Mathematical Economics ECON 205W Summer 2006 Prof. Cunningham

What Math Econ? Refers to economic principles and analyses formulated and developed through mathematical symbols and methods. Not a separate school of thought, but rather a method. Paul Samuelson, “By 1935, … [i]t became easier for a camel to pass through the eye of a needle than for a nonmathematical genius to enter into the pantheon of original theorists.” Mathematics is used in economics in two general ways: To derive and state theories, and To test economic hypotheses or theories quantitatively. Econometrics combines these two types of mathematical economics.

Econometrics Ragnar Frisch, a Norwegian economist and statistician, introduced the term “econometrics” in 1926, modeling the term after “biometrics.” Arose out of a need to test theories, make estimates, and to forecast. Useful in policy analysis, which predicts the impact of government policies and programs. Large-scale econometric models.

Leon Walras ( ) Developed and advocated general equilibrium analysis, in contrast with partial equilibrium analysis used by others. Involved solving large systems of equations. Endogeneity vs. exogeneity. Approach leads to interest in VARs, etc., much later. (Sims, 1980)

Wassily Leontief ( ) Russian-born American economist. Ph.D., from University of Berlin, Moved to Harvard as a faculty member. Input-output analysis, Widely used for planning and analysis, interest in post-war rebuilding, development, etc. Problem: fixed technical coefficients.

Von Neumann and Morgenstern John von Neumann ( ), born in Hungary, came to US in 1930 to teach at Princeton. Okskar Morgenstern ( ), economist from Vienna. Together they wrote Theory of Games and Economic Behavior (1944). Competition leads to economic warfare, with strategic interests.

John R. Hicks ( ) Background Professor at Oxford, Nobel Prize 1972 for pure economic theory. 1932, Theory of Wages. 1935, “Wages and Interest.” 1956, Revision of Demand Theory. 1935, “A Suggestion for Simplifying Monetary Theory” 1936, “Mr Keynes’ Theory of Unemployment” 1937, “Mr Keynes and the Classics”

Hicks (2) 1939, Value and Capital. 1950, A Contribution to the Theory of the Trade Cycle. 1974, The Crisis in Keynesian Economics. 1969, A Theory of Economic History. 1973, Capital and Time: A Neo-Austrian Theory. 1979, Causality in Economics.