history

In this book the psychological and environmental factors that affect human economic behavior and determine the historical laws of economy and development.
There was a great social unrest in Germany during 1863. This unrest led the people to politics. People opposed the laissez faire policy of the classical economists. This opposition gave birth to the historical school in Germany. In this school Von Schmoller was also a major person.
In the beginning, Schmoller bitterly criticized the classical economics thought. He tried to study the real man instead of an imaginary economic man of classical economists on the basis of historical analysis and observations. He also criticized the analytical and abstract deductive method of classical economists. He tried to explain the economic laws on the basis of historical events and facts. He also tried to relate economics with other social sciences. He considered inductive method the base. The Austrain school of Economics was rising in Austria when schmoller was leading the New Historical School in Germany. Karl Menger was the pioneer of the Austrian school of Economics. Karl Menger was a great supporter of deductive method. There started a conflict on the method of study among these two pioneers of these two schools. This conflict of method lasted for 20 years. Schmoller declared during the conflict that the supporters of abstract method of Austrain School are unfit to teach in the universities of Germany. On the other side, Menger blamed that the historians are entering into the area of our science as the foreign victors and are compelling us to adopt their culture, language, terminology, method, etc. This conflict was minimized after the publication of Menger’s book “On the theory of Capital” in 1888. Now, Schmoller expressed that the followers of inductive method do not oppose the deductive method but these writers use inductive method only because the deductive methods depends only upon hypothesis and assumptions and the inductive method depends upon facts and observations. Schmoller now began to feel the need of both the inductive and deductive methods for economic analysis. In this context he has expressed his idea in this way, “Induction and deduction are both necessary for the science just as the right and left feet are needed for walking.” In this context he blamed his preceding historians that they make haste to use inductive method. He began to trust the socio-economic analysis of the classical economists and believed the necessity of analysis in economic study. But he also doubted the completion of study in the lack of facts and observations. Therefore, he decided that both the theory (deductive method) and the practice (inductive method) are necessary in economic study.
Schmoller was more a social reformer, a nationalist and a practical person. In this context, all the new historians including Schmoller followed the path of old historians. Their main objective was to improve the level of living of the labourers. Social reform was their main interest. They argued in favour of an equal distribution of national income. It is also said that all the new historian including schmoller are the socialists of the chair.
Karl Bucher, Ludwig Joseph Brenatano, Adolf Wagner, etc. were other new historians of Germany. This school had also influenced the writers of England, U.S.A., France, Italy, Hungary, etc.
Conclusion
The historians criticized the classical concept of stability and university of economic laws. The old historians completely boycotted the deductive method. Later on, the new historians felt the need of both the deductive and inductive methods. To be concentrated only on the study of history was the wrong concept of the old historians. Therefore, the new historians began to search the economic history instead of the study of the philosophy of history. These were the historians who brought the conflict of method to end. By including historical events these writers added a new chapter in economic literature. The use of inductive method has become compulsory in the act of economic analysis at the age where mathematics and statistics are well developed.
The concept of nationalism was started in German citizens after the arrival of historians. The economic and industrial progresses were successful due to their economic laws and the country was unified due to their social and political laws.
Many economists like J.S. Mill, A. Marshall, J.M. Keynes, including Karl Marx, a great propounded of socialist theory, were influenced by this historical concept.
This historical concept has left aside he hypothetical assumption of ceteris paribus (other things remaining the same) of the classical economists. This concept has proved the rigid individualism and open policies an illusion.
Finally, the historical concept has made the scope of economic literature very wide.
2. Contribution of Subjectivists
The classical economic thought reigned the world for a whole century. J.S. Mill is supposed as the last writer of this thought. This thought started to fall down since the last period of Mill. Many socialist writers and the writers of the historical school had already started to strongly criticize the classical economic thought. The socialist writers were harshly attacking the socio-economic structure and the capitalistic economy of that time whereas the historian writers were strongly attacking the deductive method of classical economists. But the economic study of all these writers was based on objectivism. They placed secondary importance to man and first importance to society and social circumstances in their study. At the sometime or by 1860, the physiologists like E.H. Weber, Fechner, etc. propounded the laws of human soul. According to this law, if the degree of stimulus of the people goes on increasing, the rapidity in their sensation starts to decline. In this law these writers have also explained the last or marginal unit of stimulus. The economists formulated the economic laws like. The law of Diminishing utility, The law of Marginal utility, etc. on the ground of this law of human soul. These economic laws are based on human beings and their feelings. Therefore, these laws are called subjectivist approach. In this way, the subjective approach became popular in economic analysis instead of objective approach. This subjective approach may be taken as an alternative form of price theory of the classical economists. These classical economists have said that the price may be determined on the basis of the quantity of labour or labour time incurred in production or reproduction of commodity. But the subjectivists lay more stress on human beings and their feelings concerning price determination. They have explained economic activities of the people in a very individualistic form and people in an economic man. The economic analysis of these economists starts from consumption or wants of the people. They said that a consumer consumes goods in order to satisfy his utility, satisfaction, pleasure, happiness, etc. This consumption is possible though exchange. Consumers compare between utility and disutility or pleasure and pain in this process of exchange. Therefore, the subjectivists call the economics also a science of measuring pleasure and pain. The concept of consumption of these economists depends upon the utility concept of Jeremy Bentham. Again, these economists have also explained consumption on the basis of marginal utility. They said that when a consumer consumes different units of different goods he tries to manage to attain the same satisfaction from the marginal units of all the goods. In his way, this approach is know as the subjectivist approach for these economists have explained economic behavior on the basis of the feeling of the people and it is also called the Marginal utility Approach for they have explained the economic behavior of the people on the basis of marginal utility.
This subjectivist approach or the Marginal utility approach was developed on the basis of classical economic thought. Therefore, both these principles are similar in many respects. In both the principles the perfect competition is assumed and the deductive method has been used. In both the principles the laissez faire policy is supposed to be the base and the government intervention has been opposed. In both the principles it is said that economic forces tend to more to a stage of equilibrium. But there are also many dissimilarities in these two principles. The classical theory has assumed long-run and has applied the macro approach whereas the marginal utility theory has assumed short-run and has applied has applied the macro approach. The classical theory has stressed on production, cost and supply whereas the subjectivist approach has emphasized on consumption, utility and demand. The classical economists have explained rent, wages and interest of distribution that these factor prices are closely related to each other and the cost of production and prices are inter-dependent. The marginalist principle is a partial equilibrium principle. Its price theory is independent of the social system.
