From Classical to Neoclassical

Economics
Disappearance of interest in the phenomenon of
economic development. Attention is focused on the
problems of allocating the given resources between
Neoclassical Economics alternative uses.
Stanley Jevons: "The economic problem can be
The General Economic Equilibrium formulated as follows: given a certain population with
various needs and powers of production, in possession
of certain lands and other sources of matter, the way to
employ labor must be determined in order to maximize
the usefulness of the product ".

With Samuelson, at the heart of every economic Method. Substitution principle. Consumption theory:
problem, there would be a simple principle: a substitutability between one basket of goods and
mathematical function to be maximized under another. Production theory: substitutability between a
constraints. combination of production factors and another.

Utilitarian approach. Human behavior is exclusively

reducible to rational calculation aimed at maximizing
utility. Hence the formulation of the theory of utility
value and marginal utility.

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Economic subjects. Subjects capable of making rational
choices with a view to maximizing an individual goal,
utility or profit. Minimum social aggregate, but
characterized by the individuality of the decision-making
unit, such as families or businesses. The classes
disappear.
Partial and general equilibrium
PARTIAL EQUILIBRIUM:
• LIMITED NUMBER OF VARIABLES
• CETERIS PARIBUS
• SIMILAR LABORATORY EXPERIMENT
GENERAL EQUILIBRIUM:
• VARIATION OF MANY (ALL) VARIABLES
• IDENTIFICATION OF DATA
• INTERDEPENDENCE RELATIONS
Ahistorical economic laws. Economics is assimilated to the
natural sciences, physics in particular. Economic laws take on
that absolute and objective character which is attributed to
the laws of nature. Time is logic not real.
The objectivist theory of value is replaced by a
subjectivist theory of value. All values are individual and
subjective. The ends are always individual. There are no
collective values that can be expressed as ends of groups
or social classes.
A few notes on the Gee ...
GEE
DESCRIPTIVE-
AXIOMATIC NATURE
EXPLANATORY NATURE
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 Descriptive-explanatory perspective Descriptive-explanatory perspective
(Walras and Pareto) (Walras and Pareto)
THEORY: EMPIRICAL-
REPRESENTATION SYNTHETIC EXPERIMENTAL

REALISTIC
RELATIONSHIPS
ARE
WELL PLACED REPRESENTATION
OF REALITY
WELL FORMULATED

Axiomatic perspective (Arrow and Fundamental elements in the

Debreu) construction of the GEE
AGENTS
META-THEORY: LOGICAL SIZES:
LOGICAL-FORMAL DATA
SPACES, POINTS,
RELATIONS ... GOODS

SOCIAL AND
MARKET
MATHEMATICAL
A POINT IN THE ORGANIZATION
THEORY BECOMES
ECONOMIC THEORY EUCLIDEAN SPACE
BECOMES A QUANTITY
BASKET OF GOODS
… VARIABLES PRICES

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 Explanatory principles of GEE

MOTOR OF REASONING WALRAS-PARETO DETERMINATION OF EQUILIBRIUM

MAXIMIZATION
CRITERION WALRAS-PARETO, EXISTENCE OF EQUILIBRIUM
ARROW-DEBREU, WALD

ARROW-DEBREU,
WORLD VIEW SONNESCHIN-MANTEL- UNIQUENESS OF EQUILIBRIUM
DEBREU
METHODOLOGICAL
INDIVIDUALISM
SAMUELSON
STATIC EQUILIBRIUM STABILITY OF EQUILIBRIUM
(NOT STATIONARY)

General Economic Equilibrium Léon Walras (1834-1910)

Determination of equilibrium: number of equations equal He can be considered the 'father' of the first complete
to the number of unknowns (Walras and Pareto 1906); formulation of the equilibrium (general economic);

Existence of equilibrium (Walras-Pareto and Arrow-Debreu
1954; Wald 1936);
Uniqueness of equilibrium (Arrow-Debreu; Sonneschin-
Mantel-Debreu 1972-4);
He studied economics under the watchful eye of his
father, in 1854 he enrolled in the Ecole des mines, but left
a year later. He was a journalist and writer until he
obtained the chair of political economy in Lausanne in
1870;

In 1874, 1st ed. of Eléments d’économie politique pure.

Stability of equilibrium (Samuelson 1947).

