Modern Microeconomics and

Macroeconomics

Several Paths

Mathematical
Partial Equilibrium
Alfred Marshall

General Equilibrium
Leon Walras

Distribution
Wilfredo Pareto

Several Paths (cont.)

Non-Mathematical
Laissez-faire
Austrian Economics

Institutional
Thorstein Veblen

Mathematical
M a t h e m a t ic s a n d M ic r o e c o n o m ic s
A n o to in e
A u g u s tin
C o u rn o t
A lfr e d M a r s h a ll

L e o n W a lr a s

W ilfr e d o P a r e t o

The Merging of Paths

Paul Samuelson combined Cournot, Jevons,

Pareto, Edgeworth and Fisher and
concluded that economics analysis had
primarily two concerns:
Equilibrium
Stability
Problem is that such formalism lead to little
importance of partial equilibrium and more
emphasis on Walras general equilibrium

Paul Samuelson

He had two texts that basically shaped the

economic profession between the end of
WWII until about the early to mid 1970s
The undergraduate book, Economics, used
graphs and was basically followed the
Marshellian model
The graduate book, Foundations of Economics,
basically followed Cournot and Walras

Samuelson-Hicks

They took the geometry of the early 1900s and

after WWII converted to the mathematics of the
1960s and to the present
To where Hal Varian suggests that models be built
using the KISS criterion:
Keep it simple, stupid
The idea being find a problem and find a simple model
and the generalized it
However the emphasis remained strongly partial
equilibrium

The counterweight

Milton Friedman
The approach became known as the Chicago
School
Approach is Marshellian
Economics as an engine of analysis rather than
an abstract work of economic modeling

Gary Becker
Took the simple concept of maximization to
study a wide variety of issues

Modern Microeconomics
Utility still holds a strong position in the
undergraduate study but game theory is
slowly taking over at the graduate level
Pedagogy has created two different world:
undergraduate and graduate.A Paul
Samuelson legacy

Empirical Economics

Econometrics is the merging of Mathematical

Economics and Statistics
In other words, the formulation of hypothesis from
mathematical economics with statistics to formally
test those hypotheses
Recall the earliest empirical work was the Gregory
King and Charles Davenant law of demand

Henry Moore
Used statistical procedures to test JB
Clarks marginal productivity theory of
wages, which predicted that MP=w
While there was problem with his analysis
the important aspect of it was the fact that
he used statistical tools

Henry Schultz
Noted that one got a different elasticity of
demand if we regressed quantity on price or
vice-versa
The importance here is that statistical
measurement is not separate from theory

Macroeconomics

Jevons Sunspot Theory

Related business cycles to the sunspot cycles

Henry Moore
Trade cycles related to weather cycles

Heterodox Empiricist

Wesley C. Mitchell
Institutionalist
Saw statistics not as a way of testing economic
theories
Instead he saw theories as the stories one would
give to explain empirical observations
Initial approach of the National Bureau of
Economic Research (NBER)

Simon Kuznets

Student of Mitchell
Developed the modern national income
accounting

Wassily Leontief organized data in the

development of input-output models

Econometrics
E. J. Working first discussed the
identification problem. If one correlates
price and quantity does one get demand or
supply
Ragnar Frisch and Jan Tinbergen develop
first macroeconomic models

System of equations

Trygve Haavelmo

Trygve Haavelmo is the first to argue that the use

of statistics in economics implied that one was
searching for probabilistic theories.
In other words, the statistics were part of
understanding economic theory
Correlation between price and quantity does not
explain supply or demand
Theory needs to be part of the statistical construct

Cowles Commission
Alfred Cowles, wealthy investment advisor,
sponsored a commission in 1932 to use
Trygve Haavelmo approach to examine
economic issues
Commission was first set in Colorado
Springs, in 1937 moved to Chicago
In 1950s moved to YALE

Other Issues
Bayesian Econometrics
Experimental Economists