Neoclassical School - 2: Historians and Theorists

The Neoclassical School had begun to be grounded in mathematics to a great extent with the efforts of Jevons and Walras to increase the scientific level of economics. Theoretical economics was making significant progress. However, there was a process of theoretical development in which abstract concepts were increasingly coming to the fore, especially with the contributions made to the microeconomic literature.

With the development of theoretical economics, two main trends began to be defined: historical and theoretical. The lines between these two trends, especially in the German school, were very clear. While the assumptions and the intensive use of mathematics and abstract concepts increased with the efforts to make economics a pure "economic science", the historical school tried to make inferences by analyzing economic relations within the historical process and to determine the rules of economics with the processes coming from history. In other words, there was a method discussion (methodenstreit).

An important name in the arguments related to the historical movement was Thomas Edward Cliffe Leslie (1827-1882). Leslie suggested using historical processes instead of abstract concepts by using case studies in historical developments. He took into account the development process of economic, political and social institutions, and said that competition and the freedom of movement of capital made economic relations extremely complex and increased the elements of uncertainty. He also stated that the laws of the economy were not universal and varied from place to place. These views are striking in that they are views with a very high level of foresight when today's economic structure is considered.

England, unlike Germany, discussed economics in an atmosphere where the line between historical and theoretical approaches was not so sharp. The main reason for this was the presence of Alfred Marshall (1842-1924), a professor of political economy at Cambridge who dominated economic studies in England from the 1880s until the 1930s, when the Keynesian revolution left its mark on economics.

Marshall tried to adapt the doctrine of John Stuart Mill (1806-1873) to mathematics in the 1860s. He examined supply and demand curves in a mathematical format. He was influenced by the German Rau, Hermann and Thünen in this analysis. Then, he read Jevons's "The Theory of Political Economy" and adapted the theory of utility to supply and demand curves. He dealt with the demand curve with utility analysis. As with Jevons and Walras, he reached the static equilibrium point with mathematical equations. However, instead of intensive use of abstract concepts, he adopted a realist perspective. He broke away from Jevons and Walras in terms of analyses based on abstract concepts. In his analyses, instead of a single general economic equilibrium, he adopted the concept of partial equilibrium by analyzing each market separately.

Economists have used the methods of physics and biology in particular throughout the 19th century. Marshall used the methods of biology and especially evolution. Jevons and Walras' analyses used the mechanical principles of physics, but Marshall was skeptical of this approach. He claimed that the behavior of an individual does not have the quality of data and that behavior can change according to the environment they are in. Again, within the logic of evolution, he explained that firms also have a life cycle and that firms that lose their effectiveness over time are replaced by new and effective ones in the market.

Marshall also made important contributions to the periodicity (short/long) analysis of economics and raised awareness on this issue. He suggested that the shortest period in the economy is the market period. He said that in the short term, demand determines the price. He determined that in short-term markets, where products that need to be consumed quickly (e.g. fish) are concerned, demand has a much greater power over price in the short term because supply cannot be activated quickly. He explained that in long-term markets, there is sufficient time for production and therefore prices will tend to fall in the long term with increasing supply.

Marshall also thought that economics should be included in the scientific classification as a science. Marshall was a mathematician. However, he explained that the use of mathematics in economics should not lead economics to very abstract concepts and make it unrealistic. In his works Principles of Economics (1890) and Industry and Trade (1919), he used mathematical equations as a basis for his work, but he did not make mathematics the focus of his works. For this reason, that is, because Marshall used mathematics as a tool and adopted realist approaches, a balance was created between the historical and theoretical schools. Therefore, as mentioned above, the sharp lines between the historical and theoretical approaches in the German school were not in question in England thanks to Marshall.

At the beginning of the 20th century, economics had become a branch where the theories of the marginalist movement were dominant and their scientific characteristics were strengthened. With Neoclassical Economics, economics had left behind the analyses of the Classics that took into account long-term dynamics. However, the concept of static equilibrium, which was mentioned in the previous article and in this article, began to be questioned and studies on cyclical fluctuations emerged. Schmoller's students Arthur Spiethoff (1873-1957), Mikhail Ivanovich Tugan-Baranovsky (1865-1919) and Albert Aftalion (1874-1956), who were influenced by Marx, were switching to dynamic analysis by examining cyclical fluctuations. Similarly, Joseph Alois Schumpeter (1883-1950) and Eugen Bohm von Bawerk (1851-1914), who were influenced by Friedrich von Wieser (1851-1926), became pioneers of theories of economic development.

There was an important conclusion reached by those who worked on cyclical fluctuations and development economics. With the gains provided by technological developments and innovations, the economy was moving from the current balance point to another balance point. When the opportunities created by technological developments were exhausted, the economy began to slow down and entered a depression period. The exit from the crisis period was only possible with a new wave of technological developments and innovations. In today's world, when we consider the speed of technological developments experienced in the USA in the 1990s and how it started to decline from the beginning of the 2000s, the evaluation of these analyses under today's conditions will become much more meaningful.

As the 20th century began, a major debate between historicists and theorists was over free trade. Theorists supported complete free trade, while historicists argued that economic policy should allow for free trade with a more protectionist approach.

Most of those interested in development economics were social reformists. In the development process of capitalism, there was a process in which the working class was gradually declining. Social reformists were not Marxists, but they thought that capitalism needed a change. In the USA, Henry George, in his work "Progress and Poverty (1879)", expressed his thoughts on the taxation of rent and developed ideas on the liberation of the working class from its unjust economic position.

In the process of capitalism's development, economics had become an academic discipline and was entering the 20th century. The United States was also contributing to the economics that was advancing in Europe with theories developed in England, Germany and Austria. In the 1850s, it was debated whether the studies conducted in the United States were derivative of those conducted in Europe. However, by the 1880s, the United States had begun to be accepted as a place of academic study in its own right.