economist/Public advocate/Government advisor
First President of Econometric Society, 1930
Irving Fisher
1867 – 1947

11. Fisher’s Debt Deflation Theory of Depression
Easy money  over-indebtedness/speculation/boom – bubble
Bubble bursts  Debt liquidation  distressed sale of assets
Contraction of bank balance sheets  M down
M down  P down
P down  Profits down  Business net worth down
Liquidation does not liquidate but rather aggravates debt
“The more debtors pay the more they owe.”
Output down / Employment down / Income down
Depression
Hoarding / reduced velocity of money / P down
Vicious spiral of deflation

12. Established marginal productivity theory of distribution
Competition Linear homogeneous (Cobb-Douglas) production function
Proposed Pareto optimal log-rolling before Pareto
Fiscal packages where everyone gains
Level the playing field:
inheritance tax!
public education!!
Market socialism!!!
Interest and Prices,1898,1924:
Cumulative process in full-employment economy using bank money … Say’s Law holds  real GDP steady
Lecturer/Professional student – first job as economist at age 48
Career at University of Lund
Social radical serving conservative (neoclassical) science
Champion of birth control (neo-Malthus), women’s rights, free love
Military nihilist (Sweden can’t defend self  disband army…Russify)
Jailed for sacrilege
Knut Wicksell
1851 – 1926

13. Wicksell: Pioneer of Aggregate Demand and Supply
A general rise in prices is only conceivable (if) the general demand has for some reason become, or is expected to become, greater than the supply…Any theory of money worthy of the name must be able to show how and why monetary or pecuniary demand for goods exceeds or falls short of the supply of goods in given conditions.
MV = “efficiency of money” (Karl Helfferich’s term)
In a pure credit system, MV is perfectly elastic, subject to the bank rate
The effective supply of money accommodates the demand for money…unless the bank rate set by the central bank imposes monetary discipline.

14. Wicksell’s Monetary Economics
Interest and Prices,1898,1924:
Cumulative process in full-employment economy using bank money
 real GDP steady
i = market rate of interest set by banks…credit and Ms adjust to Md at market rate i
r = “normal” rate of interest—keeps P steady = “natural rate” = return on capital
r = f(fundamentals, expectations)
I/Y = Investment/Real GDP = F(i – r) demand for credit (remember, Y is fixed)
$Y = $C + $I = PY
Steady-state equilibrium ($I = 0): $Y = $C = $Yt-1
Disequilibrium (r rises; i steady):
$Y = $C + $I = $Yt-1+ $I
 $I = Δ$Y = ΔPY = $S
 Investment is financed out of forced saving owing to inflation (real C down)
$I = PI = ΔPY  ΔP/P = I/Y = F(i – r)
In summary, if i<r, firms demand credit to finance investment
…banks create money to meet demand for credit
Prices and wages rise (wages not as much as prices)
Profit expectations rise  r remains > i  Demand for Credit Up
Monetary equilibrium requires i = r
Equilibrium reached when
Credit system is linked to convertible metal … demand for credit pushes i up
Or … Central Bank management of i … goodbye laissez-faire

15. Wicksell’s interest rate rule for monetary equilibrium: Precursor of inflation targeting
So long as prices remain unaltered the (central) bank’s rate of interest is to remain unaltered. If prices rise, the rate of interest is to be raised; and if prices fall, the rate of interest is to be lowered; and the rate interest is henceforth to be maintained at its new level until a further movement of prices calls for a further change in one direction or another.
Wicksell, Interest and Prices, p. 189
quoted in Michael Woodford, Interest and Prices: Foundations of a Theory of Monetary Policy, p. 38

16. Monetary Theory David Hume – specie flow, prices, and trade balance
Of Money (1742)
Long-run neutrality: M  P
But there’s an economic expansion story before the long-run is reached…
…since the discovery of the mines in America, industry has increased in all the nations of Europe, except in the possessors of those mines…In every kingdom into which money begins to flow, every thing takes on a new face: labor and industry gain life; the merchant becomes more enterprising…and even the farmer follows his plow with greater alacrity…Though the price of commodities be a necessary consequence of the increase of gold and silver, yet it follows not immediately…
At first no alteration [in prices] is perceived; by degrees the price rises, first of one commodity, then of another…When any quantity of money is imported into a nation, it is …confined to the coffers of a few persons who immediately employ it to advantage…They are thereby enabled to employ more workmen than formerly…who can now eat and drink better. [The workman] carries his money to market where he finds everything at the same price as formerly but returns with a greater quantity…The farmer and gardener, finding that all their commodities are taken off, apply themselves with alacrity to raising more…
We may conclude, that it is of no consequence whether money be in greater or less quantity… Good policy consists only in keeping it, if possible, still increasing.

