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ECON301: History of Economic Ideas

Unit 4: Neoclassicism, Keynesianism, and Post-War Economic Thought   Modern thinking presents many challenges to historians. Because we lack the perspective of time, it is unclear which ideas will emerge as dominant strains of thought. Classifying new ideas into meaningful agglomerations is an uncertain and tentative process. In the midst of a contemporary debate, it is impossible to know which theories and debates will survive and which will be overturned. With these limitations, unit 4 will broadly discuss the two main strains of mainstream economic thought: neoclassicism and Keynesianism.

There is little agreement as to how to define a neoclassical thinker. Neoclassicism is mostly a microeconomic discourse, meaning that it only lightly considers the role of government. In general, neoclassical thinkers assume that people will act rationally, that the information needed to make decisions is available, and that people try to maximize their utility while firms seek to maximize profit. Each of these assumptions is simultaneously reasonable and flawed. Much debate centers on how to modify or interpret these three concepts.

Keynesianism is better defined, because it is derived from a single source: the writings of John Maynard Keynes. In general, Keynesians recognize that the free market may generate inefficient outcomes on the macroeconomic level. The economic role of government is fairly well defined as interventionist seeking to stabilize the macroeconomy.

The relationship between neoclassicism and Keynesianism has been dubbed the neoclassical synthesis.In other words, much of the 20th century has been devoted to understanding how these two schools of thought relate. There is an emerging third school known as monetarism, which was championed by the economist Milton Friedman.

Unit 4 Time Advisory
Completing this unit should take approximately 28.5 hours. ☐    Subunit 4.1: 16 hours

☐    Subunit 4.1.1: 13.5 hours

☐    Subunit 4.1.2: 2.5 hours 

☐    Subunit 4.2: 11.5 hours

☐    Reading: 11 hours

☐    Web Media: 0.5 hours

☐    Subunit 4.3: 4 hours

☐    Subunit 4.3.1: 1.75 hours

☐    Subunit 4.3.2: 1.25 hours

☐    Subunit 4.3.3: 1 hour

☐    Assessment: 2 hours

Unit4 Learning Outcomes
Upon successful completion of this unit, you will be able to: - explain neoclassical and Keynesian thought; - discuss how neoclassical and Keynesian thought form the basis for mainstream modern economics; and - analyze how monetarism relates to the neoclassical synthesis.

4.1 Neoclassicism   4.1.1 Jevons, Marshall, and Pigou   - Reading: William Stanley Jevons’s “Brief Account of a General Mathematical Theory of Political Economy” Link: William Stanley Jevons’s “Brief Account of a General Mathematical Theory of Political Economy” (HTML)
 
Instructions: Read this article by Jevons. Active in the late 19th and early 20th century England, Jevons was one of the early pioneers of the marginal revolution in economics, using a marginalist method for analyzing questions relating to the theories of value and distribution and later to theories of money, fluctuations, income determination, and growth.
 
Reading this article should take approximately 30 minutes.
 
Terms of Use: “Brief Account of a General Mathematical Theory of Political Economy” is in the public domain.

  • Reading: Alfred Marshall’s Principles of Economics Link: Alfred Marshall’s Principles of Economics (HTML)
     
    Instructions: Read book 1, book 3, chapter 13 of book 4, and book 5 of Alfred Marshall’s Principles of Economics. Marshall provides a substantial exposition for the marginal revolution in economics, using a marginalist method for analyzing questions relating to the theories of value and distribution and later to theories of money, fluctuations, income determination, and growth.  

    Reading these books should take approximately 9 hours.
     
    Terms of Use: Principles of Economics is in the public domain.

  • Reading: Arthur Cecil Pigou’s The Economics of Welfare: “Preface and Part I: Welfare and the National Dividend” Link: Arthur Cecil Pigou’s The Economics of Welfare: “Preface and Part I: Welfare and the National Dividend” (HTML)

    Instructions: Read the preface and part 1 of The Economics of Welfare. Pigou, Marshall’s successor at Cambridge University, elaborates on Marshall’s views. Pigou is well known for his work on externalities and the Pigouvian tax, which was intended to cover the social costs of a market activity not covered by the private cost of an activity – an example being environmental pollution.  
     