In this way, the marginalists formulated new ideas in the economic world by the middle part of the 19th century. In this context, many writers of many European countries were expressing their ideas independently. Among them there were three main marginalists as (a) William Stanley Jerons of England (1835-1882), (b) Karl menger of Austria (1840-1921) and (c) Leon Walras of Switzerland (1834-1910). They developed economics as a pure science though deductive method. Among them, Jerons and Walras were the mathematic economists and Menger was a psychological economist. Among them, Karl Menger was an Austrian and had the greatest contribution to it, so, this marginalist school was also called The Austrian School. A brief description of some major economists of this Austrian school is presented below.
2.1 Some Noted Subjectivists
2.1.i. William Stanley Jevons (1835-1882)
William Stanley Jevons was born in 1835 at Liverpool in England. He was a son of an iron trader. He was born one year after the death of T.R. Malthus and died one year before J.M. Keynes was born. He was very shy in his childhood but had a very sharp brain. At the age of 16 he has said, “I have started to think that I should be greater than others and I can.” He studied at the university college school and university college of London from 1851 to l854. He was highly interested in pure science and especially in chemistry. A gold mine was discovered in 1850 in Australia. This gold mine was in need of a good gold examiner (expert). The gold mine authorities selected Jevons as a gold expert and manager of the mine. Therefore, Jevons went to Sydney of Australia as a gold expert by postponing his study at the age of 19. He worked there for five years (1854-1959). While working there, he wrote an important article “The climate of Australia and New Zealand” in 1857 when he as only 22 years old. He saved some money while working as gold expert in Sydney, returned to London after five years, and again started his study at the University of London. He passed M.A. in Logic and Economics from London University in 1863. After passing M.A. he started to teach economics at Owen’s college of Manchester since 1866. He was awarded the post of Professor of Economics at the University of London in 1876. He was very much labourious and preferred future too much to present. He had an ill health due to hard labour and due to ill health he resigned the post of Professor at the University of London after four years in 1880. He had an untimely death by drowning in swimming accident at the age of 47 in 1882. Jevons’ death was an inevitable damage to the development of economic thought.
William Stanley Jevons was a sociologist and a theoretician. He has written many books and articles. He has expressed his original ideas in these books and articles different from the classical ideas. He was always thinking of removing poverty and raising wages of the workers. The central point of his economic analysis was considered the pleasure and pain of the people. In this context he has utility the base of this analysis. William Stanley Jevons was also influenced b the utilitarian theoretician Jeremy Bentham. Among his many articles and books, the book “The Theory of Political Economic” published in 1871 is considered the best. Let’s now explain some of his original economic ideas in brief.
Among the various articles of Jevons, The Theory of Political Economy is considered the best one. He has significantly stressed on consumption, exchange and distribution in this book. He has used the deductive method in his analysis. All his economic analysis is based on the concept of pleasure and pain or on the hedonistic concept. He has considered the obtaining of maximum pleasure or maximum utility the main objective of economic life of the people. Therefore, he has researched in his book about how the optimum consumption of wealth is possible. As other economists did, Jevons has also started his analysis from the point that human wants are unlimited but each separate want can be instantly satisfied. He has laid special stress in his book on the satisfaction of wants through utility. He said that any commodity contains utility but that utility is not inherent but abstract and it is relative to wants. He has also explained utility as the creation of circumstances. He has included motivation, uncertainties of future events and social-mental concept of the people in these circumstances. He has also shown in his book that utility falls with a rise in the units of commodity and disutility may also be the result. He has divided utility into two parts as (a) Total utility and (b) Degree of utility. He has also stated that the degree of utility is the final degree of utility. He said that the final degree of utility of additional units of commodity goes on diminishing but total utility goes on increasing. He has explained the final degree of utility as the degree of utility of the last unit of commodity. According to him, this final degree of utility is the ratio between an increase in total utility and an increase in the units of commodity. We now call marginal utility to this final degree of utility of Jevons. Jevons has also shown this marginal utility in a figure in which the vertical axis measures pleasure and the horizontal axis the food grains. He has also presented this marginal utility in a mathematical term as du/dx. Here, u denotes total utility and x denotes units of commodity consumed. Besides total utility and marginal utility, Jevons has again divided utility into three parts as (a) Actual utility, (b) Perspective utility and (c) Potential utility. In the same way, he has also divided utility into three dimensions as (a) Quantity, (b) Degree and (c) Duration.
In this way, Jevons has given more importance to consumption than production and distribution in a different way than the classical economists. He has also expressed his ideas that the law of variety of human wants is more important than all the economic theories. He has used this concept of final degree of utility not only in the preset selection but also in the future selection of consumption. Finally, he has also expressed his idea that the final degrees of utility or the marginal utilities tend to be equal to each other.
Jevons also has a separate concept about price. The classical economists had a concept that the price depends upon the quantity of labour incurred in the production of a commodity. But Jevons opposed the labour cost Theory of Value. He said that once already used labour has no effect on the future price of the commodity. Because he thought that the labour once used in any production loses its existence far good. He has also criticized all the cost theories. He said that the cost of production has no meaning in relation to non-reproducible goods. He also said that there is no direct relation between labour and price also due to the reason that market prices are always changing and moving around the cost of production. Due to all these reasons he held a concept that the price always completely depends upon utility and the cost of production indirectly affects price though supply. This price theory of Jevons may be expressed in the following way-
Cost of production determines supply, supply determines the final degree of utility and final degree of utility determines price.
In his price determination theory Jevons is complied that labour plays a role of determinant of circumstances. Because he has said that a state of utility of any commodity may be changed by changing the quantity of labour and this change affects price. Ultimately he seemed confirm that the labour does not directly affect price and the price of commodity determines the value of labour but the labour value does not determine price.
Jevons has said that the price completely depends upon utility. He considers utility a matter of pleasure and pain or a subjective fact and it cannot be cardinally measured. Therefore, in order to be aware of price he has a term ‘Ration of exchange.’ He said that the ratio of exchange is a ratio of a change in utility of a commodity and a change in the units of that commodity. He has also explained this ratio of exchange as a mutual relationship between the final degrees of the units of the commodity available after the completion of the act of exchange. He further said that when any two persons exchange two commodities, the marginal utility of these commodities received by each person and the price of them are of equal ratio. Jevons has become successful to present an identical base in the act of comparison of relative importance of various commodities though this ratio of exchange.
