Economic Theories

French Marginalists differ from their British counterparts

Marginal Revolution originated as a response to the classical economics school when the latter began losing its popularity. Marginalism replaced the labor theory inherent to the classic approach with the subjective utility presumption. While the classic school presumed that the value of goods depended primarily on the price of their production, marginalists stated that value became a trigger for production. The desire to receive a certain item became a factor influencing its value, while the production expenditures became subordinate to it. Moreover, the value of each item depended on a variety of purely subjective factors (Kiesling “The Marginal Revolution”). The school developed simultaneously in three separate countries under the influence of different people. Specifically, Carl Menger in Austria, William Stanley Jevons in England, and Frenchman Léon Walras from Switzerland contributed to this school in their peculiar ways.

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William Stanley Jevons became a founder of the English school of Marginalism. He united mathematical, deductive, and empirical studies to justify the value of goods by their utility (“The Marginalists and Marshall” 35). People would consume goods to satisfy their desires, or particularly, to receive the maximal possible pleasure while minimizing the pain. The production revolved around the hedonistic nature of consumption. The utility, or desire for the possession of certain goods, was individual and subjective. Moreover, it was not constant. Thus, the utility would decrease if the number of certain goods was sufficient, while rare commodities would remain desired. This statement allowed solving the ‘diamond-water paradox’, as diamonds would be scarcer and thus, more expensive. Jevons also studied the exchange conditions. The utilitarian approach allowed presuming that certain resources would be sacrificed equally to the benefits one would receive for sacrificing them (“The Marginalists and Marshall” 39-41). For example, tiring hours of work should be equal to one’s earnings. Thus, Jevons’ approach revolved around the consumption motives and the possibility to apply them practically.

While developing the idea of marginal utility simultaneously with Jevons, Léon Walras focused on the search for equilibrium. Consequently, his studies presumed direct attention to the methods, through which equilibrium had to be achieved. As people exchange their goods to give away one commodity and receive the other, there should be something that makes them stop the exchange. To calculate the point of stopping, Walras evaluated the relation between prices and quantities more attentively. Thus, not only the goods were desired as they were needed and scarce, but their value also inevitably depended on the number of people who would wish to purchase them. Walras also created the possibility of calculating substitution as the process in which a certain amount of one commodity becomes equal to another one. Whereas Jevons’ famous theory used as an example the value of diamonds and water to address rarity, Walras evaluated the equilibrium as a process similar to an auction. Each consumer and seller know their desires and possibilities, thus stating the desired price. Prices grow or drop to acquire the balance between opposing needs, and this process, which is called ‘tatonnement’ or ‘groping’, becomes an instrument of balancing competition. As Kiesling explains, equilibrium originates when “the quantity demand and quantity supply are equal” (“Léon Walras”). Otherwise, the price will rise, if the demand is greater than the supply, or fall if the number of potential purchasers is insufficient until equilibrium is achieved. Walras created the direct connection between utilities and prices, while Jevons did not address the issue.

Innovations Alfred Marshall add to Microeconomics and where did he just borrow ideas from others

Alfred Marshal was among the most influential figures in modern economics. He reconciled the concept of classical economics, inspired by Smith, Ricardo, and Mill, with marginal economics, created by Jevons, Menger, and Walras. On this basis, he created the neoclassical synthesis, simultaneously accepting certain concepts of both schools and denying others. Such a complicated mixture and transformation of two opposite schools resulted in the neoclassical synthesis.

To make economic studies flexible and functional, Marshall applied various methods and tools. He did not limit himself to balancing between the classical approach and its superiority of supplying demand and marginal centralization on utility value, and he often mixed seemingly unconnected aspects. Marshall used mathematics to formalize Mill’s political economy and, at the same time, rejected the mechanistic use of mathematic formulas. To describe the economy as a flexible science, he referred to biology and physics as well as popularized the graphic explanation and calculation of theories. Economic relations now looked like the interconnected system, or a ‘firm’, in which the final product, the incoming resources, and profit were mutually balanced. Finally, the economy as science had to be efficient. Each new theory had to have a mathematical formula that still could be expressed through the conventional English language.

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Marshall greatly contributed not only to the methods of economic study but to functional theories as well. The exploration of partial equilibrium, as opposed to Walras’ general equilibrium, became one of such achievements. According to the theory, only a separate part of the market is studied during the analysis, which makes calculations more exact while neglecting the global picture. Marshall also studied the effects of the economy in the immediate, short, and long run. He was able to learn that in the long run, all effects of production and inputs to production could vary, but in the short run, there was at least a single fixed factor. The short-run and long-run supplies also influence the development of firms. In the short run, the quantity of the available capital is fixed, and received funds should cover only prime costs. However, in the long run, both prime and supplementary costs should be covered to retain balanced production (“The Marginalists and Marshall” 85). Otherwise, the industry will grow if the profit is exceeding the minimum or limit the production if the profit is insufficient. The consumer’s surplus, or particularly the balance between the current price and the price customers are willing to pay, is also attributed to Marshall as well as the language and methods for its study (Kiesling “Alfred Marshall”) and elasticity, or the interrelation between price and demand with a consequent change in expenditures (“The Marginalists and Marshall” 78). Marshall connected the decrease and increase in costs with free competition. The costs decreased under the pressure of the external factors; otherwise, the cost decrease would result in a monopoly (“The Marginalists and Marshall” 88-89). The only circulation of costs could result in the desired level of cost distribution. Economics methods offered by Marshall created necessary borders, thus allowing to systematize the global issues segmentary.

