History of

Microeconomics
Module: Week 2
History of Microeconomics
In every society, choices must be made about what things should be
produced, how they should be produced and who should get them.

Economic theory is not a static body of truths; rather, it is an expression of

a perspective about economic activities during a particular historical period.

Microeconomics is the study of decisions, relationships and behavioral

patterns of individuals, families, organizations (firms, not-for-profit
organizations, etc), industries and markets.

Economics is a social science that provides the context to understand and

interpret the world about us
Pre-Industrial Economics
We might divide the history of economic
thought into three general periods.

One being the preindustrial period,

another encompasses the rise of
science

Second, Third period

Industrial that is the
mentality modern era
Pre-Industrial Economics
• During the Middle Ages, economic thought was influenced by
the process of reconciling the religious teachings of the old
and new testaments with the secular teachings of Aristotle.

• Economic thought of the Hebrews was primarily expressed

as laws or rules of conduct.

• Christianity grew out of the traditions of Judaic law and

consequently many attitudes about appropriate economic
behavior are similar.
Greeks
The Greeks are often regarded as the first
important contributors to Western culture.

It is commonly believed that the early man

evolved in Africa and began making primitive
tools 2.6 million years ago.

The Greeks lived in city-states and sustained a

level of economic development not surpassed until
the 12th or 13th century in Europe.
Greeks

Athens is best known as a center of

philosophy and the birthplace of
democracy.

Greek thought on economics tended

to be grounded in perceptions of
justice and morality.
Socrates [468-399BCE]
In Athens, Socrates had a number of students, among
the most important were Plato [427-347 BCE] and
Xenophon [430-355 BCE]. Both contributed to
economic thought.

Plato in turn helped a student, Aristotle [384-322 BCE]

whose writings served as the basis for philosophy during
the middle ages.
Plato [427-347 BCE]
Specialization results in increased production
because the individual has become more
knowledgeable about their craft.

The division of labor divides a craft into

smaller tasks.
Adam Smith [1723-1790]
Identifies the division of labor as a primary source of increased productivity
and the Wealth of Nations [1776].

For Plato, specialization has two effects. First it increases output and
improves the welfare of individuals in society by producing more goods and
services.

Second, it is a component of justice. Specialization promotes the

improvement of the individual by encouraging the development of the
individuals craft and knowledge about that craft.
Adam Smith [1723-1790]
He divides society into three groups with the “perfect guardians” or
“philosopher kings” (gold) responsible for ruling. The “auxiliary guardians” or
soldiers (silver) must protect society and aid in the administration of order
while the workers, farmer artisans or traders (bronze) produce goods and
services.

Slavery was accepted by Plato as a permanent characteristic of society.

Slaves tended to be individuals who were captured during war.
Aristotle [384-322 BCE]

Aristotle divided the concerns of economics into two separate

fields; one was oikonomiks the other chrematistiks.

Oikonomiks dealt with the production and consumption of

goods while chrematistiks encompassed the activities of
money making as well as some aspects of production.

Oikonomiks translated literally means "household

management" which referred to the latifunda or large landed
estate
Romans

The Romans and the Scholastics were also faced with

societies where economic growth was not seen as the most
important facet of economic life.
Mercantilism

Mercantilism was not without its problems. Its success,

particularly in Spain lead to the discovery of the "quantity theory
of money" and inflation.
Jeremy Bentham [1748-1832]

Jeremy Bentham, an English philosopher, laid the

foundation for British Utilitarian microeconomics
in his Introduction to the Principles of Morals and
Legislation.

Bentham presumed that human behavior was

rational and was directed by "felicific calculus," an
evaluation of the pains and pleasures associated
with each choice.
John Stuart Mill (1806-1873)
John Stuart Mill can be regarded as a transitionary writer, he connects
the Classical economists and Utilitarianism to the development of market
oriented microeconomics.

Mill clearly identifies the concepts of supply, demand and

equilibrium in his Principles of Political Economy.

The concept of elasticity is implied in Mill's analysis of equilibrium of

supply and demand.

Mill argued that the laws of production were immutable while the laws of
distribution and exchange were subject to change.
Marginalism
• Jevons is largely responsible for the
simplification of Bentham's utilitarian
philosophy as is has come to be used as a
foundation for mainstream microeconomics.

• Jevons' development of marginal utility or

what he called the "final degree of utility"
also leads him to a more simple form of
Utilitarianism.
Carl Menger (1840-1921)

Austrian, developed the concept of

marginal utility concurrently and
independent of Jevons. However, Menger
avoided "constructing it on a Benthamite
base" and argued that there were different
classes of commodities based on the
urgency of need.
Summary of Utilitarian Microeconomics

The British root of mainstream microeconomics emerged from

the philosophy of utilitarianism

The ability of a good to give pleasure was called utility.

Total utility of society was simply the sum of the individual

utilities which focuses the analysis on the individual.
French Rationalism and Microeconomics
The French rationalist root of microeconomic theory can be traced
from Cournot and the French engineers to Walras to Vilfredo
Pareto (1848-1923). The concept of utility is used (particularly by
Dupuit and Walras) but it is not the philosophical foundation of the
analysis.

. Public utility was based on real-wealth considerations induced by

changes in cost savings and were dependent upon the income
distribution.
French Rationalism and Microeconomics

Augustin Cournot is the best known of the early contributors to French rationalist
microeconomics.

Descartes, from which this philosophy stemmed, had also been the discoverer of
analytic geometry, whose system of coordinates now became the parade ground for
the display of the new approach to economics.

In the Chapter "Of the Law of Demand," Cournot perceives the quantity demanded as
a continuous function of the price.
French Rationalism and Microeconomics

Cournot's influence on the development of

microeconomics is through the work of Leon
Walras.

The general equilibrium model explains how inputs

used to produce a set of goods that will result in
the maximum social wealth.
Integration of British Utilitarianism
and French Rationalism

Modern, mainstream microeconomic theory is the

result of two separate philosophical foundations:
British Utilitarianism and French Rationalism.

The Utilitarian approach encourages the focus to

be on individual behavior and the optimization of
the welfare of the individual.
Integration of British Utilitarianism
and French Rationalism
• Was defined by Sidgwick as the
system that fixes as the reasonable
Egoistic ultimate end of each individual's
Hedonism action his own greatest happiness.

• Draws an analogy between the

Francis Principles of Maximum Energy
Ysidro (which he calls the highest
Edgeworth generalization in physics) and the
Principles of Greatest Happiness.
Integration of British Utilitarianism
and French Rationalism
Pareto was the successor to Walras at the
University of Lausanne whose name has
been associated with the basic criteria
used as a measure of efficiency --- Pareto
Optimality

Pareto's term, ophelimity was never

adopted by mainstream economists, so it
is not used here, however the distinction
is still of importance.
Conclusion
Production, distribution and consumption were perceived to be,
at least partially, ethical problems as well as economic
problems.

The perception created is that the demand function is a

representation of preferences, not an embodiment of ethical
principles.

If microeconomics is to be useful as a set of tools to analyze

problems and to evaluate alternatives, it is necessary to
understand what the tools were designed to do and to
understand their limitations.