Jevons has also used his utility theory in labour supply theory. He has mentioned two sides of labour as positive side and negative side. Positive side is a utility side and a negative side is a disutility side. Any labourer gets wages for his labour. This is a utility side on the contrary, to provide labour means to bear physical or mental trouble. Therefore, this is a disutility side. He said that the labourers supply labour only upto a point where utility and disutility or pleasure and pain are equal to each other. He has explained wages as the residues of production. He has said that a wage is a residual price of the commodity produced after deducting the amount of rent, tax and interest for capital. He has further stated that a wage is a result not a cause of the price of a product. He was in favour of piece wage system. He has argued that the labourers should not be engaged on strikes, on reducing working hours, etc. Jevons has considered capital to all the goods required to maintain life of the working labourers. He has linked capital with time. He said that a time gap separates the final product of a commodity and an initial employment of the labourer and capital is necessary to induce workers in jobs during this time gap. Jevons has considered the rate of interest to the amount derived by dividing the increment in production by the total production. According to him, the interest is determined by the productivity of capital and it is a function of time. Jevons has completely accepted the Ricardian Theory of Rent and he did not present nay new theory of it. In this way it is supposed that Jevons had a very less contribution to distribution.
William Stanley Jevons was born in 1835 and in 1882. Within this 47 years Jevons was very much successful to contribute t o economic thought. He specially brought a revolution concerning utility and price. This revolution is also known as the Jevonian Revolution. Jevons was not only an economist but also a statistician a mathematician and a logician. Jevons had tried to make Economics a pure science though mathematics and statistics. He was supporter of laissez faire policy and individualism. But he was also in support of government intervention when necessary. He had considered the pleasure and pain of the people the central point of his economic analysis and his main concept was that the degree of pleasure should be increased by lowering the degree of pain. He led the marginalist and subjectivist approaches and was the pioneer of the Neo-classical Economists.
2.1.ii. Karl Menger (1840-1921)
Karl Menger was born in 1840 in Austria and died in 1921. He studied Law in the University of Prague and the University of Vienna and was conferred the degree of Ph.D. by the University of Cracow. He was appointed as a professor of Economics in the University of Vienna in 1873. He was also appointed as a private tutor of the prince for some time and after 1900 he was made a life long Member of Parliament of Austria.
Karl Menger published a book “Principle of Economics” in 1871 at the same time when Jevons had published his book. His another important book “Studies in the method of the Social Sciences and of Political in Particular” was published in 1883. Besides them, he has also written many other articles. The contributions made by Menger to the field of Economics through various articles may be divided into three divisions.
a. Method of Study:
There was a deep influence of the inductive method of the historian writers of Germany on the Austrian writers during the period of Karl Menger. These writers had applied the new inductive method to the study of Economics instead of the deductive method of the classical economists. This inductive method is based on the historical events, data, experiences, etc. This method leads us from any particular fact to the general conclusion. But Karl Menger had applied the deductive method of the classical economists as a method of his study. This deductive method leads the people from the general fact to the particular conclusion.
The historians had a concept that various economic activities may be studied only through this inductive method and only this method can make the materials available required for economic principles. On this ground, they used to study both the theoretical and practical aspects of economics hand in hand. Menger has responded it by dividing the economic science into three separate branches. In the first branch he has kept the economic history. He said that the economic history is merely a source of materials of principles and in the second and third branches he has put theoretical and practical aspects respectively. In the practical aspect he has taken the individual behaviors of the people as a base. He said that the economic activities of any society are only the collective summation of the individual economic activities of the people of that society. He held a concept that the theoretical aspect is required to formulate the policies of all these economic activities and the principles may be bestowed only through the abstract or deductive method. In this way, there was a conflict for 20 years between the German historian writer, Gustav Schmoller and the Austrian marginalist writer, Karl Menger concerning the method of study. This conflict is famous as the Battle of Methods. This conflict took a harsh from. As a result, Schmoller declared that the followers of the deductive method of the Austrian school are unfit to teach in the German Universities. Karl Menger also blamed the historians that they are entering into the area of our science as the foreign victors and are compelling us to adopt their culture, language, terminology, method, etc. This conflict was reduced to some extent after the publication of articles of the followers of Menger like Von Wieser, Bohm Bawerk, etc. Ultimately the writers of both the schools felt the need of both the methods and the battle of methods ended.
b. Money
Menger has also explained money. He held a concept that money was invented due to the inconveniences of barter system. He said that any commodity contains saleable acceptable qualities. He believed that money was invented in an unplanned way in the society due to the reasons. He was not agreed with The State Theory of Money. He also believed that after the invention of money it acts as a universal means of exchange. He has also clearly explained the functions of money in determining process and also in the process of exchange. He said that money acts as a price index and also as a quantitative measurement of the subjective value. His money theory is based on the subjective approach. The money theory of Menger had an important contribution to the monetary reform of Austria of that time.
