PRECLASSICAL ECONOMICS CLASSICALS ECONOMICS NEOCLASSICAL ECONOMICS (18701900) MODERN ECONOMICS

MODERN MICROECONOMICS THEORY MODERN MACROECONOMICS THEORY ECONOMETRICS & EMPIRICAL METHODS MODERN HETERODOX ECONOMICS

THE DEVELOPMENT OF MODERN MICROECONOMIC THOUGHT

Important Writers A. Cournot (1838) Leon Walras (1874) F. Y. Edgeworth (1881) Irving Fisher (1892) Vilfredo Pareto (1906) Gustav Cassel John R. Hicks (1939) John Von Neumann & Oskar Morgenstern P. A. Samuelson (1947) Kenneth Arrow (1951) Herbert Simon (1957) Gerard Debreu

Many elements of neoclassical economics still exist within modern microeconomics, but what distinguishes modern microeconomics is not the elements, it is the a modeling approach to problems.
The assumptions & conclusions of the model are less important than whether the model empirically fits reality.

A. The Movement Away From Marshallian Economic

Marshallian economics falls in the 1930s.

Marshalls engine of analysis, combining supply and demand curves with common sense, could answer certain questions. Questions like what determines dist of income, what effect certain laws & taxes wld have, introduced prob beyond the applicability of PE or violated the assumptions.
Nonetheless, economists continued to apply PE to such issues workable theory.

 Marshallian economists were engineers rather than scientists. Marshallian economists were interested in the art of economics (building), not in positive or normative economics. Marshallian economics was criticized by the formalists and intitutionalists. Institutionalists history & institutions shld be emphasized, dropped (eliminate) inadequate theory. Formalists economics shld be a science, not an engineering field, a theory is needed to show how & why the market work-well. Formalist agreed with institutionalists but they wanted to provide a better, more rigorous general equilibrium foundation which can answer more complicated questions.

B. THE FORMALIST REVOLUTION IN MICROECONOMICS

In the late 1930s the formalist research program won and the Marshallian approach started to wane. By the 1950s the formalist had reformulated microeconomics into a mathematical structure dependent on Walras not Marshall.

The formalist revolution reached its apex in 1959 with the publication of the ArrowDebreu model.

 GE they integrated policy prescriptions into the mathematical models. Hence, the neoclassical era evolved into the modern modeling era. In the modeling approach, mathematics is used to develop simple models that ideally capture the essence of the problem. Then econometric techniques are used to test those models This development & empirical testing of models has become the modern economic method.

 The Battle over Formalist Approaches

The mathematical approach is rooted in the thought of 19th & early 20th century (neoclassical).

The great pioneers in starting hypotheses in mathematical form was A. Cournot.

Leon Walras & Vilfredo Pareto early devotees of mathematical economics

Whereas Marshall had focused on PE equilibrium, Walrass using algebraic techniques, focused on general equilibrium & displaced PE.
Jevons advocated a more extensive use of mathemtics in economics, was followed by another pioneer in mathematical economics, F. Y Edgeworth (1845-1926),who pointed out in 1881 that the basic structure of microeconomics was simply the principle of maximization.

 The mathematical approach was not well received in the US until mid 20th century. In the early 1930s this situation began to change. Expositions of the many geometric tools began to fill the journals.

The marginal revenue curve, the short-run marginal cost curve and models of imperfect competition and income-substitution effects were discovered and explored during this period. History & institutions were abandoned because the new mathematical tools required stating precisely what was being assumed & what was changing, & stating it in such a way that the techniques cld handle the entire analysis.
History & institutions no longer fit in. The competitive economy was defined as one in all individuals are price takers.

 The use of geometry as a tool in Marshallian analysis the beginning of the end of Marshallian economics.

The late 1930s and early 1940s witnessed a revolution in microeconomics theory, which formalism won.

Equilibrium and Stability

The theoretical structure that underlies and unifies the individual elements of micro and macroeconomic theory rests on two very general hypotheses concerning the conditions, first equilibrium and second of its stability. (Samuelson ) For problems of comparative static, the conditions of equilibrium can be placed in the familiar maximization framework in which much of the previous work in microeconomics theory had been done.