Veblen’s main criticisms of the mainstream economic theory

In his refutation of both classical and neoclassical economic theories, Thorstein Veblen applied the philosophic approach to proving that both of them were unscientific. The presumptions lying in the core of these studies addressed a ‘supernatural power’ represented by natural law, unproven and yet, indivisible. Natural law inevitably controlled society for it to achieve equilibrium. The latter was proclaimed as a commonly desired state of things, in which total benefits would become maximal. The existence of the natural law was not witnessed but rather presupposed as the one that should exist. Thus, the economy proved to be similar to religion, where God inevitably led people to the unconditionally perfect Heaven.

Veblen claimed that economic theory in its current state heavily relied on faith and it was similar to religion. According to his statement, it could be described as “teleological and pre-Darwinian” (Zera). Teleology was presumed because the expected equilibrium was never achieved, and yet, it became a core value justifying the whole combination of interrelated actions. Pre-Darwinism assumed that classic economy had its desired means, while evolution did not presuppose the purpose of its mechanical neverending existence. Thus, the economy, as the process of moving towards the unproven but foreseen end, was far from a purely mechanical and self-sufficient evolution process (Zera). Classic theories also conflicted with evolution since they did not discuss the development of the economic process through a time of existence, but rather studied its static aspects and elements. Under Veblen’s presumption, one had to study not only the existence of prices, consumer preferences, and other concepts, but also evaluate their origin, the reason for their enduring existence, and possible future transformation.

Veblen disagreed with the presumption that making money and producing goods were indivisible parts of the single flow. Classic economy presupposes that the selling party produces the goods while minimizing their value to receive maximum profit. By balancing one’s desires with the preferences of consumers, one would create trade relations. At the same time, people, who sell goods to clients at the most profitable prices, and those, who produce goods, usually work for different associations with different work specifics. Thus, businessmen are primarily concerned with their goods, so they disregard social needs. In Adam Smith’s epoch, production and profit could probably be justified, but currently, managers and workers conflict. The high-quality production of goods could become opposite to profit-making which often presumes the creation of monopoly and the destructing of production.

In certain cases, wealth rather conflicted with the common good despite the maximization of pleasure through utility. Managers covered majorly their own needs, and international trade controllers chose a pace that often led to conflicts, unemployment, or even wars. Moneymaking was divided from social good promotion or production and directed to the destabilization of a system for one’s profit (Zera). Conspicuous leisure and conspicuous consumption, as examples of enviable but vain spending, also became downsides of the classic economy with its urge to consumption (“The Institutionalists and Other Critics” 6). Usually indivisible, the concepts of consumption, production, and pleasure resulted from the promotion of maximal good and minimal pain.

Finally, classical economics lacked a scientific approach. Thus, it was separated from “psychology, sociology, and anthropology” (Zera), and it discussed presumed but not calculable human behavior. The structure of economic justification of trading by hedonism was clear, but the presumption of hedonism itself was unjustified. Veblen believed that certain model of human behavior was applied without previous studies. The justification of economy was built on the assumptions that one should blindly believe in something without a proper correlation with adjacent sciences.

Veblen’s presumption seems thoughtful. The idea to perform closer socio-economical studies would become an improving factor for the classic economy. However, it is disagreeable that the study of classical economy is unscientific. Stating presumptions based on certain evidence to cover the relatively unknown case issues through either proving or refutation is called a deductive method, and it remains an element of the scientific study. Thus, Veblen’s claim that classic economy needs a deeper study is agreeable, while his evaluation is arguable.

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Keynes’ critique of his predecessors’ work

John Keynes majorly accepted classical economic theories. He agreed with the fact that the interests of consumers and sellers collided in the conditions of the free market. Both sellers and consumers strive for the maximal satisfaction of their needs and seek for acceptable balance. When both sides agree on satisfactory conditions, they may receive the desired commodities, be it money or items. The system exists in constant transformation, and yet, it remains stable as the ‘invisible hand’, the inner principle of self-regulation, fixes it.

Considering the conditions, in which Keynes’ theory originated, they might be evaluated as a protective element of the classical economy. Kaynes performed his studies during the Great Depression which became uncontrolled particularly due to the reluctance of the state to interfere. Too much time was wasted while waiting for the economy will fix itself without external interference. Keynes presumed that the ‘invisible hand’ would remain a valid fixator only under certain conditions. As imbalance becomes crucial, the government should interfere and manually fix the source of the problem (You Will Love Economics). Without timely interference, the economy may become uncontrolled. In total, Keynes’ critique is represented by the statement that the government should intervene and fix the economy in cases when internal mechanisms are unable to preserve acceptable balance.