c. The Theory of Value
Menger’s theory of value is a subjective theory. He said that the price depends upon the individual activities or feelings of the people. Price is independent of society and government regulations and it has no direct relationship with labour and capital. He again said that the price is a feeling of the people. The feeling of the people creates various wants. There is a close relationship between these wants and commodities. This relationship makes people feel about price. This price depends upon the rapidity of wants of the people. The same commodity may contain different prices for different persons. Menger has first of all divided the goods having the quality of satisfying human wants into two parts as (a) economic goods and (b) Non-economic goods. According to Menger, those goods which contain human wants and which have a quality of satisfying them are the non-economic goods. If the people can identify the want satisfying quality of such non-economic goods and if these goods may be mobilized to satisfy wants, then, to Menger, such goods are the economic goods. But he said that this classification of goods is not a permanent classification. Sometimes, economic goods may be termed as non-economic goods and non-economic goods as economic goods. Specially this classification depends upon the supply of goods. The goods with an unlimited supply are the non-economic goods and the goods with a limited supply are the economic goods. The goods with an unlimited supply have no price due to the reasons that the supply of a large quantity of goods is unlimited, or the supply exceeds demand, people should not apply the policy of frugality to he use of such goods, people should not make any effort to obtain such goods, etc. Therefore, only economic goods have price. The demand for such economic goods exceeds supply. Menger has also divided these economic goods into different processes on the basis of the nearness of the consumers or the rapidity of wants. According to this division, the goods which can directly satisfy consumer’s wants are placed in the first or lower order and the goods which can only indirectly satisfy wants are placed in the last or higher order. For instance, bread is placed in the first order for it instantly satisfies human wants whereas flour, wheat, land, tools, etc. are placed in the second, third, fourth or higher orders. Menger has used this classification in order to establish price relations between goods in different processes. Thus, according to this classification, he has tried to show that the prices of goods are different in different processes. He said that the price of any commodity is not determined on the basis of the historical process of production of that commodity, rather the price of it is determined on the basis of service or importance the commodity renders to the people. This price determination depends upon the mentality of the people, the limited supply or scarcity of the commodity, etc. According to Menger, people spend for the first time end the first part of their income on their strongest wants and at the last time and the last part of their income on their weakest wants. In this way, he has tried to show that the price has a tendency to fall on basis of the falling rapidity of wants. He as also tried to show that the price of any commodity falls as much as the satisfaction is reduced in the lack of any part of it. This idea of Menger is very much similar to the term of the final degree of utility of Jevons. Later on, A. Marshall and Von Wieser used the term “Marginal utility” on the basis of this concept. In this context, Menger has also explained the subjective measurement of utility.
Menger has also opposed the concept of exchange of Adam Smith. Adam Smith’s concept of exchange is objective. He held a concept that people exchange goods only with an objective of trade. But Menger’s concept on exchange value is subjective and he has stated that people exchange goods in order to attain maximum satisfaction. According to him, each person undervalues the commodity of this possession in comparison to the commodity possessed by others. This is the reason that the process of exchange starts. Ultimately when the under valued commodities are exhausted with both the exchange doers, the process of exchange ends. In this way, Menger has explained the process of exchange within two persons to the stage of perfect competition. Menger has also explained the different processes of exchange under monopoly. According to him, if only one unit of a commodity is brought for sale under monopoly, the highest price that the buyer is willing to pay for that unit becomes the exchange value of that unit. A little lower price than the highest price becomes the exchange value of the second unit (if there is any second unit). He has also shown that the price discriminating exchange process may also be possible under monopoly.
Menger has applied the subjective approach also to distribution or to the prices of the factors of production. He said that the prices of the goods of the higher order (capital goods) or the factors of production are determined by the expected prices of the goods of the lower order (consumable goods). In this way, he has used the marginal utility principle in determining the prices of all the factors of production. This theory of Menger is also called The Theory of Imputation. He has included the cost concept also in this theory.
2.1. iii. Marie Esprit Leon Walras (1834-1910)
Leon Walras was born in Evareaux of France in 1834. He was born in a well cultured family. His father was professor of philosophy and later on, became an economist. Leon Walras received a Bachelor degree in literature when he was 17 years old and a Bachelor degree in Science when he was 18 years old. Later on, he entered into the school of technology and engineering but he was not interested in these subjects. After obtaining the bachelor degree he served in different capacities as a journalist, a novelist, a railway employee, a bank employee, etc. But he could not be successful in any of these jobs. Later on, he, according to the suggestion of his father, started to study economics since 1858 in order to formulate a sociological science. He got an appointment in the post of professor of economics in the faculty of Law of The University of Laussane of Switzerland in 1871. Then after, he published a book "Elements of Pure Economics" in 1874. Besides this, he has also published may other books at different times. In his articles Leon Walras was very much impressed by the articles of his father Auguste Walras, Augustian cournot, Philosopher comte, H.H. Gossen, W.S. Jevons, Karl Menger, etc. and the French Revolution of 1848. The great astonishing fact was that he was failed two times in his examination of mathematics. But later on, he became a great mathematical economist and also established a mathematical school.
Walras has written many books. Among them, "Elements of Pure Economics" is the most important one. This book is divided into two parts as (a) Theory of Exchange and (b) Theory of Production. The first part was published in 1874 and second part in 1877. "Elements of Pure Economics" of Walras was published three years after the publications of "Theory of Political Economy" of Jevons and "Principles of Economics" of Menger, but Walras had not studied those books. As the economists like N.W. Senior, H.H. Gossen, W.S. Jevons, etc. did, Walras also has tried to make economics a pure science by separating the pure economics from applied economics and social economics. Walras, as Jevons did, have applied Mathematical method and as Jevons and Menger did, had applied the deductive method to this analysis. As Jevons did, Walras had also used the hedonistic concept in his analysis. In this way, the articles of Walras are supposed as a mid-way of the articles of Jevons and Menger in many respects.
Walras has considered all the material and immaterial goods having limited supply and utility the social wealth. As Jevons and Menger did, Walras also has stated that the price depends upon marginal utility. Walras has used the term Rarete (the term his father had used) in place of marginal utility. He defined Rarate (rarity) as the intensity of the last want satisfied. He held a concept that exchange values are proportional to rarest. He has also said that the exchange values depend upon the limitedness of supply. He further said that the will to make the marginal utilities equal leads a consumer to the act of exchange. According to Walras, two commodities being given, if the utility and the quantity of one of the two commodities varies in the act of exchange, the raret varies. Walras has constructed an equation of exchange on the basis of this fact. He has told that more than two exchange values may be included in his equation of exchange. In this equation he has told that there is a direct relationship between demand and price and there is no such direct relationship between supply and price. He has explained the general exchange equilibrium on the basis of functional relationship between these demand, supply and price. He has used too much mathematics in this equilibrium analysis. His equilibrium analysis is based on the following assumptions-
(a) Market is perfectly competitive.
(b) Each consumer should have his own utility curve for each commodity.
(c) Each consumer should have tried to maximize utility through exchange.
(d) Each consumer should have obtained maximum satisfaction at a time when the marginal utility and price of the good are equal.
(e) The demand for and the supply of each commodity should be equal.
On the ground of the above mentioned assumption Walras has explained the general equilibrium method by making the whole parts of the economy interdependent or by not separation any part of it from each other. He has considered the whole economy an integrated system. He held the view that price is determined in the same way in the whole market. By whole market Walras meant a product market and a factor market. According to him, the problem of price determination is solved at the time when the demand and supply of the whole economy are equal to each other and there is a state of equilibrium in the whole economy. When the economy is not in equilibrium the price of the commodity with a higher effective demand rises and the price of the commodity with a higher effective supply falls and finally the economy reaches an equilibrium state and the equilibrium price is maintained, he argues. In the process of explaining the general price equilibrium Walras has used a special term Numeraire. He said that Numeraire is the good which is used as a unit of account, not money. He has used this term Numeraire to solve his equation.
