Università degli Studi di Torino DOTTORATO IN ECONOMIA DELLA COMPLESSITA’ E DELLA CREATIVITA’

1. Università degli Studi di TorinoDOTTORATO IN ECONOMIA DELLA COMPLESSITA’ E DELLA CREATIVITA’ LECTURES ON THE HISTORY OF ECONOMIC THOUGHT ECONOMIC THEORY IN THE XXth CENTURY ROBERTO MARCHIONATTI (University of Torino)

2. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURYINTRODUCTIONTHE CURRENT STATUS OF H.E.T. AMONG MAINSTREAM ECONOMISTS MAINSTREAM = THE IDEAS THAT ARE HELD BY THOSE GROUPS WHO ARE DOMINANT IN THE LEADING ACADEMIC INSTITUTIONS AND JOURNALS AT ANY GIVEN TIME “NO HISTORY OF IDEAS, PLEASE, WE’RE ECONOMISTS” THE RESULT OF THE CONCEPTION OF ECONOMICS PREVAILING AFTER 1945 A PECULIAR KIND OF HISTORIOGRAPHY: G. STIGLER: THE EFFICIENT MARKET OF IDEAS P. SAMUELSON: A “WHIG” HISTORY OF SCIENCE H.E.T. AS A “RATIONAL RECONSTRUCTION”

3. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURYINTRODUCTIONSCHUMPETER’S SOPHISTICATED PERSPECTIVE ON THE ROLE OF H.E.T.WHY DO WE STUDY THE HISTORY OF ECONOMICS ?

4. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURYINTRODUCTIONSCHUMPETER’S SOPHISTICATED PERSPECTIVE ON THE ROLE OF H.E.T.WHY DO WE STUDY THE HISTORY OF ECONOMICS ? • “WE STAND TO PROFIT FROM VISITS TO THE LUMBER ROOM …: PEDAGOGICAL ADVANTAGES, NEW IDEAS, AND INSIGHTS INTO THE WAYS OF THE HUMAN MIND” • FIRST, “THE PROBLEMS AND METHODS THAT ARE IN USE AT ANY GIVEN TIME EMBODY THE ACHIEVEMENTS … THAT HAS BEEN DONE IN THE PAST … THE SIGNIFICANCE AND VALIDITY … CANNOT BE FULLY GRASPED WITHOUT A KNOWLEDGE OF THE PREVIOUS PROBLEMS AND METHODS TO WHICH THEY ARE THE (TENTATIVE) RESPONSE” • “SCIENTIFIC ANALYSIS IS NOT SIMPLY A LOGICALLY CONSISTENT PROCESS THAT STARTS WITH SOME PRIMITIVE NOTIONS AND THEN ADDS TO THE STOCK IN A STRAIGHT-LINE FASHION”. RATHER IT IS • “AN INCESSANT STRUGGLE WITH CREATIONS OF OUR OWN AND PREDECESSORS’ MINDS AND IT ‘PROGRESSES’, IF AT ALL, IN A CRISS-CROSS FASHION … AS THE IMPACT OF NEW IDEAS …, AND AS THE … TEMPERAMENTS OF NEW MEN, DICTATE” • SECONDLY, “OUR MINDS ARE APT TO DERIVE NEW INSPIRATION FROM THE STUDY OF THE HISTORY” • THIRD, THE STUDY OF THE HISTORY “TEACHES US MUCH ABOUT THE WAYS OF THE HUMAN MIND”

5. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURYINTRODUCTIONA NEW CONCEPTION OF ECONOMICS and A NEW CONCEPTION OF THE HISTORY OF ECONOMICS • THE MAINSTREAM PERSPECTIVE HAS BEEN RECENTLY CHALLENGED BY A CONCEPTION OF ECONOMICS AS A SCIENCE OF SOCIAL COMPLEXITY IN WHICH HISTORY MATTERS • IN THIS PERSPECTIVE, THE “HISTORICAL RECONSTRUCTION” OF THE ECONOMIC THEORIES RE-ASSUMES AN IMPORTANT ROLE MY APPROACH. KEY POINTS: • THE SPECIFICITY OF THE THEORIES TO THE HISTORICAL PERIOD • THE CULTURAL MATRIX AND CONVENTION OF DISCOURSE OF THE COMMUNITY OF SCHOLARS UNDER FOCUS • THE IMPORTANCE OF THE BIOGRAPHICAL DATA • ECONOMICS PROFESSION AS A DYNAMIC ENTITY WHICH GENERATES AN EVOLVING SYSTEM OF INTERACTING IDEAS • THIS APPROACH PERMITS: • TO ACCOUNT FOR THE NON-RECTILINEAR EVOLUTION OF THE THEORIES • TO EMPHASIZE CHANGE AND INNOVATION IN THIS EVOLUTION

6. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURYINTRODUCTIONTHE SUBJECT OF THESE LECTURES: THE EVOLUTION OF THE ECONOMIC THEORY IN THE TWENTIETH CENTURY PHASES OF THE ECONOMIC THEORY IN THE TWENTIETH CENTURY: • 1890-1914: THE CLASSIC AGE OF MARGINALISM • 1919-1939: THE “YEARS OF HIGH THEORY” • THE POST-WAR II PERIOD • 1940s - 1970s • 1980s – 1990s MEN, SCHOOLS &INSTITUTIONS, CENTRES AND PERIPHERIES (IDEAS HAVE ORIGIN AND GROW BETTER IN SOME ENVIRONMENTS THAN IN OTHERS)

7. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURYINTRODUCTIONTHE EVOLUTION OF THE ECONOMIC THEORY IN THE TWENTIETH CENTURY PRESENTED IN THE QJE “WHAT DO ECONOMISTS KNOW NOW THAT MARSHALL AT HIS TIME DID NOT?” (BAUMOL,2000, STIGLITZ,2000, BOWLES&GINTIS, 2000) Two types of answers. They focus: • On the relation between theory and empirical research (Baumol) • On the anticipations and intuitions of post-Walrasian economics (Bowles,Gintis, Stiglitz) Questions: • What is the relation between the orthodox and the eterodox side of M? • Why did M. adopt a loose attitude towards empirical work? • Why did twentieth-century economics take the Walrasian path ? • Is M. to be considered a precursor of contemporary post-Walrasian economics ?

8. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914INTRODUCTION THE PERIOD 1890-1914: GENERAL CHARACTERISTICS • RAPID ECONOMIC GROWTH • INCREASE OF THE STANDARD OF LIVING • NEW WAVE OF INDUSTRIALIZATION • THE LEADERS: GREAT BRITAIN, THEN GERMANY AND UNITED STATES • HIGH INTEGRATION OF THE WORLD ECONOMY AND THE GOLD STANDARD • A GOLDEN AGE (J.M. Keynes)

9. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914INTRODUCTION THE ECONOMIC THEORY OF THE PERIOD: MEN AND SCHOOLS CENTRES OF ECONOMIC THEORY MEN, SCHOOLS, INSTITUTIONS • Cambridge & Oxford in UK Marshall, Edgeworth & the Cambridge School The Royal Economic Society, 1890 The Economic Journal, 1891 The Cambridge Ec.Tripos, 1903 • LausanneWalras, Pareto and the Lausanne School • Vienna (and Berlin) Bohm-Bawerk, Wieser & the Austrian School, Marxism, Historical School, Neoricardism (Bortkievicz)

10. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914INTRODUCTION THE ECONOMIC THEORY OF THE PERIOD: MEN AND SCHOOLS PERIPHERIES MEN, SCHOOLS, INSTITUTIONS IN EUROPE • Sweeden Wicksell, Cassel • Italy: Roma and Torino Pantaleoni & Barone; Einaudi, Jannaccone & Cabiati Il Giornale degli Economisti IN UNITED STATES • Johns Hopkins S. Newcomb, R.T. Ely • Columbia, New YorkJ.B. Clark, W.C. Mitchell • Yale I. Fisher • Harvard F.W. Taussig The Quarterly Journal of Economics • Chicago J.L. Laughlin The Journal of Political Economy

11. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914INTRODUCTION THE ECONOMIC THEORY OF THE PERIOD: THE LEGACY AND SYSTEMATISATION OF MARGINALIST REVOLUTION THEORYMEN AND SCHOOLS • CONSUMER & DEMAND • THE NATURE OF UTILITY • Psychological Approach Marshall & Edgeworth (Cambridge) • Non-Psychological Approach Pareto, Fisher (Lausanne) • MEASUREAMENT OF UTILITY • Cardinal Marshall & Edgeworth (Cambridge) • Ordinal Johnson (Ca.), Pareto&Slutsky (Lo.) • UTILITY & DEMAND • Utility Function Marshall&Edgeworth&Johnson (Ca.) Pareto, Fisher (Lo.) • Indifference Curves Edgeworth (Ca.), Pareto (Lo.) • Non-Utilitarian Approach Barone, Cassel, Moore

12. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914INTRODUCTION THE ECONOMIC THEORY OF THE PERIOD … THEORYMEN AND SCHOOL B. MARKET EQUILIBRIUM • General Equilibrium Walras&Pareto&Barone (Losanna) • Partial Equilibrium Marshall (Cambridge) • Market Structure • Competition Marshall (Ca.), Austrian school • Monopoly Marshall (Ca.), Pareto (Lo.) • Oligopoly Marshall&Edgeworth (Ca.) • C. DISTRIBUTION Wicksteed(UK), Marshall&Edgeworth &Berry&Flux(Ca.) Walras&Pareto&Barone (Lo.), Wicksell (Stockolm) • D.CAPITAL Marshall (Ca.), Wieser&Bohm&Schumpeter (Vi.), Wicksell, Cassel (Sv), Fisher,Clark(US) • E.MONEY Marshall&Pigou(Ca.), Wicksell, Fisher • F.TRADE CYCLE Marshall et al.(Ca.), Spiethoff et al.(Berlin), Mitchell (Columbia)

13. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914INTRODUCTION THE ECONOMIC THEORY OF THE PERIOD: THE EMERGENCE OF A MATHEMATICAL SCHOOL • A CHANGING ATTITUDE IN ECONOMICS: THE ADOPTION OF THE MATHEMATICAL METHOD OF REASONING, 1871-1915 “The logic of the calculus may be expressed in terms of a small number of concepts such as variables, functions, limits, continuity, derivatives and differentials, maxima and minima. familiarity with these concepts – and with such notions as systems of equations, determinateness, stability, all of which admit of simple explanations – changes one’s whole attitude to the problems that arise from theoretical schemata of quantitative relations between things: problems acquire a new definiteness; the points at which they lose it stand out clearly; new methods of proof and disproof emerge” (SCHUMPETER)

14. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914INTRODUCTION A PERIODIZATION OF THE CLASSICAL ERA OF MATHEMATICAL ECONOMICS • THE EMERGENCE OF MATHEMATICAL REVOLUTION IN ECONOMICS, 1871-1881 (JEVONS, MARSHALL, WALRAS) • SPREAD AND CONSOLIDATON OF THE MATHEMATICAL METHOD IN ECONOMICS, 1880s-1890s (LAUNHARDT, AUSPITZ AND LIEBEN, PANTALEONI, THE MARSHALLIANS, WALRAS&PARETO, FISHER, BARONE, BORTKIEVICZ, MOORE) • THE ESTABLISHMENT OF THE MATHEMATICAL APPROACH IN ECONOMICS, 1901-1915 (PARETO AND THE PARETIANS)

15. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914INTRODUCTION AN APPRAISAL OF THE CLASSICAL ERA OF MATHEMATICAL ECONOMICS • AT THE BEGINNING SOME ISOLATED PIONEERS • IN 1915 MATHEMATICAL ECONOMICS IS AN ACCEPTED, BUT SMALL, SCHOOL IN ECONOMICS • THE EARLIER SCEPTICISM ABOUT APPLYING MATHEMATICS TO ECONOMICS WAS LARGELY REDUCED • SCIENTISTS AND THE USE OF MATHEMATICS IN ECONOMICS: FROM SCEPTICISM TO (MODERATE) FAVOUR • BUT THE GREAT EXPECTATIONS WERE STRONGLY REDUCED: THE FIELD OF M.E. IS STATIC EQUILIBRIUM; ITS DEFECT: EXTREME ABSTRACTNESS AND UNREALITY OF ASSUMPTIONS

16. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) “Marshall’s great work is the classical achievement of the period, that is, the work that embodies, more perfectly than any other, the classical situation that merged around 1900”

17. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) LIFE Educated at St John’s College, Cambridge • 1868 - lecturer in political economy in Cambridge • 1877 - Professor of Political Economy at the Bristol University • 1883 - Professor of Political Economy at the Oxford University • 1885-1908 – Professor of P.E. at the University of Cambridge • 1890 – founding member of the Royal Economic Association • 1891 – founding member of the Economic Journal (first editor F.Y. Edgeworth) WORKS • 1879 - The Pure Theory of Foreign Trade; The Pure Theory of Domestic Values • 1879 - The Economics of Industry • 1890 - Principles of Economics, first edition (1920, seventh edition) • 1919 - Industry and Trade • 1923 - Money, Credit, and Commerce

18. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) CAMBRIDGE’S CIVILISATION IN THE VICTORIAN AGE AND MARSHALL’S CONCEPTION OF ECONOMICS • The Victorian demand: an authoritative social doctrine • The two dominant figures in Cambridge: H. Sidgwick and A. Marshall • “We are not at liberty to exercise ourselves on subtleties which lead nowhere” • Economics for Marshall= applied ethics • The mission: to get economics in a position where it could serve as an engine for moral progress and instrument of social stability

19. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE INAUGURAL LECTURE, 1885: “THE PRESENT POSITION OF ECONOMICS” • REFUTATION OF THE HISTORICAL SCHOOL'S CRITICISMS: "FACTS BY THEMSELVES ARE SILENT“ • ON CLASSICAL POLITICAL ECONOMY: CONTINUITY WITH THE CLASSICAL ECONOMISTS AS FOUNDERS OF ECONOMICS ON A SCIENTIFIC BASIS, BUT: • “THEY REGARDED MAN AS … A CONSTANT QUANTITY … [THEY DID NOT ALLOW FOR] HUMAN PASSIONS, INSTINCTS AND HABITS ... THEY THEREFORE ATTRIBUTED TO THE FORCES OF SUPPLY AND DEMAND A MUCH MORE MECHANICAL AND REGULAR ACTION THAN THEY ACTUALLY HAVE” • “MAN HIMSELF IS IN A GREAT MEASURE A CREATURE OF CIRCUMSTANCES AND CHANGE WITH THEM" • ECONOMICS IS INDEBTED TO THE SCIENTIFIC MOVEMENT FOR THIS CHANGE, PARTICULARLY TO BIOLOGY • THE FUNCTION OF ECONOMIC THEORY: SUPPLYING A MACHINERY “TO AID US IN REASONING ABOUT THOSE MOTIVES OF HUMAN ACTION WHICH ARE MEASURABLE” • THE ECONOMISTS WORKS “IN THE LIGHT OF FACTS”

20. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE ECONOMICS OF MARSHALL: THE PRINCIPLES “THE PRESENT TREATISE IS AN ATTEMPT TO PRESENT A MODERN VERSION OF OLD DOCTRINES WITH THE AID OF THE NEW WORK, AND WITH REFERENCE TO THE NEW PROBLEMS, OF OUR OWN AGE” THE STRUCTURE OF THE BOOK • Book I Preliminary survey • Book II, Some fundamental notions • Book III, On Wants and their Satisfaction • Book IV, The Agents of Production. Land, Labour, Capital and Organization • Book V, General Relation of Demand, Supply and Value • Book VI, The Distribution of National Income • Appendices

21. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) ON THE NATURE AND METHOD OF ECONOMICS: THE PRINCIPLES • The subject of Economics: “a study of men as they live and move and think in the ordinary business of life” • Economics as a science: "The methods required for this work are not peculiar to economics; they are the common property of all sciences. All the devices for the discovery of the relations between cause and effect, described in treatises on scientific method, have to be used .. by the economist: there is no any one method of investigation which can properly be called the method of economics" • However, economics differs from the ‘harder’ sciences: “Every cause has a tendency to produce some definite result if nothing occurs to hinder it .. The law of gravitation states how any two things attract one another; .. they will move towards one another if nothing interferes to prevent them. The law of gravitation is therefore a statement of tendencies. It is a very exact statement … Now there are no economic tendencies which act as steadily and can be measured as exactly as gravitation can: and consequently there are no laws of economics which can be compared for precision with the law of gravitation”

22. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) ON THE NATURE AND METHOD OF ECONOMICS: THE PRINCIPLES • ECONOMICS IS A SCIENCE OF SOCIAL COMPLEXITY “Progress or evolution, industrial and social, is not mere increase and decrease. It is organic growth, chastened and confined and occasionally reversed by decay of innumerable factors, each of which influences and is influenced by those around it; and every such mutual influence varies with the stages which the respective factors have already reached in their growth” • THIS COMPLEXITY HAS SEVERAL FACETS “The forces of which economics has to take into account are more numerous, less definite, less well known, and more diverse in character than those of mechanics; while the material on which they act is more uncertain and less homogeneous” • LAWS OF ECONOMICS AND LAWS OF BIOLOGY “Economics, like biology, deals with a matter, of which the inner nature and constitution, ... are constantly changing”

23. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) ON THE NATURE AND METHOD OF ECONOMICS: THE PRINCIPLES HOW DOES THE ECONOMIST HAVE TO DEAL WITH COMPLEXITY ? • "The work to be done is so various that much of it must be left to be dealt with by trained common sense” • “Economic science is but the working of common sense aided by appliances of organised analysis and general reasoning, which facilitate the task of collecting, arranging, and drawing inferences from particular facts” IMPLICATION FOR THE LANGUAGE OF ECONOMICS: EVERYDAY LANGUAGE MAKES IT POSSIBLE TO MAINTAIN THE SHADES OF MEANING THAT IN COMMON USE EVERY WORD HAS, WHICH CAN BE INTERPRETED “BY THE CONTEXT”: • “The economist … must make the terms in common use serve his purpose in the expression of precise thought, by the aid of qualifying adjectives or other indications in the context. If he arbitrarily assigns a rigid exact use to a word which has several more or less vague uses in the market place, he confuses business men, and he is in some danger of committing himself to untenable positions”

24. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) ON THE NATURE AND METHOD OF ECONOMICS: THE PRINCIPLES WHAT IS THE ROLE OF ABSTRACT REASONING IN ECONOMICS? • “There is a fairly close analogy between the earlier stages of economic reasoning and the devices of physical statics. But is there an equally serviceable analogy between the later stages of economic reasoning and the methods of physical dynamics ? I think not. I think that in the later stages of economics better analogies are to be got from biology than from physics; and consequently, that economic reasoning should start on methods analogous to those of physical statics, and should gradually become more biological in tone” • “The most helpful applications of mathematics to economics are those which are short and simple, which employ few symbols; and which aim at throwing a bright light on some small part of the great economic movement rather than at representing its endless complexities”

25. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) ON THE NATURE AND METHOD OF ECONOMICS: THE PRINCIPLES WHAT IS THE ROLE OF ABSTRACT REASONING IN ECONOMICS? • “It is obvious that there is no room in economics for long trains of deductive reasoning … It may indeed appear at first sight that the contrary is suggested by the frequent use of mathematical formulae in economic studies. But on investigation it will be found that this suggestion is illusory … [The mathematician] takes no technical responsibility for the material” • “While a mathematical illustration of the mode of action of a definite set of causes may be complete in itself, and strictly accurate within its clearly definite limits, it is otherwise with any attempt to grasp the whole of a complex problem of real life, or even any considerable part of it, in a series of equations. For many important considerations, especially those connected with the manifold influences of the element of time, do not lend themselves easily to mathematical expression”

26. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE ECONOMICS OF MARSHALL: THE PRINCIPLES THE THEORY OF COMPETITIVE EQUILIBRIUM • A COMBINED ANALYSIS OF OF BOOKS IV AND V • BOOK IV • COMPETITION AS A PROCESS: IT RESTS ON THE ‘OPENNESS OF MARKETS’ NOT ON ATOMISTIC PRICE-TAKING BEHAVIOUR • THE ANALYSIS OF COMPETITION GOES ALONG WITH THE THEORY OF THE FIRM’S GROWTH • BOOK V: "GENERAL RELATIONS OF DEMAND, SUPPLY AND VALUE"

27. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE ECONOMICS OF MARSHALL: THE PRINCIPLES THE THEORY OF COMPETITIVE EQUILIBRIUM BOOK V • IT IS THE ‘THEORETICAL’ BOOK OF THE VOLUME: “The word ‘Theory’ applies to the title of that book alone. It deals with abstractions” • MECHANICAL EQUILIBRIUM: “a simpler balancing of forces which corresponds rather to the mechanical equilibrium of a stone hanging by an elastic string, or of a number of balls resting against one another in a basin”

28. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE ECONOMICS OF MARSHALL: THE PRINCIPLES THE THEORY OF COMPETITIVE EQUILIBRIUM BOOK V • THE THEORY OF VALUE IS STUDIED WITH REGARDS TO THE NORMAL COST OF PRODUCTION OF A COMMODITY UNDER THE CETERIS PARIBUS HYPOTHESIS • FIRST STEP: EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY OF A COMMODITY THAT OBEYS THE LAW OF DIMINISHING RETURNS • SECOND STEP: EQUILIBRIUM WITH REFERENCE TO SHORT AND LONG PERIODS • THIRD STEP: LONG TERM EQUILIBRIUM & THE REPRESENTATIVE FIRM: IT “MUST BE ONE WHICH HAS A FAIRLY LONG LIFE, AND FAIR SUCCESS, WHICH IS MANAGED WITH NORMAL ABILITY, AND WHICH HAS NORMAL ACCESS TO THE ECONOMIES, EXTERNAL AND INTERNAL, WHICH BELONG TO THAT AGGREGATE VOLUME OF PRODUCTION” EQUILIBRIUM "AS RESEMBLING A BALANCING OF FORCES OF LIFE AND DECAY"

29. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE ECONOMICS OF MARSHALL: THE PRINCIPLES THE THEORY OF COMPETITIVE EQUILIBRIUM DIFFICULTIES • The difficulty of assuming the ceteris paribus condition “reach their highest point in connection with industries which conform to the law of Increasing Returns” • Long-term supply curves in relation to such industries are irrealistic: “[They] are fascinatingly clear and vivid, but they are made too clear and vivid to be at all near to reality” • “Abstract reasoning as to the effects of the economies in production, which an individual firm gets from an increase of its output are apt to be misleading, not only in detail, but even in their general effect. This is nearly the same as saying that in such case the conditions governing supply should be represented in their totality. They are … especially troublesome in attempts to express the equilibrium conditions of trade by mathematical formulae”

30. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE ECONOMICS OF MARSHALL: THE PRINCIPLES THE THEORY OF COMPETITIVE EQUILIBRIUM. FROM MECHANICAL EQUILIBRIUM (BOOK V) TO BIOLOGICAL EQUILIBIRUM (BOOK IV) • Starting point: the Smithian division of labour concept • the chief advantage of d.l.: machinery supplants purely manual skill • the chief effect of improvement of machinery: “to cheapen and make more accurate the work which would anyhow have been subdivided” • d.l. generates increasing returns • d.l. tends “to increase the scale of manufactures and to make them more complex ..therefore to increase the opportunities for d. l. of all kinds” • The economies of production permitted by the division of labour: • internal economies: “those dependent on the resources of the individual houses of business engaged in it, on their organisation and the efficiency of their management” • external economies: “those dependent on the general development of the industry”

31. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE ECONOMICS OF MARSHALL: THE PRINCIPLES THE THEORY OF COMPETITIVE EQUILIBRIUM. EXTERNAL AND INTERNAL ECONOMIES EXTERNAL ECONOMIES (discussed in connection with “the concentration of specialised industries in particular localities”) • internal to the industry • inter-industrial Typology: • dissemination of skill and know-how in the district-areas • diffusion of inventions and improvements in machinery and in the general organisation of business • growth of subsidiary trades in the neighbourhood • increasing availability of entrepreneurial ability • a local market for special skill Moreover, Marshall stresses that: • The e.e. are by their own nature essentially inter-industrial • They are partial irreversible

32. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE ECONOMICS OF MARSHALL: THE PRINCIPLES THE THEORY OF COMPETITIVE EQUILIBRIUM. EXTERNAL AND INTERNAL ECONOMIES INTERNAL ECONOMIES • “economy of skill” • “economy of machinery” • the capability to exploit economies of buying and selling

33. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE ECONOMICS OF MARSHALL: THE PRINCIPLES MARSHALL VERSUS COURNOT • Cournot: Exploiting increasing returns a firm becomes a monopoly • Marshall: I. R. and competition can co-exist MARSHALL’S REASONING • as much as factors such as skill, inventiveness and entrepreneurial energy, needed to exploit potential internal economies, exist, a firm can growth rapidly • Yet, the tendency to monopolisation is not inevitable because the rise of diminishing returns in the life cycle of the firm opposes it • Monopolisation of the market on behalf of a firm can at the most be partial and temporary limited

34. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE ECONOMICS OF MARSHALL: THE PRINCIPLES THE TYPICAL ‘CYCLE OF LIFE’ OF A FIRM An able man, assisted perhaps by some strokes of good fortune, gets a firm footing in the trade, he works hard and lives sparely, his own capital grows fast, and the credit that enables him to borrow more capital grow still faster; he collects around him subordinates of more than ordinary zeal and ability; ... Corresponding to this steadily increasing economy of skill, the growth of his business brings with it similar economies of specialised machines and plants of all kinds; every improved process is quickly adopted and made the basis of further improvements; success brings credit and credit brings success; credit and success help to retain old customers and to bring new ones; the increase of his trade gives him great advantages in buying; … and thus diminish his difficulty in finding a vent for them. The increase in the scale of his business increases rapidly the advantages, which he has over his competitors, and lowers the price at which he can afford to sell. This process may go on as long as his energy, his inventive and organising power retain their full strength and freshness; and … he and one or two others like him would divide between them the whole of that branch of industry in which he is engaged … But here we may read a lesson from the young trees of the forest as they struggle upwards through the benumbing shade of their older rivals. Many succumb on the way, and a few only survive; those few become stronger with every year, they get a larger share of light and air with every increase of their height, and at last in their turn they tower above their neighbours, and seem as though they would grow on for ever ... But they do not. One tree will last longer in full vigour and attain a greater size than another; but sooner or later age tells on them all. Though the taller ones have a better access to light and air than their rivals, they gradually lose vitality; and one after another they give place to others, which … have on their side the vigour of youth. And as with the growth of trees, so was it with the growth of businesses … In every trade there is a constant rise and fall of large businesses, at any moment some firms being in the ascending phase and others in the descending

35. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 ALFRED MARSHALL(1842-1924) THE CONCEPT OF ‘BIOLOGICAL EQUILIBRIUM’ • “A business firm grows and attains great strength, and afterwards perhaps stagnates and decays; and at the turning point there is a balancing of equilibrium of the forces of life and decay” • this ‘business firm’ is typical, or representative, from a ‘biological point of view’: it represents the typical growth path of a firm • With the representative firm, M. brings together the equilibrium of the industry and the disequilibrium of the individual firms of the industry, in which some firms are rising and others are declining • “a fine distinction between ‘theory’ and ‘real life’ in Marshall’s economics is impossible to draw because Marshall himself did not draw it, and never tired of warning others against drawing it” (Chamberlin) THE LESSON • the abstract reasoning, the chain of theoretical deductions, has to be limited: absolute rigour means neglecting time and irreversibilities and so come to the wrong conclusions

36. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 THE MARSHALLIANS • Within the English-speaking world, Marshallian economics was the dominant form of Neoclassicism from the 1890s to the 1920s.  • It relied on practical, intuitive arguments rather than mathematical formalism - taking into account items such as institutional and industrial structure and real world phenomena, such as uncertainty, money and business cycles.  Its main focus was on  representative conditions, rather than idealized conditions. • It was a leading force in the professionalization of economics and its establishment as an independent entity in academia. The Marshallian formula was exported to the United States in the hands of Frank Taussig at Harvard and to Italy by Maffeo Pantaleoni. • Cambridge Marshallians H.H. Cunynghame (1848-1935) John Neville Keynes (1852-1949) A.W. Flux (1867-1942) Sir John H. Clapham (1873-1946) Arthur Cecil Pigou (1877-1959) Ralph G.Hawtrey (1879-1971) Frederick Lavington (1881-1927) John Maynard Keynes (1883-1946) Walter Layton (1884-1966) Dennis H. Robertson (1890-1963) Gerald F. Shove (1887-1947)

37. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 THE MARSHALLIANS Cambridge Marshallians J.N. Keynes Pigou Hawtrey J.M. Keynes Robertson

38. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE WALRAS’S LEGACY Léon Walras (1934-1910) • Professor of political economy at Lausanne (1870-93) • Works: • Eléments d’économie politique pure (1874-77, 1889, 1900) • Etudes d’économie sociale, 1896 • Etudes d’économie politique appliquée, 1898

39. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE WALRAS’S LEGACY • The idea of the general economic equilibrium: “Walras’s claim to immortality” • The origin of W.’s formulation of G.E.T.: Louis Poinsot, Eléments of statistique, 1803 • W.’s analysis of G.E.E.: a step-by-step process: • The case of two-person, two-commodity barter of given stock of consumer goods • The case of multi-person, multi-commodity exchange of given stocks of consumer goods • The case of the production of new consumer goods and the market for factor services • The case of saving, investment, and the use of money and credit

40. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE WALRAS’S LEGACY W.’s procedure: the static picture: • To write down the demand and supply equations on the assumption of perfect competition • the demand functions of individuals are deduced by their utility functions) • In the cost-supply equations price are equated to average costs • To prove the existence of a general equilibrium solution for the set of simultaneous equations by counting the number of equations and unknowns • If they were equal a general equilibrium solution was possible W.’s procedure: the “realistic” picture: the tatonnement: the automatic adjustment of price in response to excess of demand or supply

41. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE Life 1870: Degree in Engineering at the Polytechnic Institute of Torino 1870-1888: Engineer and manager in industrial firms 1889: Retirement from business 1893-1907: Professor of Political Economy at the University of Lausanne succeeding Léon Walras Works 1892-3: “Considerazioni sui principi fondamentali dell’economia politica”, Giornale degli Economisti 1896-7: Cours d’Economie Politique 1900:“Sunto di alcuni capitoli di un nuovo trattato di economia pura”, GdE 1906: Manuale di Economia Politica 1909: Manuel d’Economie Politique 1916: Trattato di Sociologia Generale

42. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE

43. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE METHODOLOGICAL ISSUES: PARETO VS. WALRAS, OR EXPERIMENTAL METHOD VS. RATIONAL METHOD Walras on method: “The pure theory of economics … is a physico-mathematical science like mechanics … Economists should not be afraid to use the methods and language of mathematics. The mathematical method is not an experimental method; it is a rational method … The physico-mathematical sciences, like the mathematical sciences, … do go beyond experience as soon as they have drawn their type concepts from it. From real-type concepts, these sciences abstract ideal-type concepts which they define, and then on the basis of these definitions they construct a priori the whole framework of their theorems and proofs. After that they go back to experience not to confirm but to apply their conclusions”

44. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE METHODOLOGICAL ISSUES: PARETO VS. WALRAS, OR EXPERIMENTAL METHOD VS. RATIONAL METHOD Pareto on method vs. Walras: “Professor Walras’s great contribution to economic discussion was his discovery of a general system of equations to express the economic equilibrium. I cannot, for my part, sufficiently admire this portion of his work, but I must add that I entirely disagree with him … I am a believer in the efficiency of experimental methods to the exclusion of all others. For me there exist no valuable demonstrations except those that are based on facts” (Pareto 1897)

45. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE METHODOLOGICAL ISSUES: PARETO’s LOGICAL-EXPERIMENTAL METHOD • “Political Economy is a natural science founded exclusively of facts” • Political Economy’s aim: to find out the regularities of phenomena (i.e. their laws) on the guidance of experience and observation • The laws are simple hypotheses, abstractions deduced by facts: they are good as far as they agree with the facts (verifiable facts)

46. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE METHODOLOGICAL ISSUES: PARETO’s LOGICAL-EXPERIMENTAL METHOD Logical-experimental method. Phases • Formulation of hypotheses on the basis of an inductive process of observation of facts (from “concrete cases” to “general propositions”) • Deduction of theories from the principles • Comparison of theoretical deductions with concrete facts in order to confirm or not the theory • Statistics and history are the tools of verification of a theory

47. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE METHODOLOGICAL ISSUES: MECHANICS, ECONOMICS AND MATHEMATICS • The use of mechanical analogy • Fisher (1891): “a systematic representation, in terms of mechanical interaction, of the economic equilibrium” • Pareto (1896-7): mechanical analogy clarifies concepts in economics; analogies are worthless “as demonstration of a theory”, they “explain some statements which must be verified by experience” • Mathematics (according to Pareto) • It is necessary in order to examine the general conditions of economic equilibrium • It does not make demonstration more rigorous, but it permits us to treat problems far more complicated than those generally solved by ordinary logic • To be used with caution

48. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE METHODOLOGICAL ISSUES: THE SUCCESSIVE APPROXIMATION APPROACH Logical-experimental method. Levels of abstraction: • Pure economics, or first approximation: the facts considered are the most fundamental (tastes and obstacles of homo oeconomicus) • Applied economics, or second approximation: the facts considered go beyond the homo oeconomicus. A mix of theory and applied research

49. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE CONCEPTUAL ISSUES: FROM THE CARDINAL UTILITY TO THE ORDINAL UTILITY • The neoclassical theory of value considers the perfect hedonist homo oeconomicus – each force of a system works for the maximum utility of everyone • Is such an abstraction permissible ? • Pareto 1892-3: the hedonistic hypothesis as a first approximation • But: is utility a measurable quantity ? • Pareto 1900: The rejection of hedonism: economists are not interested in the reasons why a good is useful, only in the fact that it is useful

50. Roberto Marchionatti , ECONOMIC THEORY IN THE XXth CENTURY. PART I. ECONOMICS IN THE AGE OF CERTAINTY, 1890-1914 VILFREDO PARETO (1848-1924) AND THE ECONOMICS IN LAUSANNE CONCEPTUAL ISSUES: FROM THE CARDINAL UTILITY TO THE ORDINAL UTILITY “Until now [1900], in order to establish economic doctrines we went back to choice. Choices have been explained as man’s aim to achieve maximum pleasure. Between two things, man choses the one that provides more pleasure. The point of equilibrium is obtained by expressing the conditions mathematically which enable the individual to enjoy the maximum pleasure compatible with the obstacles he meets … The use of this point of view forces us to consider pleasure as a quantity. And this is what the economists who have established pure economic theories have done, and what we ourselves have done in the Cours: but we must admit that this is not a throughly rigorous method” “In order to examine general economic equilibrium, this measurement is not necessary. It is sufficient to ascertain if one pleasure is larger or smaller than another, This is the only fact we need to build a theory”