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The neoclassical revolution was a shift from economics of production to economics of exchange. The study shows from an internalist point of view that one of the origins of the neoclassical revolution can be traced back to young John Stuart Mill, who tried to sort out a problem left unresolved by David Ricardo. Due to a peculiar reason that I would later clarify, he was led toward examining a pure exchange economy. In this setting, Ricardo’s cost of production theory of value was invalid. When Mills found the answer to this, he came to the following conclusion: “we must revert to a principle anterior to that of cost of production, and from which this last flows as a consequence,—namely, the principle of demand and supply” (On Laws of Interchange between Nations. First essay in J.S. Mill, Essays on some unsettled questions of political economy, 1844. Citation is made from Library of Economics and Liberty, 1844, I.19). This thesis caused a long-lasting and strong influence on the research programs in economics. The study describes how Mill’s thesis profoundly influenced three founding fathers of British neoclassical economics, namely, Stanley Jevons, Francis Ysidro Edgeworth, and Alfred Marshall. Different alternatives were researched and discovered, but it was Alfred Marshall, with his concept of demand and supply functions, who paved the way for today’s mainstream economics.
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Hicks preferred to use the term “catallacticist” instead of “marginalist.” I use the expression “neoclassical revolution” to indicate that the revolution comprises much wider changes of economic thinking.
For a more detailed account of the classical theory of value, see Shiozawa ( 2016a).
Hicks ( 1976) asked how we could explain the rise of catallactics. He examined possible explanations, such as the reaction to socialism and the real-world changes, but he denied these were major factors and advanced a thesis in which the main appeal of catallactics lay in its intellectual quality. Walras made it possible to consider the economic system as a system of interactive markets and Menger as adjustments of means to ends. Hicks considered that Jevons did not complete his system. In this sense, Hicks attempted to understand the neoclassical revolution on an internalist standpoint, but he did not mention the points that I raise in this chapter.
For simplicity, we assume that production is linear, that is, inputs and outputs are directly proportional.
There is no necessity to ask if it is proportional to toil and pain (or real cost after Viner).
It is widely reported in the literature that the minimal price or non-substitution theorem holds only when there are no fixed capital goods. This is a serious misunderstanding because the theorem is valid in the situation in which durable capital goods retain their efficiency within the depreciation period and are discarded thereafter. See Shiozawa ( 1975).
Sraffa might have been aware of this theorem in the form of what he dubbed “Borkiewicz’s dictum.” See Gehrke and Kurz ( 2006).
This became much more conspicuous because production adjustment speed became faster in many industries. Since the twentieth century, modern industrial firms have had less necessity to appeal to price adjustment in order to adapt to demand changes.
Blaug ( 2001, p. 159) reported that “the first appearance of subjective value theory and a demand and supply diagram-with price on the vertical axis as in Marshall-was in the fourth 1841 edition of Rau’s Grundsätze der Volkswirtschaftslehre (1826).”
Keynes cited the following economists on the side of Malthus: K. Marx, Silvio Gesell, and Major Douglas, who remained in the underworld.
For a detailed history on this connection, see Tabuchi ( 2017a).
A true solution requires these theories, as revealed by Shiozawa ( 2014).
The word “internal” here means “in the interior of the positive orthant.” Vertices are always on the boundary of a polytope and never in its interior.
From Fig. 1 itself, it is not clear that the wage rates of both countries are determined uniquely at the same time as prices. The international value system comprises wages of all countries and is uniquely determined when world demand lies in the interior of a facet or on an open domain of the frontier. See Theorem 3.4, Chap. 1 of this book.
Some call this point the “Ricardo point” or “Ricardo’s Limbo point.” Because these are not suitable names, I do not adopt them. The reason for my naming is given later.
For the existence of an internal vertex, it is necessary and sufficient that the permutation products have a unique strict minimum.
Ricardo’s footnote on the shoemaker and hatmaker (Ricardo; Sraffa 1951, p. 138, Library 7.30 footnote 20) is more ambiguous. He might have been thinking as we normally do by taking two ratios of two different industries for both countries.
This explains in part why A. A. Cournot ( 1838) introduced the concept of the demand function as early as 1838. Cournot was trained as a mathematician, In addition, mathematics education was much more developed in France than it was in England in the first half of the nineteenth century.
Expressions law/laws of demand and supply did not appear in Jevons ( 1871). By contrast, the expression “law of supply and demand” appeared twice in chapter 5 (V.47. V.48), and the expression “laws of supply and demand” appeared 18 times in 17 paragraphs, including the prefaces for the first and second editions.
Jevons cited the wrong pages.
In chapter 5 of the Theory, in which Jevons explained labor and production, he dealt with international trade under the headline of Various Cases of the Theory. He argued correctly when trade (“foreign commerce” in Jevons’s words) was excluded. This is the case in which ω 2/ω 1 = μ 2/μ 1 (Jevons’s substitutes for Ricardo’s four magic numbers), but, in order to study specialization, he had to analyze the case in which the two ratios were not equal (Jevons 1871, IV.42). See also footnote 27 on Turgot.
