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Aristotle - use value 310 BC Jeremy Bentham concept of utility in utilitarian philosophy end of 18th century 19th century writers - concept of diminishing marginal utility, marginal productivity theory
Jevons, Menger and Walras (Menger - 1st generation Austrians) A. A Revolution in Theory?
All 3 thought they had developed a revolutionary analysis of the forces explaining the determination of prices (stressed demand side). Jevons - application of marginal analysis to the side of demand Walras - application of marginal analysis to both demand and supply, and the formulation of a general equilibrium model of the
2nd Generation marginal utility theorists Jevons, Menger and Walras (Menger - 1st generation Austrians) A. A Revolution in Theory?
Menger - application of marginal analysis to both the demand and supply side
1. Classical theory of value found inadequate to explain the forces of prices (stressed supply side).
a) Cost of Production theory - lacked generality b/c could not analyze prices some goods
1) Labor theory of value (Ricardo) and cost of production theories (Senior & Mill) required separate explanation for goods with fixed supply b/c value did not depend on production cost. 2) Theory suggested prices comes from cost incurred in the past. Jevons, Menger and Walras said large production costs will not necessarily result in high price.
b) Marginal utility theory - value depends on utility (consumption) and comes from the future.
1) dead stock - goods for which demand so that prices < cost of production. 2) Value of factors of production determined by marginal utility received from consuming final product
What is Utility?
1. Utility - a psychological phenomenon with unspecified units of measurement. 2. Jevons, Menger and Walras did not use term marginal utility 3. Menger used importance of satisfactions instead of utility
What is Utility?
1. acquired utility -utility of goods consumed indirectly (acquire utility from the consumption of goods for which they are finally exchanged. 2. diminishing marginal utility -as the consumption of a good increases, its marginal utility decreases
What is Utility?
3. continuous functions - have smooth curves when plotted (arise from continuously divisible quantity of goods consumed and continuously divisible quantity of utility. 4. discontinuous functions have steplike curves when plotted (arise from nondivisibility)
Comparisons of Utility
Interpersonal comparisons of utility - comparing the utility of different persons for a good (e.g., and additional amount of income given to a person with high income and to a person with low income) .
Utility Functions
Jevons, Menger and Walras : marginal utility depends only on the quantity of a good consumed and does not depend on the quantity of other goods consumed (substitute or complementary)
a) Therefore total utility is an additive function: total utility = f1 (Qa) + f2 (Qb) + f3 (Qc) + . .
b)
a) Attempted to determine the conditions that would hold when a consumer is maximizing utility b) Attempted to develop a theory of exchange c) J. & W. investigated the relationship between utility and demand
d) Walras most successful of the 3 in these attempts b/c of greater mathematical ability & better understanding of interrelatedness of various sectors of economy
d) Walras most successful of the 3 in these attempts b/c of greater mathematical ability & better
Jevons and Menger: Factors of production are price-determined; price of factors of production (called intermediate goods or good of higher order) depends on the utility of the produced final good.
Walras: Saw causal relationships more complex and formulated consideration of value in general equilibrium analysis
All failed to see interdependence of variables of marginal utility, supply and demand.
Second-Generation Austrians
Second-Generation Austrians
Second-Generation Austrians
1. Classical economists recognized 3 element of profits: a payment for the use of capital (now classified as interest) a payment to the entrepreneur for management services a
2. the rendered payment that compensated for the risks of business activity
Profit Theory
J.B. Clark called payment for entrepreneurs management services and assumption of risk a wage, not profit.
Present goods are worth more than an equal amount of future goods ($1 today is preferred to $1 a year from now b/c $1 received today could be lent and thus worth more in the future.
Interest exists b/c of the technical superiority of present good over future goods. Goods produced by roundabout (capitalistic) method gain technical superiority at every stage of production and increases the flow of final goods as opposed to the direct method (e.g., catching a fish by hand involving no capital goods).
Taught at Harvard University Important works: Theory of Economic Development, 1911 (translated to English in 1934). Business Cycles, 1939 Capitalism, Socialism, and Democracy, 1950 (3rd. edition) Ten Great Economists, 1951. History of Economic Analysis, E.B. Schumpeter (ed.), 1954.
Business Cycles and the importance of the Tax system cutting off the incentive for the entrepreneur.
Failure of the market system stems from its successfulness
born in Austria and emigrated to America Student of B hm-Bawerk at the University of Vienna
The Anti-Capitalistic Mentality (Van Nostrand, 1956; Libertarian Press, 1972). Theory and History (Yale, 1957; Arlington House, 1969). Epistemological Problems of Economics (Van Nostrand, 1960). The Free and Prosperous Commonwealth (Van Nostrand, 1962). Planning for Freedom (2nd edition, Libertarian Press, 1962). The Ultimate Foundation of Economic Science (Van Nostrand, 1962.) The Historical Setting of the Austrian School of Economics (Arlington House, 1969).
While he had many contributions one of his most important comes from his explanation of the value of money: Marginal Utility of Money comes from two sources:
Value from the value of the goods it can buy. Value from the subjective use value of its own because it can be held for future purchases. (today that would be called the purchasing power)
His importance can be seen today by the fact that Auburn University has established a well know institute in this country under his name: Ludwig Von Mises Institute.