The classical theory believes in flexible wages that will increase with inflation and decrease with deflation. Allegedly, the economy remains at the maximal production level, and thus, the falls and rises of wages gradually balance themselves. Consequently, as extensive consumption triggers the rise of prices, it leads to an increase in wages and a consequent boost in consumption. This process can be long-lasting. The economy is expected to fix itself as the rise of value slows down consumption, limits production, and activates a reverse reaction. Prices become lower and urge consumers to buy the desired goods more intensively when the latter becomes available. Thus, periods of inflation and deflation remain temporary side-effects of the maintenance of equilibrium. In certain cases, the ‘invisible hand’ does not function. Keynes foresaw three ranges in macroeconomy – classical, intermediary, and Keynesian (You Will Love Economics). As long as a balance remains in the classical range, the market fixes itself through internal sources. In the intermediary range, the system starts losing its balance and it can go both up and down. In the Keynesian and intermediary ranges, the recessionary gap may occur under the conditions that the system has not reached its full work capacity. Just like in the classical range, the prices are flexible, in the Keynesian one, they become sticky. Such a condition renders the balance of rising and fall invalid, as prices simply will not fall further regardless of conditions. At the same time, salaries will also fall to a minimum. In such cases, as Keynes argues, the government’s interference is necessary (You Will Love Economics). In certain cases, the economy becomes not as self-sufficient as classic theories presume.

Keynes’ main innovations in economics

John Maynard Keynes built his theory based on the classic school as he was urged by the necessity to improve it. The Great Depression cornered economists who could not explain why the market had not stabilized automatically. Economics was also unable to employ everyone who would desire to work. Keynes majorly agreed with classic concepts in conditions that the economy could control itself within the plausible scale. However, he presumed that the government had full authority to interfere in the cases when the market showed the tendency to imbalance (Jahan). Majorly, his theory became a stabilizer in the classic system.

Keynes’ theory revolved around the concept of aggregate demand. Aggregate demand, or the total sum of money exploited in the system, became the fuel for the economy (Agarwal). Lack of intensity of financial operations influenced every element of the economy since without investment, the system did not work. The aggregate demand was constituted by multiple factors such as business issues, governmental affairs, and households. “Consumption, investment, government purchases, and trading with foreign partners” (Jahan 53) represented four sources of filling the economy. Connected to every element of society, aggregate demand also influenced wages and employment, supply and demand, although the effect of interrelation was not immediate.

Keynes attentively studied unemployment, its reasons, and its place in the economy. The process of economic stabilization foremostly was connected to employment and economic output, while the price and wage balance became the consequent results of workplace provision. Being imbalanced for a long time, the employment system could result in unemployment, the shortening of expenditures, and the exhaustion of the system. Being unable to purchase goods, consumers would refrain from such purchases. Consequently, markets and production firms would remain without clients and fire unneeded workers, thus causing further unemployment (Jahan 53). Proponents of the classic economic system supported the idea that the system was balanced, and thus, cutting wages could increase the demand for laboring power. However, the wage cut could not stabilize the system during the Great Depression, as wages had already fallen, but stabilization did not begin. According to Keynes’ presumption, the artificial creation of the extra workforce and external financing could stabilize the situation (Agarwal). Without employment balance, simple manipulations with money will have minimal results.

When studying the equilibrium level of output, Keynes shifted the balance from full employment to the balance between production and consumption. The desired balance did not require full employment, which classics presumed inherent to the economic system. Aggregate demand had to be balanced with aggregate supply. With these two elements balanced, the system would remain stable with insufficient, full, or excessive employment (Agarwal). The artificial creation of a balance between two elements could create it and dispose of expectations regarding full employment that cannot be achieved.

The balance between wages and prices transformed the consuming ability of people. According to the consumption function, disposable income, or the amount of extra financial resources, could allow a more intense consumption. To support the system, consumption had to be constant, and the possibility for people to have money increased their ability to buy (Agarwal). Being able to receive and spend money, people increased aggregate demand and thus, intensified economic relations in society.

Keynes presumed the necessity for governmental influence as soon as the immediate danger of imbalance occurred. To moderate the intervention process, he foresaw the application of “countercyclical fiscal policies” (Jahan 54). The government should act against both the intensity and rigidity of the economic system, urging employment during critical times and raising taxes in cases of exuberant demand. The development of separate devastated links of the economy could also be governmentally urged. Keynes did not insist on domination and canceling of free marketing, but he encouraged the influence on the issues in the short run, as “in the long run, we are all dead” (Jahan 54). The possibility to unite the governmental efforts and the free market became a historic decision that proved to be useful in overcoming the Great Depression.

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