Modern Microeconomics and Macroeconomics

Several Paths Mathematical

• Partial Equilibrium– Alfred Marshall

• General Equilibrium– Leon Walras

• Distribution– Wilfredo Pareto

Several Paths (cont.) Non-Mathematical

• Laissez-faire– Austrian Economics

• Institutional– Thorstein Veblen

Mathematical

M ath em atics an d M ic roecon om ics

A lfred M arsh a ll L eon W alras W ilfred o P are to

AnotoineAugustinCournot

The Merging of Paths Paul Samuelson combined Cournot, Jevons,

Pareto, Edgeworth and Fisher and concluded that economics analysis had primarily two concerns:• Equilibrium• Stability• Problem is that such formalism lead to little

importance of partial equilibrium and more emphasis on Walras general equilibrium

Paul Samuelson He had two texts that basically shaped the

economic profession between the end of WWII until about the early to mid 1970s• The undergraduate book, Economics, used

graphs and was basically followed the Marshellian model

• The graduate book, Foundations of Economics, basically followed Cournot and Walras

Samuelson-Hicks They took the geometry of the early 1900s and

after WWII converted to the mathematics of the 1960s and to the present

To where Hal Varian suggests that models be built using the KISS criterion:• Keep it simple, stupid• The idea being find a problem and find a simple model

and the generalized it• However the emphasis remained strongly partial

equilibrium

The counterweight Milton Friedman

• The approach became known as the Chicago School

• Approach is Marshellian• Economics as an engine of analysis rather than

an abstract work of economic modeling Gary Becker

• Took the simple concept of maximization to study a wide variety of issues

Modern Microeconomics Utility still holds a strong position in the

undergraduate study but game theory is slowly taking over at the graduate level

Pedagogy has created two different world: undergraduate and graduate….A Paul Samuelson legacy

Empirical Economics Econometrics is the merging of Mathematical

Economics and Statistics In other words, the formulation of hypothesis from

mathematical economics with statistics to formally test those hypotheses

Recall the earliest empirical work was the Gregory King and Charles Davenant law of demand

Henry Moore Used statistical procedures to test JB

Clark’s marginal productivity theory of wages, which predicted that MP=w

While there was problem with his analysis the important aspect of it was the fact that he used statistical tools

Henry Schultz Noted that one got a different elasticity of

demand if we regressed quantity on price or vice-versa

The importance here is that statistical measurement is not separate from theory

Macroeconomics Jevon’s Sunspot Theory

• Related business cycles to the sunspot cycles Henry Moore

• Trade cycles related to weather cycles

Heterodox Empiricist Wesley C. Mitchell

• Institutionalist • Saw statistics not as a way of testing economic

theories• Instead he saw theories as the stories one would

give to explain empirical observations• Initial approach of the National Bureau of

Economic Research (NBER)

Simon Kuznets Student of Mitchell

• Developed the modern national income accounting

Wassily Leontief organized data in the development of input-output models

Econometrics E. J. Working first discussed the

identification problem. If one correlates price and quantity does one get demand or supply

Ragnar Frisch and Jan Tinbergen develop first macroeconomic models• System of equations

Trygve Haavelmo Trygve Haavelmo is the first to argue that the use

of statistics in economics implied that one was searching for probabilistic theories.

In other words, the statistics were part of understanding economic theory…• Correlation between price and quantity does not explain

supply or demand

• Theory needs to be part of the statistical construct

Cowles Commission Alfred Cowles, wealthy investment advisor,

sponsored a commission in 1932 to use Trygve Haavelmo approach to examine economic issues

Commission was first set in Colorado Springs, in 1937 moved to Chicago

In 1950s moved to YALE

Other Issues Bayesian Econometrics Experimental Economists