Neoclassical Economic Theory

Neo-Classical Economic Theory, Marginal Analysis,
Or The Revolution In Value and Dıstribution Theory

As I have said, this era (1870 to 1914) witnessed, along with renewed prevalence of the liberal ideology, a great renaissance, and array of new, further advances of economic theory of the main-traditional, liberal-and-scientific, general kind. There had been, as regards the progress of such theory, a relatively sterile interlude of about two decades after the first appearance of Mill's Principles. The Ricardian-classical theoretical system as expounded and improved by Mill had become, for all con­cerned with it, substantially a finished, static body of doctrine, repeated in the textbooks but no longer undergoing much further progressive growth and improvement. Outside the circle of its "orthodox" expo­nents, a good many other economists were dissatisfied with it, and vari­ous minor, scattered, and isolated theorists did produce, within that otherwise sterile interval of time, little-noticed studies which in various degrees and ways anticipated or resembled the new developments that were to conquer and dominate the field after 1870. In fact, the list of forerunners of those later developments runs much farther back, into the quite early nineteenth century. Diverse scattered writers in various countries, unconnected with the early classical school and unknown, until much later, to most economists, had done bits of work on the "mathematical" and "psychological" lines (see below) and had al­ready made some of the same "discoveries," which were later independ­ently renewed and more fully developed in the big theoretical "revolu­tion" of the era that I speak of. Probably Von Thünen Gossen, and Coumot were the most important of those earlier forerunners; but therevolution," i.e., its impact on the whole profession began when, in 1870-1871, W. S. Jevons in England, Karl Menger at the University of Vienna, Leon Walras in Switzerland (University of Lausanne), and (though he did not publish any of his work until much later) Alfred Marshall at Cambridge, England, all about simul­taneously, and independently of one another and of those forerunners, struck out on their differing individual variants of the new lines of economic-theoretical research involving, centrally, what came to be known as "the marginal utility theory of value."

As it appears now in retrospect, the totaTimovement which thus be­gan exhibits as a whole a striking unity-in-variety. In all it produced or included a large "family" of similar-and-different systems of economic theory, created in different countries and centers by different economists and "schools" or groups of them, as schemes of analysis differing among themselves in many important detailed respects, but all involving, in a broad sense, the same general theoretical vision. Although in the fol­lowing classification which in part is rather arbitrary, some of the groupings make less sense—have more internal diversity and less dis­tinctive characters as entire groups—than others, one may perhaps speak of the Jevonian, Austrian, Walrasian, Scandinavian, American, and Marshallian "schools," or varieties or variants of the "new" kind of economic theory, of this era.

W. S. Jevons led the way in England, and the later English theorists whose styles and views most nearly resembled his and who may perhaps be grouped with him or called "Jevonian"—even though these two were in many ways unlike each other and unlike Jevons, and though all three were equally brilliant, original, and independent—were Philip Wicksteed and F. Y. Edgeworth. Meanwhile, in Austria, at the Univer­sity of Vienna, there came on the scene at the same time with Jevons, but of course independently—these men and Jevons at first knew noth­ing of each other's work or ideas—the trio of first-generation leaders of the famous, still continuing, "Austrian school" of economists, Karl Menger, Eugene von Bohm-Bawerk, a.nd Frederick von Wieser. Mean­while again, at Lausanne, Walras—at the Same time with Jevons and with Menger et a]., but again in complete independence and isolation from them all—was producing his unique and impressive system of economic theory which, however, was to gain any wide vogue or in­fluence only in a later time and slowly, because it was fully "mathe­matical" in substance and expression, and intricate and difficult, and hence was at first and long remained beyond the reach or ready com­prehension of most economists. "Walrasian" theory did fairly soon be­gin to spread among Continental European economists of diverse na­tionalities, and find here and there among them various able adherents and exponents who went on improving it and adding to it or develop­ing it further on their own lines; and the ablest of all these later Wal-rasians was the great Italian figure, Vilfredo Pareto. In the English-speaking world, Walrasian (and Paretian) economics have only quite recently begun to be really widely studied and appreciated. But we are only halfway through my list of six general "groupings" of the great economic theorists of the last decades of the nineteenth century.