Marginal utility principle is a remarkable principle in the history of economic though. In the same way Leon Walras has a great name in it as an user of mathematics in economic analysis. He was a liberal socialist. Although he was a great supporter of individual freedom he favored government intervention in many areas. He held a concept that there should be government intervention specially in the areas of education, justice, security, transportation, labour, monopoly, monetary stability, etc. He suggested that perfect competition is also not always beneficial. According to him, perfect competition can provide maximum utility only upto a certain limit. He has also explained the determination of price of the factors of production. But his production theory is only a special form of the price theory. He has also explained capital in an incomplete way. He has considered perfect competition and static state the base in his analysis. In this way, the economic analysis of Walras is criticized on various grounds. But Leon Walras is supposed to be a founder general equilibrium analysis and the marginal utility school. He felt that the knowledge of mathematics is essential in economic principles. Walras died in 1910.
3. Contribution of Neo-classicists
The classical thought dominated the history of economic thought for about a hundred years from 1750 to 1850. In this context John Stuort Mill is considered the last classical economist. Mill himself was inclined to socialism in the later part of his life. After Mill, economists started to present economic analysis in a new way. The classical economists laid a special importance on production, supply and cost in their analysis whereas the succeeding economists started to lay special importance on consumption, demand and utility in their analysis. The analysis of the classical economists was objective whereas the analysis of the succeeding economists was subjective. These succeeding economists laid a great emphasis on marginal utility. Jevons, Menger, Walras, etc. are such succeeding economists.
On the other hand, when J.S. Mill was still living and before the publication of articles of Jevons, Menger, Walras, etc. Alfred Marshall had already started to present the analyses of Ricard, Mill, etc into figure and to write economic articles. Later on, his book "Principles of Economics" was published only in 1890. This book is considered an important contribution to the history of economic thought. The subjectivists and marginalists had tried to present their principles against the classical economic principles. But Alfred Marshall regarded the classical principle as the base of his economic principle. He tried to combine the classical principle and the marginal utility principle into one. His main objective was to reconstruct the economic principle on the ground of modern development and the changed circumstances. Therefore, he corrected and amended the classical economic theory in many places as necessary and presented his theory on its ground. He himself has said that his book "Principles of Economics" is only on effort to term the old principles into a new form in relation to the new problems of our age. In this way Marshall did not oppose the classical economic principle, but tried to combine the utility theory of the subjectivists and the cost theory of the classical economists into one. Therefore, Alfred Marshall is considered a pioneer of the Neo-classical age of economics. Now, let's explain some main economic principles of Marshall in brief.
3.1. Alfred Marshall (1842-1924)
Alfred Marshall was born in July 26, 1842 at Clapham in London. His father was a cahier in Bank of England and was of a harsh nature and domestic tyrant. He admitted his son Merchant Taylor's school at the age of 9. A. Marshall was fond of mathematics. Therefore, he joined St. John's College of Cambridge University at the age of 19 and received a bachelor degree in mathematics from there. After that he started to teach mathematics for some years for his living. He was anxious to improve the conditions of the poors of the society. Therefore, he started a deep study of economics since 1867. During the same period he came into contact with eminent philosophers like T.H. Green, Maurice, Sidgewick, etc. This contact led him to philosophy and he started to study the philosophies of Kant, Hegel, etc. During the same time, he also studied the evolutionary theory of Darwin, German Historical School, Relativity Theory, etc. Besides, he was also influenced by the writer like F.A. Walker, Cournot, Von Thunen, Austrain School, etc. He married with Mery Paley in 1877. After that he went to Bristol and become the principal of university college of Bristol upto 1881. He held a post of professor of Economics in Oxford University from 1883 to 1885. Thenafter he became a professor of economics in Cambridge University and continued this post upto 1908. He resigned this post in 1908. At that time he was 66 years old. Even after resignation he continued to work in Cambridge University for the rest of his life as an expert in research. He died in 1924.
Alfred Marshall was of a very shy nature. Marshall had started to study economics and to write economic articles even before the articles of Jevons, Menger, Walras, etc. appeared. But these articles were not published. His two books "The Pure Theory of Foreign Trade and the Pure Theory of Domestic Values" and "The Elements of Economics of Industry" were published in 1879 for the first time. He had prepared these articles with the help of his wife Mery Paley. Later on, his book "Principles of Economics" was published in 1890 and this book became world famous. Besides his other books "Industry and Trade", 1919, "Money, Credit and Commerce", 1924 and many other articles were also published. Let's now explain the economic principles of Marshall in brief.
3.1. i. Method of study
The concept of individual freedom of Adam Smith has influenced Alfred Marshall. Therefore, he laid priority to individual init in his economic analysis. The method of general equilibrium analysis was common in economic analysis during his time. But Marshall applied partial equilibrium analysis to his analysis. He had a concept that each economic unit should be studied separately, mutual relationship should be established among these economic units and all other things should be assumed as constant. In the same way, Marshall used Marginalist concept in his analysis instead of average concept. Because, he said that this marginalist concept makes any entrepreneur easier to reach the process of decision making. Although Matrshall himself was an efficient mathematician, he has not used mathematical method in his economic analysis. On the other hand, Marshall was also well acquainted with the inductive method of the historical method and the deductive method of the classical and Austrain schools. In this way, there was a conflict of methods among different schools. In this context, Marshall has accepted schmoller's saying that induction and deduction are both necessary for the science just as the right and left feet are needed for walking.
