Episode #6 of the course “Brief History of Economic Thought”
In the late 19th century, economic theory had been developing along two lines of analysis. Three European economists published essays that would provoke the classical theories of their predecessors and utilize mathematical concepts from engineering and physics applied to new evaluations of economic concepts. The works of William Stanley Jevons, Carl Menger, and Marie-Esprit-Leon Walras are considered the most influential in the economic movement known as the “marginal revolution.” This revolution immediately predated a shift into “neoclassical economics,” and it is considered essential for redefining economic theory for the 20th century.
William Stanley Jevons published The Theory of Political Economy in 1871, which emphasized the idea that value depended entirely upon utility—taking his utilitarian predecessors to the extreme and combining them with classical economic ideas. He also developed a model of exchange equilibrium that factored in the “utility ratio” with the costs of production.
Carl Menger is known for having promoted the law of diminishing marginal utility, which states that an individual worker who consumes the product he or she produces increases his or her utility through its consumption. He established his theories in his Principles of Economics, published in 1871. It took a great deal of individual psychology into account, and for that reason it is sometimes known as the “Psychological School” of economics.
Marie-Esprit-Leon Walras published Elements of Pure Economics from 1874 to 1877, which had at its basis a largely mathematical critique. He is considered the father of general equilibrium theory, given his work toward an overarching economic equilibrium despite variations in individual markets. Ultimately, his framework of pairing markets that were not necessarily directly related led to a flaw in his theory that was not re-evaluated and solved until the 1950s. However, his preliminary work toward understanding the incremental changes in a total system makes him one of the most important members of the marginal revolution in economics.
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