In the Scandinavian countries, two Swedish leaders became most widely known and influential, beyond as well as within those countries: the earlier and greater of these two was Knut Wicksell, and the later and less original, Gustav Cassell; but there have been many others in that able group. In the United States, the important theorists in the era that I speak of were fairly numerous and diverse and do not all belong in any single "school." J. B. Clark, F. W. Fetter, T. N. Carver, H. J. Davenport, and others developed systems considerably resembling that of "the Austrian school" and somewhat indebted to it, though each had much originality. F. W. Taussig remained, as a theorist, closer than others to the old, classical, Ricardo-Mill tradition, and only half absorbed or accepted the "new" ideas of his generation; but he had great wisdom, produced much good work, and taught and formed a great many younger American economists of outstanding merit. Irving Fisher stood out as the one great American mathematical economist—on his own, not Walrasian, lines. And now having glanced at all these groups I circle back to England and speak last of Alfred Marshall (of Cambridge University) and his pupils, admirers, and followers, the "Marshallian" school. This makes sense because Marshall, though he started to form his own system back in the time of the first appearance and impact of the work of Jevons, and included in it ideas similar to those of Jevons though arrived at independently, did not publish any of his main work or make his system as such known beyond the small circle of his Cam­bridge pupils until much later—1890—so that all the other "schools" I have mentioned were already flourishing before his emerged, so to speak, onto the world's stage. As we shall see hereafter, the Marshallian system was in some ways a broad "synthesis," combining elements or features of several of the other "new" ones of this era and of the old Ricardian classical tradition generally, more fully discarded in the other new schools.

Now I shail adopt here a doubtless arbitrary and criticizable, but fairly common and convenient, usage of the terms classical and neo-classical for designating general tvpes of economic theory, and use these terms as follows. By the "classical" theory of economics I mean the old, early-nineteenth-century theoretical structure which was created mainly by Ricardo and given on the whole its best full formulation or elabora­tion, with his own (Mills) revisions and additions, in J. S. Mill's Prin­ciples.And I use the term "neo-classical" in two different senses: in a very broad sense all the diverse, late-nineteenth-century theoretical structures that I have referred to, can, I think, be called "neo-classical"; whereas the Marshallian system, alone or uniquely, was "neo-classical" also m a narrower, special, strict, and emphatic sense.

The Jevonians, Austrians, Walrasians, and Americans (with the ex­ception or Taussig), and generally the Scandinavians (partially ex-ceptmg Wicksel) were prone to lay exclusive stress on their disagree­ments with and departures from the Ricardian-classical tradition, and regard their innovations or new concepts and analyses as making up a complete intellectual "revolution" or "new economics," having very little in common with the old Ricardian-classical economics. But this I trunk resulted in all these cases from a too narrow or exclusive con­centration of attention on the (indeed important) issues, questions, or matters of relatively detailed and technical, conceptual and logical significance, involved in all the innovations or new advances; and from a tendency to take for granted" and not fully realize the large amount of continuity that was there at the same time, as regards the broad, basic, underlying general outlook that was—with some changes even here indeed, but largely-carried on. All (in the broad sense) "neo-classical-economic theory had in common with the old Ricardian-classical type or theory, in the first place, the economic-liberal outlook and hence the same general conception of the province or field and over-all task of economic theory as such, i.e., to develop a full understanding or ex­planation of the abstract general "laws" or "principles" of the operation, functioning or processes of the liberal economy, or system of "free," private, producing enterprises and consuming households and competi­tive markets. And this carried with it, also, continuing work on much the same rangeof theoretical problems, concerning the "determinants" and modes of determination," in the working of that system, lof the exchange values or relative prices of the different products, the chang­ing allocation of all productive efforts and resources into different em-pJovments and resulting outputs or supplies of the different products, and the distribution" or division of all income, or the value of all out­put, into the "shares" going as wages, profits, interest, rent, etc., to the contributors of the different kinds of "factors of production" or pro­ductive services. In all the varieties of "neo-classical" theory, new and different and generally superior analyses of these problems were de­veloped, with the aid of new "conceptual tools" and reasonings, which led to largely or partly new and more "correct" and fuller "solutions" of the old problems. But there was to a great extent retention or con­tinuation of the early "classical" vision of the general character, struc­ture, and mode of operation of the liberal economy, and of the array and the interrelations of the main problems which should be investi­gated. Among all the "neo-classical" systems in that sense, the Marshall-ian system was "neo-classical" also in the special sense that it retained or carried on, and combined with (Marshall's version of) the "new" ideas, important elements of the old Ricardian-classical, distinctive analytical scheme, which the other "new schools" either wholly or more largely discarded.