3.1.ii. Scope and Definition of Economics
The humanitarian writers like Ruskin, Carlyle, etc. the writers of historical school the writers of Austrain school; socialist writers, etc. were severely criticizing the classical concept of economics. Due to these reasons, economics was about to lose its existence and prestige in the society. At the same time, fortunately, Marshall tried to reestablish the lost prestige of economics by defining it in a new way. Marshall has defined economics as "political economy or Economics is a study of mankind in the ordinary business of life, it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being, thus it is on the one side a study of wealth, and on the other hand more important side, a part of the study of man." This definition of economics of Marshall is related to achieving material welfare. Therefore, this definition is also known as the material welfare definition, Marshall and his followers have made it a selfish science saying that it is a science which teaches us about how to achieve wealth. Marshall is partially agreed with the ideas of Adam Smith. Going ahead of Adam Smith, Marshall has said, economics is a science of achieving wealth, but more than that, it is a science to provide material welfare to the people. He said that this science teaches people to achieve maximum material welfare by spending wealth. Marshall was a humanitarian. He was deeply impressed by the economists like J.S. Mill, Jeremy Bentham, etc. He had tried to make economics a social, economic and applied science. He said that economics studies human behavior. This human behavior may be both good and evil. In this way, Marshall considered economics a normative science, not a positive science. He said that economics studies human behavior and it can be measured by money. Therefore, Marshall said that money is a convenient medium to measure human behavior and believed that human behavior is continuously changing. Therefore, he considered economic laws a statement of tendencies of human behavior. But he held a view that economic laws may not accept an appropriate result as the pure science like chemistry, physics, etc. does. Due to this reason he has stated that economic laws should be compared with the laws of eves and fides not with the simple and fixed laws of gravitation. Even then, Marshall has supposed that the economic laws are more certain and stranger than the laws of other social sciences like political science, ethics, etc.
3.1.iii. Want and their satisfaction
The prior economists laid less importance on the study of consumption. But Marshall placed a special importance on it. He said that consumption is the beginning and end of all economic activities. He said that consumer's demand determines all the business activities. He has also explained in detail the characteristic of wants and has divided wants into three parts as (a) Necessary, (b) Comfortable and (c) luxuries wants. He said that human wants are unlimited. People are motivated to labour to satisfy these wants. This labour improves the physical and mental health of the people and they feel pleasure after fulfilling their wants (objectives).
Marshall has also explained demand in detail in his book "Principles of Economics". Marshall's theory of demand depends upon consumer behavior. He said that demand is the quantity of goods demanded by a consumer at a fixed price, ceteris paribus. He has also said that any rational consumer desires to achieve maximum satisfaction or utility from his purchase. His theory of demand depends upon utility also and he has divided utility into two parts as (a) total utility and (b) marginal utility. He has also explained The Law of Diminishing Marginal Utility. This law tells us that an individual gets lesser marginal utility form each increase in quantities of a good that he has. Marshall has propounded the Law of Demand on the basis of this law. He has said, "There is then one general low of demand – the greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purcher, or in other words, the amount demanded increases with a fall in price and diminishes with a rise price." He has also shown in this law of demand that there is a close but inverse relation between demand and price and therefore, the demand curve has a generally a nature of slopping downwards from left to right (negative). Marshall has also developed a concept of The Elasticity of Demand on the basis of this Law of Demand. Marshall is considered the first person to develop the concept of the elasticity of demand. The elasticity of demand is a rate of change in (response) to demand with a change in price. He has made this elasticity of demand related to the monopoly price determination, tax determination, trade unions, international trade, etc. He has also developed the law of substitution (equi-marginal utility) on the basis of the law of marginal utility. This law is based on consumption of any two goods. According to this law, consumer gets in equilibrium or maximum satisfaction at a state where the marginal utilities and price of two goods are equal to each other.
Marshall has also explained the consumer's surplus (rent) on the very basis of the Law of Demand. The concept of consumer's surplus is also based on the Law of Diminishing Marginal Utility. He said that this consumer's surplus is a difference actually pays and what he is willing to pay for a good. Marshall has also related this concept of consumer's surplus to economic progress, production, monopoly price, value-in-use, value-in-exchange, international trade, tax determination, etc.
3.1. iv. Cost and Supply
After explaining demand and consumption Marshall has tried to explain production, His explanation of production is related to supply price. This supply depends upon the cost of production. Marshall has also explained the theory of supply in the same way s the theory of demand. For example, when a consumer gets utility from consumption a producer gets disutility from production. When a consumer tries to maximize his satisfaction a producer tries to minimize his cost, when the marginal utility of a consumer is diminishing the marginal cost of a producer is increasing, the law of substitution plays an important role in both the theories, etc. Marshall has divided cost into two parts as (a) Real cost and (b) Money cost. Real cost includes labour, abstinence, sacrifice, etc. Whereas money cost is the money amount to be paid for the use of the factors of production like labour, raw materials, capital, land, etc. All these costs determine supply. When the units of output are increasing the marginal cost of it is also increasing. Therefore, a supply curve has a nature of positive solve or slopping upwards from left to right just opposite to the demand curve. Or in the theory of demand, demand falls when price rises whereas in the theory of supply, supply rises when price rises.
In this way, after explaining demand and supply, Marshall has explained the process of price determination has unified the classical and Austrian theories. The classical theory has stated that the supply side (cost of production) plays an important role in determining price whereas the Austrian theory states that the demand side (utility) has a major role in it. But Marshall has stated that the price is determined by the interaction of demand and supply. In this context he has cited an example of a pair scissors. He said that although a blade (upper or lower) of a scissor may be active in cutting this act is possible only with a cooperation (meeting) of both the blades. He again states that although sometimes demand side is more active and sometimes supply side is more active, the price of any commodity may be determined only by the interaction of both the demand and supply. In this context, Dr. Marshall ha laid a special emphasis on marginal cost (supply side) and marginal utility (demand side). In this way, Marshall's theory of price determination is also called a dual theory for he has laid stress on both demand and supply sides. In this way, according to this dual theory, the equilibrium price is determined on the basis of mutual forces of demand and supply.
3.1. v. Time Element
While explained price determination Marshall has also explained the importance of time element in detail. He has divided the equilibrium price into three parts on the basis of this time element.
a. Very short-period or Market period Equilibrium
very short period is that period in which demand side has a prominent role in determining price. The price of any commodity is continuously changing but its supply side remains constant. Under this very short period, the production or supply period is merely of a day, two days, a week, two weeks, etc. according to the nature of commodity. Therefore, there can be no change in the quantity of goods made available for sale. In such a situation, the price is determined at a point where the changed demand curve cuts the fixed supply curve. Demand curve is changing and slopes from left to right downwards whereas the supply curve slopes straight upwards because supply is fixed. The goods like fish, vegetables, fruits, eggs, etc. are the examples of such market. Although there is an increase in demand the seller cannot increase the quantity of supply to earn a higher profit and although the demand falls he must sell the whole quantity at any rate. Because in the very short period, goods are perishable and they cannot be stored for a long time. Therefore, the supply side of the perishable goods of a very short period is inactive and the activity of the demand side determines price.
