Neoclassical Economics and the Second Industrial Revolution
Influence of the Second Industrial Revolution
The late 19th century saw rapid technological and production advancements, marking the Second Industrial Revolution. Key factors included the application of chemistry to industrial processes, advancements in transportation (steam navigation and railways), and the advent of electricity.
Key Differences from Classical Thought
Neoclassical economics differed from classical thought in two key aspects:
- Focus on Individuals: Neoclassical economics centers on individual actors, while classical economics emphasizes social aggregates like nations and classes.
- Theory of Value: Neoclassical economists viewed economic reality as a network of market transactions, focusing on supply, demand, and price formation. Classical thought, conversely, posited that value is determined in the production process before goods enter the market.
Neoclassical economists sought to understand individual behavior and how their minds influenced market interactions. Unlike classical economists, they believed that goods enter the market without a predetermined value, with prices being set by market forces.
Gossen’s Laws of Enjoyment
Gossen’s laws aimed to explain human behavior in terms of maximizing pleasure:
- First Law: The amount of enjoyment from something decreases continuously as it’s experienced without interruption, until satiety is reached (e.g., the diminishing pleasure of each subsequent bite of food).
- Second Law: To maximize enjoyment with limited resources and time, an individual must partially satisfy all desires, as full satisfaction of all is impossible.
The First Generation of Neoclassical Economists
Key figures included William Jevons, Carl Menger, and Leon Walras.
- William Jevons: Compared economics to mechanics, emphasizing the need for general, mathematically expressible economic laws derived from human feelings of pleasure and pain. He argued that value depends entirely on an individual’s subjective utility.
- Carl Menger: Focused on the individual as the basic element of economic behavior. He defined economics as the science of scarcity, concerned with limited goods. He believed that trade is mutually beneficial, with participants gaining more than they initially held.
- Leon Walras: Mathematically demonstrated the market’s efficiency in resource allocation through a system of equations, showing that equilibrium is achieved when supply and demand match under free competition.
The Second Generation and Beyond
Alfred Marshall, a prominent second-generation neoclassical economist, viewed economics as a tool for discovering concrete truths. Other notable figures included Friedrich von Hayek, Milton Friedman, and Lionel Robbins.
John Maynard Keynes
John Maynard Keynes, an English economist, challenged neoclassical orthodoxy with his 1936 publication, “The General Theory of Employment, Interest, and Money.” His work marked a new era in economic theory and policy. Keynes, who served as a Treasury advisor during World War I and a British delegate at the Versailles Peace Conference, opposed the harsh penalties imposed on Germany, predicting they would lead to German militarism and economic inflation.