    Reading the preface and part 1 should take approximately 4 hours.
     
    Terms of Use: The Economics of Welfare is in the public domain.

4.1.2 Walras, Pareto, and Cassel   - Reading: Irving Fisher’s Translation of Léon Walras’s “Geometrical Theory of the Determination of Prices” Link: Irving Fisher’s Translation of Léon Walras’s “Geometrical Theory of the Determination of Prices” (PDF)
 
Instructions: Read the article, “Geometrical Theory of the Determination of Prices,” which provides a graphical representation of general equilibrium theory initially put forth in the form of Walras’s 1874 work, Elements of Pure Economics. Walras was the first economist to construct a complete general equilibrium model encompassing exchange, production, consumption, capital formation, and money. He specified the interrelations between these phenomena, studied their disequilibrium behavior, and described their conditions of equilibrium.
 
Reading this article should take approximately 1 hour.
 
Terms of Use: “Geometrical Theory of the Determination of Prices” is in the public domain.

  • Reading: Journal of Political Economy 5, no. 4: Vilfredo Pareto’s “The New Theories of Economics” Link: Journal of Political Economy 5, no. 4: Vilfredo Pareto’s “The New Theories of Economics” (PDF)
     
    Instructions: Read Pareto’s article, “The New Theories of Economics.” Pareto improved Walras’s comprehensive model and developed his own original theories. He agreed with Walras that the scope of pure economic theory is limited to facts and relationships where free will does not play a part and that the methods of positive science should be used in the study of all aspects of economics and of human behavior generally.
     
    Reading this article should take approximately 1 hour.
     
    Terms of Use: “The New Theories of Economics” is in the public domain.

  • Reading: The Economic Journal 30, no. 117: Gustav Cassel’s “Further Observations on the World’s Monetary Problem” Link: The Economic Journal 30, no. 117: Gustav Cassel’s “Further Observations on the World’s Monetary Problem” (PDF)

    Instructions: Read Cassel’s article, “Further Observations on the World’s Monetary Problem.” Cassel used Walras’s conception of general economic equilibrium as a basis for his work and carried a number of the specific constructions of Walras and Pareto forward in the stream of economic studies.
     
    Reading this article should take approximately 30 minutes.
     
    Terms of Use: “Further Observations on the World’s Monetary Problem” is in the public domain.

4.2 Keynes and Hayek   - Reading: John Maynard Keynes’s *The General Theory of Employment, Interest, and Money* Link: John Maynard Keynes’s The General Theory of Employment, Interest, and Money (HTML)
 
Instructions: Read Keynes’s The General Theory of Employment, Interest, and Money. Keynes was an influential British economist in the early 20th century. His work focuses on how to use government resources to manage the business cycle and smooth out the booms and busts of industrial economies. The General Theory of Employment, Interest, and Money describes methods to manage and guide national production. Trade is an important part of economic growth and fluctuates similarly to national economic cycles. Think about how the economy cycles and its impact on unemployment and well-being.
 
Reading this text should take approximately 7 hours.
 
Terms of Use: The General Theory of Employment, Interest, and Money is in the public domain. 

  • Web Media: Khan Academy’s “Keynesian Economics” Link: Khan Academy’s “Keynesian Economics” (YouTube)
     
    Instructions: Watch this video for a brief explanation of the Keynesian approach to problems with supply, demand, and prices.
     
    Watching this video and pausing to take notes should take approximately 30 minutes.
     
    Terms of Use: This resource is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy, and can be viewed in its original form here.

  • Reading: Friedrich von Hayek’s *The Road to Serfdom* Link: Friedrich von Hayek’s The Road to Serfdom (PDF)
     
    Instructions: Read Hayek’s The Road to Serfdom. Friedrich von Hayek was an Austrian economist spending most of his career at the London School of Economics and the University of Chicago. Published in 1944, The Road to Serfdom is primarily an attack against centrally-planned economies. Hayek thought that government has a role to play with regard to the monetary system, labor regulation, and institutions to foster and protect freedom of information among other issues and principles.
     