All the goods of the very short period are not only quickly perishable, some of them may be stored for a short period of time if necessary. Price falls rapidly specially when demand suddenly and rapidly falls. In such a state the seller wants to store all the quantities of goods as far as possible due to the fear of loose at this price. On the other hand, if the price has fallen only a little the seller wants to store only a small part of the quantity of goods. The price at which the seller cannot or does not want to sell goods is called the reserve price. Rice, pulse, clothes, etc. are the examples of such goods. The supply of such goods cannot instantly be increased at a time of rising demand but they can be stored for a very short period of time when demand or price falls and the quantity of supply may be reduced a little. Therefore, when demand rises, the supply curve of such goods slopes in the beginning upwards from left to right. But if demand is increasing continuously even after the quantity brought for sale is exhausted, in such a state supply remains constant and only price goes on rising and the supply curve slopes straight upwards. In this way, even in such a state, the demand side becomes more active and effective in the process of price determination and the supply remains just as passive.
b. Short period Equilibrium- In this short period also the price is determined by the interaction of demand and supply. A short period is a bit longer period than the very short period. In a very short period all the factors of production are assumed to remain constant and cost cannot have any effect on price. But in a short period, cost or supply side is a bit active. During this period fixed factors remain fixed but the quantity of supply may be changed by making changes in variable factors on the basis of a change in demand. Variable factors include raw materials, labour, etc. In short period, a firm or an industry makes a supply only at a point where the short-run marginal cost and price are equal to each other. The variable cost plays an important role in determining in this short period and a firm or an industry makes supply at a point where marginal cost and marginal revenue are equal. In this way, when there is a sudden change in demand in the short period, there is a slight change is supply and the price is determined by the interaction of demand and supply or the short-run equilibrium is achieved. During this period a firm may also earn abnormal profit or may also be in loss.
c. Long-period Equilibrium – Long-period is a period in which the supply may be sufficiently changed in comparison to a change in demand. During this period, all the factors of production (including fixed factors) are supposed to be variable factors. All the things like the size of the industry, machines and tools, organization, management, insurance, etc. may be changed when necessary. There is a sufficient time for the new firms to enter into the industry if there is a possibility of earning abnormal profit and also there is a sufficient time for the existing firms to quit the industry if there is a possibility of loss. In such a situation, supply may be completely changed as a change in demand and the piece is determined by the interaction of long-run demand and long-run supply or the long-run equilibrium is achieved. The price determined in this way is also called a normal (natural) price. According to Marshall, a normal price is that price which is determined by the economic activities of he long period. But in fact it is difficult to get a normal price for the economic activities or the demand and supply conditions are always changing. The real price in the market is always trying to reach the normal price. The arithmetical average of these real prices of the fixed period of time is known as an average price. Besides, a firm reaches an equilibrium state in along period perfectly competitive market at a time when the prices of goods, marginal and average costs of the firm are equal to each other. In this way, the supply side plays more important role than the demand side in determining price in the long period. All the firms are earning only normal profit and this normal profit is included in cost in the long period.
3.1. vi. Internal and External Economies
This term economies are an important part of Marshall's theory of production. The term economies may be considered a synonym to benefit. In the field of production there are two main trends like diminishing returns and increasing returns. Marshall has told that there is a diminishing return in a field where nature has a dominant role and an increasing return in an area where human beings have a dominant role. There is a constant return in between these two returns. The economies are obtained in an industry on the basis of the returns. Marshall has divided these economies into two parts as (a) Internal Economies and (b) External Economies.
a. Internal Economies – Internal economy is that economy which a firm gets when it increases its size of the level of production. A firm gets this economy only by himself while increasing the level of production and it does not have any effect on any other firm in the industry. Besides this, the internal economies received by each firm in the industry are different. The firms get such economies specially due to indivisibility of the factors of production and division of labour. The large firms use larger machines, tools, management, etc. in the process of production. But in the beginning these factors are not being used in full capacity. Therefore, as much the firm wants to increase the quantities of output as much the use of these factors increases ad the quantity of output starts to rise. This increased output reduces the average cost of he firm. In this way, a firm gets internal economies due to the indivisibility of factors, division of labour, etc.
b. External Economies- This external economy is that economy which is received by all the firms when the size of all these firm or the industry itself increase. In this way, the economy which a firm gets due to its external reason not due to internal reason is the external economy. When the size of industry increases, new firms enter into it. Among them, some firms supply raw materials and some use the wastage or by products of industry as their raw materials. In this way, there is a keen competition among all the firms when there is an increase in the size of industry. This keen competition reduces both the cost and the prices. Besides, many service consultants are also established when the size of industry is increased. Due to all these reasons, on the one hand, the quantity of output increases and on the other, costs starts to decrease. In this way, when the size of industry enlarges, all the firms in the industry get benefit. This benefit is itself the external economy of the firms, Prof. Marshall has defined these External economies as "Those dependent on the general development of the industry." This external economy of the firm is independent of its own production expansion. Or the firms individually have no role in this external economy. An external economy of any firm may be an internal economy for an industry or for the group of firms.
3.1.vii. Representative Firm
Marshall has also developed a concept of representative firm. Marshall has presented the concept of representative firm concerning the price determination in an industry. Prof. Marshall has said that the normal price of any commodity should be equal to the average cost of the representative in the long-run. He has further said that a representative firm is that firm which is run for a very long time, which has gained complete success, which is run by simple capable persons and which firm is general has received internal and external economies. Therefore, according to Marshall, a representative firm is a kind of average firm. The nature of this firm is always the same. The other firms in an industry are changing in accordance with time. The amount of profit and loss received by them is also changing. But there is neither a change in size nor in the amount of profit and loss of the representative firm. Such firm always earns only normal profit. A representative firm has this nature in the long-run not in the short-run. It seems necessary to use representative firm in order to find out how an industry or different times are getting economies and what is the condition of an industry when more and more factors of production are brought into use in it. Because in such a situation, all the firms in an industry cannot be analyzed simultaneously and one or two carelessly selected firms also cannot represent the real situation of the industry. Therefore, a carefully selected medium firm is said to represent the industry. In this context, Prof. Marshall has compared the industry with a large forest and the representative firm in an industry with a medium sized pious and clean tree. As a tree, in a jungle, which has crossed its child age and has not yet reached its old age, has a less possibility of possibility and backwardness, in the same way, the representative firm of an industry also neither earns abnormal profit nor gets in loss and earns only normal profit in the long-run. But such kind of representative firm may be not only one, but more than one. In this way, Prof. Marshall has named the representative firm to that firm which can represent the average condition of the industry. The internal and external economies received by an industry may be known by means of this average firm. The representative firm is always earning only a normal profit. This firm never changes and it is run by simply qualified and able persons.
