AUSTRIAN ECONOMICS

ECON 434 | Spring 2011

Finishing up the emergence of neoclassical economics and marginalism

From last time

Forerunners of marginal analysis

Neoclassical economics Emerges in the mid 1800s Application of math to economics W. S. Jevons (a founder of marginalism) Dupit (price discrimination) Cournot (duopoly model; foundations of

modern game theory)

American marginalists

Also called American apologists, marginalist economic thinkers in America are distinguished from their European counterparts by the willingness with which they took sides in the policy debates raging in the late 19th century.

They were uniformly conservative, advocates of late 19th century industrial growth, and defenders of the status quo.

Wary of government intervention in the economy (i.e. minimum wage laws, maximum hours laws); strong opponents of the Progressive movement (especially the emergence of unions) Simon Newcomb John Bates Clark William Graham Sumner

American marginalists and Social Darwinism

American marginalists adopt Social Darwinism from Herbert Spencer (England, 1864) who is the first credited with its development.

He coins the term “survival of the fittest” and extends Darwin’s theories of natural selection into the realms of sociology and economics

Simon Newcomb The late nineteenth-century mathematician and economic

thinker who argued that certain seemingly humanitarian gestures generate negative externalities (e.g., charity to beggars stimulates more panhandling and sloth) that significantly outweigh any possible social benefits

William Graham Sumner

John Bates Clark

Marginal productivity Under a perfectly competitive market, the return to each

factor of production equals its marginal productivity.  The distribution of income under a perfectly competitive

market reflects each factor’s contribution to the social product and is therefore equitable.

People are compensated with income strictly in accord with the amounts of their productive contributions as reflected in wL + E + rN + iK

Product exhaustion Paying each factor its marginal productivity will exhaust

the total product. A refutation of Marxian surplus value

Outgrowths of marginalism

Three founders of marginalism: Jevons, Carl Menger, and Leon Walras

Develop marginal analysis simultaneously The “Marginalist Revolution” takes place from 1871-

1874 as the 3 thinkers independently and almost simultaneously publish path-breaking work in the field.

They never end up working together, despite their similar research interests.

Carl Menger and Leon Walras go on to found two separate but related branches of economic thought: Menger: Austrian school Walras: Lausanne school

Austrian economics

What it’s all about

Analyzes human behavior from the perspective of individual agents

Heavy emphasis on non-empirical analysis They aren’t on board with mathematical

modeling Why not? Social sciences are different from natural

sciences because we are what we study. Viewing human behavior from a scientific point of view blinds economists to the central mechanisms that drive human behavior.

What it’s all about

Utility and costs are subjective. Goods have subjective value (what Aristotle

called “value in use”). Goods are worth different amounts to different people, depending on their situation.

The value of anything, then, is what someone will pay for it.

“The value of a thing is just as much as it will bring”

Note: Today, Austrians are associated with libertarians.

Important names

Founder: Carl Menger Heavily influences two Austrian professors,

Friedrich von Wieser and Eugen von Bohm-Bawerk. Von Wieser

The theorist who expanded upon Carl Menger’s earlier assertions about pricing with a basic statement of the general law of value and who also invented the term “marginal utility”

Von Bohm-Bawerk Round about production: investing in capital goods by

postponing consumption, thereby enabling the production of greater amounts of consumer goods in the future.

Critic of socialism (“the worst fallacy”)

Important names

Ludwig von Mises Macro focus Disagreed with the neoclassical conclusion

that “money is a veil,” arguing that inflation is an uneven process that disrupts planning by consumers and business investors (causes uncertainty).

Reconciles Austrian theory of value with monetary theory

Important names

Friedrich von Hayek The Road to Serfdom (1943) Warns that tyranny (“serfdom”) can result

from increasing government involvement in the economy

Socialism and freedom are not compatible Key opponent to John Maynard Keynes

Important names

Johann von Thunen “Location, location, location”

Hans von Mangoldt Organized violent conflict, including war,

might sometimes contribute significantly to economic and social progress

The technological advances stimulated by armed conflicts might be more valuable than the resources destroyed during wars

Similar to Marx

Important names

Joseph Schumpeter The entrepreneur is the pivotal agent in

economic growth and development. Creative destruction Capitalism cannot survive in the long run

Why not? Marx’s answer: Marxian capitalistic crises

(fewer people own more wealth) Schumpeter’s answer: As democracy increases,

socialism will tend to displace capitalism