    Reading this text should take approximately 4 hours.
     
    Terms of Use: The Road to Serfdom is in the public domain. 

4.3 Post-War Economic Thought   4.3.1 Three Schools: Institutional Economics, Keynesian Economics, and the Chicago School   - Reading: New World Encyclopedia: “Institutional Economics”, “The Keynesian Economics”, and “Chicago School (Economics)” Link: New World Encyclopedia: “Institutional Economics” (HTML), “The Keynesian Economics” (HTML), and “Chicago School (Economics)” (HTML)

 Instructions: Read these three encyclopedic entries, which give a
synopsis of institutional economics, Keynesian economics, and its
antithetical counterpart, the Chicago school. The latter developed
primarily out of the Economics Department at the University of
Chicago in the 1950s and is associated primarily with the work of
one of its founders, Milton Friedman. Keynesian thought fully took
hold both academically and practically after WWII; the influx of
government war spending provided very strong evidence for Keynes
theory vis-à-vis the Depression. For the “Keynesian Economics”
reading, pay particular attention to the sections titled
“Developments after Keynes” and “Legacy.”  
    
 Reading these articles should take approximately 1 hour and 45
minutes.  
    
 Terms of Use: These articles are licensed under a [Creative Commons
Attribution-ShareAlike 3.0 Unported
License](http://creativecommons.org/licenses/by-sa/3.0/). The
original *New World Encyclopedia* versions can be found
[here](http://www.newworldencyclopedia.org/entry/Institutional_economics),
[here](http://www.newworldencyclopedia.org/entry/Keynesian_economics),
and
[here](http://www.newworldencyclopedia.org/entry/Chicago_school_(economics)),
respectively.

4.3.2 Monetarism   - Reading: The National Bureau of Economic Research: Milton Friedman and Anna J. Schwartz’s “The Role of Money” Link: The National Bureau of Economic Research: Milton Friedman and Anna J. Schwartz’s “The Role of Money” (PDF)

 Instructions: Read this article, “The Role of Money,” for insight
into 20<sup>th</sup> century monetarist economic thought.  
    
 Reading this article should take approximately 45 minutes.  
    
 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Reading: The University of Chicago Magazine: Michael Fitzgerald’s “Chicago Schooled” Link: The University of Chicago Magazine: Michael Fitzgerald’s “Chicago Schooled” (HTML)
     
    Instructions: You received a brief introduction to the Chicago school of thought in subunit 4.3.1. Read this article on the Chicago school, which developed out of the Economics Department of the University of Chicago. From the 1950s onward, the Chicago school was primarily associated with the theory and framework surrounding monetary policy as developed by Milton Friedman.
     
    Reading this article should take approximately 30 minutes.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

4.3.3 Post-War Neoclassical Microeconomic Thought   - Reading: The Saylor Foundation’s “General Equilibrium Theory: Theory vs. Praxis” Link: The Saylor Foundation’s “General Equilibrium Theory: Theory vs. Praxis” (PDF)

 Instructions: Read this essay on developments from the interwar
period to the present day associated with the central framework
behind neoclassical economic thought in the form of general
equilibrium theory.  

 Reading this essay should take approximately 1 hour.

4.4 Unit 4 Reading Questions   - Assessment: The Saylor Foundation’s “Unit 4 Reading Questions” Link: The Saylor Foundation’s “Unit 4 Reading Questions” (PDF)
 
Instructions: Complete this set of reading questions, referring to the primary texts for this unit as needed in order to support your ideas. Try to locate a passage which you can draw from and expand upon in order to answer each question, and in your own words, sketch out a brief interpretation of the passage’s meaning. Post your responses to these questions on the ECON301 discussion forum, as well as review and respond to one or two other students’ posts. When you are done – or if you are stuck – check your work against The Saylor Foundation’s “Guide to Responding to Unit 4 Reading Questions” for some notes on possible answers.

 Completing this assessment should take approximately 2 hours.