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econ434notes19 - History of Economic Doctrines Lecture 19...

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History of Economic Doctrines Lecture 19 Neoclassical Economics: England and the US P RICING English tradition (Micro) - supply factors determine pricing in the LR Continental - demand determines pricing in the LR (non-reproducible goods only) William Stanley Jevons (English) Jevons married demand and supply together as determining price in the LR
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Jevons, following in the line from William Petty, advocated using statistical procedures to establish casual relationships between economic variables. Theory of Political Economy (1871) Jevons began by outlining the principle of diminishing marginal utility and showed how it governed individual choice via the equimarginal principle. In a pure exchange economy, Jevons showed how this principle served as a foundation for a new and comprehensive theory of value. By combining two "laws" of exchange: (1)every exchange must be mutually beneficial and (2) every portion must be exchanged at the same rate, Jevons concluded that, without price-taking behavior (both S and D determines the price), the market will work its way necessarily to the market equilibrium (P=MC=MB). (Note: F.Y. Edgeworth disputed this notion and said that the equilibrium holds only if the market is perfectly competitive, otherwise, there would be many solutions.) “Theory of Pleasure and Pain” (1871) Jevons claimed that pleasure/utility results from the consumption of commodities; pain/disutility is involved in their production. Thus, workers face thee choice between income and leisure. At equilibrium, MUx/Px = MUy/Py = MU leisure /w (assuming there’re only two goods). The Solar Period and the Price of Corn (1875) Jevons argued that there was a connection between the timing of commercial crises and the solar cycle, from which he developed his sunspot theory on business cycle . The power of the sun's rays, according to him,influence the harvests and thus the price of corn, which in turn, affected business confidence and gave rise to commercial crises. Marginalism Extended Following the lead of the first generation of marginalists, several economists quickly applied marginal analysis to a broad array of economic problems. These thinkers included Friedrich von
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Wieser and Eugen von Böhm-Bawerk (Austrian, discussed in the previous lecture); John Bates Clark (an American); Knut Wicksell (a Swede); and Phillip Wicksteed (an English). Knut Wicksell [18xx-19xx] Wicksell’s most important contribution to the history of economics was his work on interest. In his Interest and Prices (1898), he distinguished the natural rate of interest from the market rate of interest Natural rate theory: Natural rate theory is the notion that the economy is inherently stable and that unemployment and real interest will coincide with their natural rates in the long run. According to this theory, traditional Keynesian policy goals are unattainable because
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This note was uploaded on 01/12/2010 for the course ECON 434 taught by Professor Byrns during the Spring '09 term at UNC.

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econ434notes19 - History of Economic Doctrines Lecture 19...

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