17. Monetary Theory David Hume – specie flow, prices, and trade balance
David Ricardo – The High Price of Corn
: {Thornton, Senior}
Alfred Marshall – Cambridge oral tradition: M = k PY
Professor Irving Fisher has been the first, in several instances, to publish in book form
ideas analogous to those which had been worked out by Marshall at much earlier dates.
J.M. Keynes, Alfred Marshall, 1842 – 1924, p. 336 fn.
Ludwig von Mises –cash balance approach linked with marginal utility
Irving Fisher – Quantity Theory and Real Interest Rate
Knut Wicksell – Natural rate of interest/cumulative process
Gustav Cassel – Quantity Theory  Purchasing Power Parity
“Money doctors”
Gunnar Myrdal – Monetary Equilibrium: Ex ante – ex post
John Maynard Keynes
Tract on Monetary Reform (1924)
Cambridge k
Treatise on Money (1930)
The General Theory of Employment, Interest and Money (1936)
Liquidity preference and real balances
The General Theory of Employment, QJE, 1937.
People find it convenient
to hold some fraction of their
income in the form of money
…varies with distribution of
income.

18. Foil for Keynes in General Theory
The Stockholm School
Gustav Cassel
1866 – 1945
Purchasing Power Parity
General equilibrium … extension of Walras
A writer less generous than Cassel would be hard to find.
Marx at least paid tribute to Quesnay and Ricardo. Cassel
paid tribute to nobody. Walras had written the first system of
simultaneous equations of general equilibrium. Pareto had
purged it of any measure of sensations. Cassel followed both
but mentioned neither…
Eli Heckscher
1879 – 1952
Economic
historian at
University of
Stockholm
“Classical” theory of interest: rate that equates saving & investment
Foil for Keynes in General Theory
Ohlin-Hecksher
Trade Theory
(Factor Endowments)
Teacher of Myrdal, Ohlin

19. The Stockholm School, 1927 – 1937 Extending Wicksell’s Cumulative Process
Eric Lindahl, 1891 – 1960 General equilibrium theory
Myrdal, Monetary Equilibrium, 1933
Ex ante intentions drive macro-performance.
Ex post results are basis for next period’s
intentions.
S = I ex post, but not necessarily ex ante.
Dag Hammarskjöld
1905 – 1961
UN Secretary General
Gunnar Myrdal
1898 – 1987
Bertil Ohlin
1899 – 1979
Unlike Wicksell, Myrdal and Ohlin recognized market imperfections  inflexible factor prices
Iex ante ≠ S
 Output changes while prices hold steady
 Anticipation of Keynes
Autonomous changes in
consumption
Extension of Wicksell model.

20. The Stockholm School Beyond Macrodynamics
Dag Hammarskjold – Secretary General of UN
Gunnar Myrdal … extensions of cumulative process
Cumulative causation – vicious circles
An American Dilemma, 1944  Brown v. Board of Education
Rich Lands and Poor, 1957
Asian Drama, 1968
Wife, Nobel Laureate Alva Myrdal
Director of UNESCO
Swedish Ambassador to India
Bertil Ohlin
Transfer problem (1929): income adjustment
Keynesian analysis vs. pre – General Theory Keynes
Head of opposition social – liberal People’s Party

21. Sweden’s Commission on Unemployment
1924: Return to gold standard at overvalued rate
1927: Recession … formation of Commission
Ohlin (1934) Monetary Policy, Public Works, Subsidies and Tariffs as Means for Reducing Unemployment
Focus on Aggregate Demand, not wage reduction to get out of depression
Deficit finance of Public Works + Easy Money for Investment
+ Price Supports for Farmers
Spending Multiplier and Investment Accelerator
Myrdal (1934) The Effects of Fiscal Policy
Countercyclical policies … balance budget over cycle
Build infrastructure in depression
… not US “leaf-raking”
Easy money in recession … tight money in expansion
1936: Swedish depression ended

22. Vicious Spirals of Note
Fisher – Minsky: Debt Deflation Spiral
Foreclosure “Death Spiral”
Wicksell: Loan rate < Real rate  hyperinflation
J.H. Williams: Depreciation – Inflation Spiral
Myrdal: Discrimination – Poverty Spiral
Debtor “Death Spiral”
Budget “Death Spiral”
Insurance “Death Spiral”