3.2. viii. The Laws of Returns
Marshall has also expressed his ideas on the Laws of Returns. The returns are of three types as (a) Increasing, (b) constant and (c) diminishing returns. He has said that the law of increasing returns applies to the cultivation in the land of any new country. But this law is active only upto a certain time. After this time, this law turns into the law of diminishing return though the law of constant return. While talking about the laws of returns he has used many terms as marginal quantity, marginal return, marginal cultivation, etc. Marshall has also said that the law of diminishing returns applies to the area where the nature plays a dominant role, the law of increasing returns applies to the area where the human beings have a dominant role and the law of constant returns applies to the area where the nature and human beings play the equal role. He has related the law of diminishing returns to land (agriculture) and has expressed the view that the production in land cannot increase in the same proportion to an increase in labour and capital. He has said, "An increase in the capital and labour applied in the cultivation of land cause, in general a less than proportionate increase in the amount of production raised, unless it happens to coincide with an improvement in the art of cultivation. Marshall has also stated hat this law of diminishing returns is active specially in agriculture, fisheries, mines, etc.
3.1. ix. Distribution
Prof. Marshall has also explained distribution. Distribution refers to the distribution of national income and this national income is distributed among different factors of production as their remunerations. Among these different factors of production human beings work as labour force. As Karl Marx did, Marshall has also stated that human beings having an excess power over nature can produce move than their wants. Therefore, he has considered the distribution of this excess product in the society the main problem. Marshall was a humanitarian. He was always anxious to remove poverty from the society. He held a concept than a man struggling with the hand to mouth problem can make no progress. On the basis of these facts, Prof. Marshall has expressed his ideas on national income and its distribution.
Marshall has based his national income approach on the production side. He says, "The labour and capital of country acting upon its natural resources, produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds. This is a true net national income or revenue of the country or the national dividend." This national income itself is distributed among different factors of production as their remunerations. The remuneration is the price of the service of factors. Marshall has shown that this factor price also as the price of the commodity is determined on the basis of demand and supply. He said that the demand for factor depends upon its marginal productivity whereas the supply of it depends upon its marginal cost. On the ground of these facts Marshall has explained the remunerations of different factors of production like rent, wages, interest and profit.
a. Rent
Prof. Marshall has also expressed his ideas on rent. Ricardo had related rent only to land. Marshall has improved this fact. He said that the rent received from land is not a true rent for it also includes the amounts as interest, wages, etc. He has explained the excess produce than from the marginal land as rent and has divided the use of land into micro use and macro use. He said that the supply of land in macro use is perfectly inelastic and the landlord gets rent and the supply of land in micro use is perfectly elastic and the landlord does not get rent. In this way, Marshall had a concept that rent arises due to the inelastic supply, and the supply of factors of prediction other than land is also inelastic and they also get rent. Marshall has related this rent to two time periods as short-run and long-run. He said that the supply of man-made capital goods is limited as that of land in short-run and quasi long-run and they get rent as well. He has called such rent the quasi-rent. This concept of quasi-rent is Marshall's original concept. A change in price has no effect on the supply of such capital goods in the short-run. Therefore, when the demand for such factors rises in the short-run the price of them also rises. This price rise provides a certain surplus to the master of these factors. Marshall has said quasi-rent may be defined as short-run earnings of a machine minus the short-run cost of keeping it in running order". In the long-run this rent disappears. Because the capital goods earn more than the variable factors in the short-run. This earning is also called an unearned income. But is the long-run all the factors are variable and their costs are variable as well. In the long-run when there is an increase in demand for a factor, the supply of it also instantly increases. It makes the price of the factor equal to the fixed and variable cost by reducing the surplus earned in the short-run and in this way the quasi-rent disappears in the long-run.
b. Wages
The wage is the reward paid to the laborer for the use of his labour. This labour may be both mental and physical. Marshall has said that the determination of this wage rate also depends upon the demand for and supply of labour like the determination of price of all other factors. Demand for labour is a derived labour. Labour has a commodity producing capacity. Therefore, labour is demanded. On the other hand, supply of labour is influenced by various other factors. Marshall has said that the marginal productivity of labour falls when its supply rises and the wage rate falls too. He has also shown that the supply of labor is determined at a point where the marginal disutility and marginal utility of labour are equal in the short-run. He has also shown that, on the other hand, the supply of labour in the long-run depends upon the labour producing cost. He has included education, training, life maintenance, standard of living, etc. in the labour producing cost. In this way, he has shown that the wage rate is determined by the interaction of demand and supply sides of labour. Marshall has also considered the marginal productivity of labour an aspect of wage determination.
b. Interest
Prof. Marshall has also expressed his ideas on interest. His theory of interest is very much similar to The Abstinence Theory of Interest of Nassau William Senior. But Marshall has used the term "Waiting" instead of "Abstinence". He said that the economists call the sacrifice of present pleasure the abstinence but may rich persons spend a luxurious life and do not care of abstinence. Therefore, Marshall has considered the amount received as a return to capital for the postponement of or waiting for pleasure the interest. He has said "The payment made by a borrower for use of a loan is called interest and this term is used more broadly to represent the money equivalent of the whole income which is derived from capital." He has also shown that as the reward of all other factors, the rate of interest is also determined by the interaction of demand and supply of capital. Capital is demanded because it consist capacity to produce goods and utility. On the other hand, supply of capital depends upon savings, waiting, sacrifice, etc. The rate of interest is determined on the basis of the productivity of capital in the short-run. The capital is demanded due to its productivity and this demand is almost high in the short-run. Therefore, the rate of interest is almost high in the short-run and it is almost equal to quasi-rent. But in the long-run the rate