Turgot, in his unfinished paper Value and Money ( 1769), examined just this kind of situation. See Turgot ( 2011, pp. 173–178). Murray Rothbard considered that this was the first Crusoe economics (ibid, p. xiii). It is not certain if Jevons knew Turgot’s Value and Money. In Jevons ( 1871), Turgot’s name appears only as the author of Vie de Condorcet in the bibliography. In Jevons ( 1875), Turgot appeared once each in Chapters IV and VII, but there was no mention on Turgot’s theory of exchange. In the nineteenth century one of first references to Robinson and Friday appears in Bastia’s Chap. 6 Property and Plunder of his Selected Essays (Bastiat 1845, 6.63). I owe this insight to a hint by Giulio Palermo. Economic Sophisms (Bastiat 1848) contains three sophisms on the same theme.
Turgot ( 1769) did not make such an assumption in the two-person exchange case.
Jevons praised Mill’s theory of international trade as “ingenious” and “nearly always true” (Jevons 1871, IV.100). In addition, Jevons mentioned that he thoroughly concurred with his citation from Mill ( 1848): “Almost every speculation respecting the economical interests of a society thus constituted, implies some theory of Value” (Library IV.2).
It might have been possible because Jevons was an amateur economist.
Jevon’s main contention that “value depends entirely on utility” (Jevons 1871, I.2) does not apply to an industrial economy. If Jevons had claimed that the final utilities of two newly purchased goods are the same, he would have been correct, but this does not mean that final utility determines the values of goods. If goods are produced as much as they are demanded at the price set by producers, it is this price that determines the actual price. Final utility selects those who estimate it higher than the final utility of the payable money in exchange for the product. This does not determine the price but who buys the product at that price. More over, Jevons was inconsistent with himself. See Jevons ( 1871, IV.131).
Creedy ( 1992) emphasized the same point.
I question the use of “with the consent of all parties” and wonder whether it should be “without the consent of all parties.” Another possible solution is to interpret “cannot” as a typo of “can”.
The work of Marshall ( 1879a, b) contained the term “demand curve” but not “demand function.” However, we assume that “demand curve” is employed to express the demand function in the two-goods case. As Marshall adopted an exchange between a good and money, any function could be called, simply, a “curve.” Yoshii ( 2017, Chap. 8 in this volume) examines Jenkins’ contribution to the formation of the demand function concept.
The first bifurcation point was, as I explained above, Mill’s choice as the standard situation of international trade situation and the Mill–Jones point of the two-country, two-commodity economy.
Yoshii ( 2017) examined the same point from a different angle.
This misidentification partly explains why Marshall employed quantity instead of price as the horizontal axis, whereas he assumed that prices were given. The expense curve could be defined for any production quantity, provided that production were possible.
In Sidgwick’s expression, many commodities other than corn might exist. In this sense, he considered the two-country, multi-commodity economy, but we could represent it as a two-country, three-commodity economy. See Fig. 2.
Although Senior talked a lot about wages and profits, his Political Economy ( 1850) contains few discussions on how prices are determined.
Later in 1843, Senior published in Edinburgh Review an anonymous article titled “Free Trade and Retaliation.” Senior criticized Torrens that the latter’s claim was valid only when “each country possesses, against the other, a strict monopoly;—a monopoly unaffected by the existence of any third market or of any third commodity, capable of serving as medium of exchange.” Only in such case, “[t]he prices of the two commodities in question would be governed, not by the general and permanent regulator of price, cost of production, but by the occasional and disturbing causes, demand and supply.” (Senior 1843, p. 36)” Similar claim appears in p. 42. This implies that, in a more general case, the value of a commodity is decided by the cost of production. In fact, he claimed that “So far as the price of a commodity is not affected by any natural or artificial monopoly, it coincides with the cost of production to the producer. …That this is true with respect to domestic commerce, is obvious; it appears to us obvious, that it is equally true with respect to international commerce. (Senior 1843, p. 37) Thus by 1843, just before the publication of Mill ( 1844), Senior had a clear critical view of Mill’s “solution.”
Bowley ( 1937, chap. 6, p. 201) pointed out the possibility of two different ways of treating international trade: one investigates comparative physical costs, and the other analyzes in monetary terms. Bowley placed Ricardo, Mill, Taussig, Marshall, and Haberler in the first group and Senior and Ohlin in the second group. My understanding is 90 degrees different from her classification. By their theories of value, Senior, Mangoldt, and Sidgwick are much closer to Ricardo, because all three considered that the cost of production theory of value was applicable to international trade as well as to domestic exchange.
I reproduce this sentence with Negishi’s permission (postcard dated December 19, 2014).
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