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History of Economic Thought.

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Introduction

History of Economic Thought Carl Menger along with three other economists, Stanley Jevons, Leon Walras and Alfred Marshall, deserved to be considered as the pioneers of marginal utility theory that significantly changed the economic thought at the end of the 19th century (1870s) converting it from classical to neoclassical approach to economics. Their input into economics is very important since it dominates economics even now. Although Menger's vision on economics differs from the works of the other two economists, it did not prevent him to found Austrian school which was flourishing until 1930s and made the significant impact on the development of Economics. In this paper I will try to outline vision of mentioned economists and reveal the differences in their theories. According to the classical approach to economics, there were typically attributed differences in product prices to differences in the costs of producing those products. Products command higher prices because they are more costly to produce. However, in 1870s there was appeared a new line of explanation thanks to Mengor, Jevons and Walras. Although these economists had his own mode of presentation and expression, they were united in replacing this cost-of-production theory of pricing and resource allocation with a marginal utility theory. ...read more.

Middle

In addition to French economists, the English school, led by Alfred Marshall, developed the theory of supply and demand, integrating utility theory and classical cost theory with demand and supply curves. Marshall also developed theory of factor supply: invented concept of "real cost" as sacrifice (applying to capital as well as labour). Developing partial equilibrium analysis Marshall is considered to be practical since he applied this analysis to particular markets and industries. Comparing with Jevons and Walras, it is obvious that Menger used his analytical apparatus and not used mathematics in his work. For those economists, economics was basically concerned with the explanation of prices and resource allocation. For Menger theory, however, pricing and resource allocation were only of secondary interest, because he thought that mathematics would not be able to cover the complex reality of human nature. Menger considered that math can be used only where there is no change. Where Walras and other neoclassic economists stated that equilibrium pattern of prices should be view from a logic of marginal utility, Menger had different point of view and rejected the statement that the same product sell everywhere for the same price. Such price uniformity might arise in some historical settings, Menger would surely acknowledge, but the main problem would be to explain how such uniformity was formed, and not to impose it by assumption. ...read more.

Conclusion

Under socialism, there is no way to tell. Everything becomes guesswork. However in a free market, only individuals know the current situation on the market and if one wants to manage it centrally, he will be bound to fail. Free market allows people to bid for resources, which in turn generates market prices for these resources. People can make their own decision of what goods to buy or sell, and how to use them. The very act of buying a good at a particular price signals the producer to continue producing and selling this good. A market price summarizes the diverse knowledge of millions of individual human beings as they act in the market. The producer does not have to know why customers choose their products, only that they do. And profits are also knowledge signals in the market that direct resources into one industry and out of another. This is why Austrian economists have always been highly critical of central planning and strong supporters of a free market. Thus, Menger had very different vision of economics from Walras, Jevons and Marshall whether because of his view on subjective valuation, on disequilibrium, on his lack of mathematics - I should recognize that much of his work and insights have contributed to the development of modern economics, in general, and to the foundation of Austrian school, in particular. At present, their analysis of central planning is used by many prominent economists. ...read more.

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