All of the "new schools" together achieved a very considerable ad­vancement or improvement of the science on its abstract and "techni­cal," conceptual and logical or theoretical side; an advance beyond the primitive or rudimentary, Ricardian-classical theoretical analysis of economics, which had achieved little more than a relatively clear and systematic formulation of "common-sense" ideas about the subject matter, to a much more truly or fully "scientific" kind of analysis. The latter, in other words, was more fully precise and rigorous, thorough, penetrating, and logically unified, and could yield many insights not readily evident or available to the "common sense" of generally in­formed and intelligent but not specially trained or mentally equipped observers of and reasoners about economic affairs. There was still not very much truly scientific empirical research in economics, or effective work toward making the inquiry an empirical as well as a logical science; but the advances made in this era in theoretical research were also required and useful steps toward making more scientific empirical re­search possible later on. Yet along with all the real and important gains or advances that were achieved, there was I think a partly offsetting loss of some of the somewhat greater or relative "realism" in a meaning­ful sense, which Ricardian-classical theory, with all its crudity and de­ficiencies, had possessed. Although the latter had not spelled out so well, with full precision and logical rigor," all the implications of its basic insights; it had embodied on the whole a better intuitive grasp of the most important factors and connections in the real processes of the operation and development of the real economy. The "neo-classical" systems, in the process of improving theory as such, made it more ab­stract; and the new preoccupation with the work of perfecting the con­ceptual and logical details of the analysis, and working out all the exact implications of various possible sets of assumptions, or conceptual-visions of imaginable situations, entailed a partial withdrawal of attention from the effort to form and adhere to a realistic vision of the real world. Moreover, there was also, in neo-classical as compared with the old classical theory, an increased and excessive concentration on just "value and distribution" theory, or analysis of the competitive market system's way of determining the relative prices of the economy's different prod­ucts, and productive services and resources, and allocating the latter among different industries. There was no adequate continuing develop­ment of "aggregative" theory, of the whole economy's total output or income and the places and relations within that of total consumption, saving, investment, etc.; and theory of economic growth or develop­ment. Perhaps, however, all these limitations of "neo-classical" eco-nomic theory were or made up only the unavoidable and not excessive "price" of all its new, real, and great achievements, which on the whole outweighed them. And it would be futile to deplore the fact that the new advances made economic theory, as it had not been in earlier times, too intricate, "technical," and esoteric to be readily intelligible to a very wide public; although this change probably reduced its in­fluence on public opinion and actual governmental economic policies. Wot of course the "science" still did not gain enough prestige to make the public willing to accept the recommendations of economists without understanding the analyses behind them. Economics had to go through this phase of its development, which was of more value for its still later, further progress than for its current usefulness within this era.

Now I turn to consideration of the two main aspects of the innova­tions or novel elements in neo-classical as compared with Ricardian-classical economic theory. In a sense all these innovations were mathematical in form, i.e., in their conceptual and logical nature—even "hen expressed in ordinary language, not in the special "language" of athematics. And in substance the most important substantive innova-ions were in a sense "psychological," i.e., were comprised in the new analysis of "utility" or all the human wants and satisfactions, subjective eelings, and comparative estimates of the amounts of "utility" of differ-nt goods or goals or gains, or in short "motives," thought of as under-ying, producing, and directing human economic behavior. In other words, on its formal side, all the "new" economic theory systematically carried out—although often entirely or mainly in ordinary verbal lan-guage—applications of the concepts and logic of integral and differ­ential calculus to the task of analyzing the relations among the changes of variable economic quantities—"inputs" of work and of other re-"purces in production and "outputs" of products, and market supplies, emands, prices, costs, incomes, spendings, savings, investments, etc. and with the help of this new conceptual and logical apparatus, as applied in this particular field, the attempt was made to analyze fully—as Ricardian-classical theory had not tried to analyze—the psycho­logical or subjective backgrounds of consumers' demands, and evalua­tions of products, and the backgrounds in the same sense of all economic choices or decisions and actions; as well as greatly to improve on the older "classical" analysis of the other, not human-psychological, but physical or material part of the economic subject matter—the relations among the changes of the "tangible, objective" economic quantities or variables.