RH351 Rhetoric of Economic Thought Transparencies Set 7 Modern formalism, Chicago, and current trends

Marshall on method I never read mathematics now; in fact I have forgotten how to integrate a good many things… But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules – (1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them until you have done. (3) Translate into English. (4) Then illustrate by examples that are important to real life. (5) Burn the mathematics. (6) If you can’t succeed in (4), burn (3). Alfred Marshall

Mathematical formalism in economics – important milestones Cournot, Researches into the Mathematical Principles of Wealth (1838) Walras, Elements of Pure Economics (1874) Edgeworth, Mathematical Psychics (1881) Hicks, Value and Capital (1939) Samuelson, Foundations of Economic Analysis (1947) Debreu, Theory of Value (1959)

Mathematical Formalism in Economics -- Samuelson’s Foundations of Economic Analysis (1947)

General Equilibrium Theory

Mathematical Formalism in Economics -- Debreu’s’s Theory of Value (1959)

Mathematical Formalism in Economics -- Arrow’s Social Choice and Individual Values (1951)

Game Theory John Nash (1928 – ) John von Neumann (1903 – 1957 ) Oscar Morganstern (1902 – 1976) 2,2 4,4 5,0 0,5 a1a1 a2a2 b1b1b2b2 A B

The “Chicago” school of economics I n discussions of economic policy, "Chicago" stands for belief in the efficiency of the free market as a means of organizing resources, for skepticism about government affairs, and for emphasis on the quantity of money as a key factor in producing inflation. In discussion of economic science, "Chicago" stands for an approach that takes seriously the use of economic theory as a tool for analyzing a startlingly wide range of concrete problems, rather than as an abstract mathematical structure of great beauty but little power; for an approach that insists on the empirical testing of theoretical generalizations and that rejects alike facts without theory and theory without facts. Milton Friedman (1912 – 2006) Gary Becker (1930 – ) Canonical texts: Milton Friedman, Capitalism and Freedom (1962) Gary Becker, The Economic Approach to Human Behavior (1978)

The Rise of Econometrics

Financial Economics Pioneer in financial theory: Benjamin Graham, Security Analysis (1934) Modern portfolio theory and asset pricing: William Sharpe (1961, 1964) and John Lintner (1965) – Capital Asset Pricing Model (CAPM) Steven Ross (1973) – Arbitrage Pricing Theory (APT) Fisher Black and Myron Scholes (1973) – Option Pricing Model Financial markets and corporate finance: Franco Modigliani and Merton H. Miller (1958, 1963) – Corporate Financial Structure Eugene Fama (1970) --Efficient markets hypothesis

PAUL A SAMUELSON for the scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science. SIR JOHN R. HICKS and KENNETH J. ARROW for their pioneering contributions to general economic equilibrium theory and welfare theory. MILTON FRIEDMAN for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy GERARD DEBREU for having incorporated new analytical methods into economic theory and for his rigorous reformulation of the theory of general equilibrium GARY S. BECKER for having extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including nonmarket behavior Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (a.k.a. Nobel Prize in Economics) Some of the Winners …

AMARTYA SEN for his contributions to welfare economics. DANIEL KAHNEMAN for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty and VERNON L. SMITH, for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms JOHN C. HARSANYI, JOHN F. NASH and REINHARD SELTEN for their pioneering analysis of equilibria in the theory of non-cooperative games ROBERT LUCAS for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (a.k.a. Nobel Prize in Economics) Some of the Winners …