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The two volumes of the Elements of
Why General Economic Equilibrium?
pure political economy
THREE TYPICAL MARKETS:
EQUILIBRIUM IN THE WHOLE SYSTEM
PRODUCTION FACTORS SERVICES
EARTH, CAPITAL, WORK
CONSUMPTION GOODS GIVEN VARIABLES (CONSTRAINTS):
PRODUCTION RESOURCES;
NEW CAPITAL GOODS PRODUCTION TECHNIQUES,
PREFERENCES
+
SAVING

In these markets, "infinitely selfish and infinitely UNKNOWNS: PRICES

clairvoyant" economic subjects operate. AND QUANTITY

Social wealth
BUT THE PARTIES
INVOLVED COME The theoretical determination of equilibrium is carried out on
NO INSTITUTIONAL the basis of an accurate classification of the elements that
FROM CAPITALISTIC
FRAMEWORK (NO HISTORY)
ECONOMY make up social wealth.

PURE ECONOMY: THEORY

First distinction: capital and income.
OF SOCIAL WEALTH
SOCIAL WEALTH:
the set of tangible or intangible
things that are scarce, that is, Capital: goods that are not limited to a single use (lands,
things that are useful but that are personal capital, capital proper);
SCARCITY: available in limited quantities
SOURCE OF
VALUE Income: goods that run out in a single use (non-durable
goods and services).

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The equilibrium theory is structured in four
stages

The four markets tend to achieve the simultaneous

4 STAGES equilibrium of the set of variables present at the given
THEORY OF EXCHANGE moment and therefore valid for a production instantaneous.

THEORY OF PRODUCTION
The equilibrium coincides with the optimal
configuration, in the sense that, thanks to the full use of
THEORY OF CAPITALIZATION
all the production services offered, it is not possible to
increase the advantage to any of them without
diminishing the advantage of another.
SAVING

HOW IS THE EQUILIBRIUM

Drastic logical-economic assumptions
DETERMINED?
1. the entrepreneur reduces his long-term
AUCTIONEER behavioral motivation to the exclusive balancing of
costs to revenues, not realizing neither gains nor
losses in the financial statements.
PROCESS OF TATONNEMENT

SUPPLIES AND DEMANDS MEET AT THE

EQUILIBRIUM PRICE

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•
2. the second condition, constituting the same
3. the third condition, also organic to the
formulation of the EEG, is given by the equivalence
establishment of equilibrium, is given by the
of the value of the investments to the overall
constraint of full use of all the productive
savings, to be understood in the sense that
resources present, including work.
entrepreneurs cannot turn to the production of
new capital goods if not the exact amount (nothing
more, nothing less) than the savings of the
community.

Neo-Walrasian research program

4. the fourth condition applies to the equivalence of
the quantity of money needed for exchanges with the
value of 'real' income distributed to the production
factors and intended entirely for consumption and
investment (the latter identical to savings for the
second condition). The addition of the currency thus
constitutes little more than a "veil" spread over the
determination of the economic quantities of prices and
quantities as established by the previous "real"
equations of equilibrium.
The theory of general economic equilibrium was
developed by eliminating all its more uncertain
components (savings , prices of new capital goods, the
uniform rate of return and the monetary interest rate).
This was the so-called a 'neo-Walrasian' research
program resulting from an initial proposal by Gustav
Cassel in the theory of social economy (1918) and then
culminated in the axiomatic arrangement given to him
by Debreu in the theory of value (1959).

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 That entrepreneur with no gains or
losses
Walras distinguishes the entrepreneur from the
What economic significance can ever have an analytical
capitalist. The result is that it must break down the
representation that is independent of money and the
profit into interest on the capital and the business gain.
phenomenon of capital accumulation (the formation of
savings and its destination for investment), thereby
precluding the determination of strategic unknowns such
as the quantities and prices of capital goods produced, the
uniform rate of return and the monetary interest rate of
the system? In addition to labor, the entrepreneur buys the services
of capital goods on the factor market, paying their
owners (capitalists) a service price, that is, a profit-
interest on the cost price.

The profit on capital is very present in the Walrasian

representation, with the only difference that it figures as a The entrepreneur seems moved by two reasons for action:
cost for the entrepreneur and an income for the capitalist.
The rate of interest i, equal to r, represents this kind of profit.
But it's not about π.
the pursuit of maximum profit;

The zero profit of the Walrasian entrepreneur does not

concern the presence or absence of a profit or interest as a the search for optimum production, as allowed by the
return on capital goods, but rather the possibility of a profit- achievement of the position of maximum economic
gain also for the entrepreneur: π is this gain that is random. efficiency ensured by the minimization of average costs

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Following Walras, the entrepreneur arrives at a zero-profit
result, while still pursuing maximum profit. It is not true
that the Walrasian entrepreneur is not looking for profit.
The point is that the simultaneous search for 'maximum
efficiency' leads him to achieve minimum average cost,
which coincides with zero profit.
Conclusion
Frank Hahn (1980): “Adam Smith was the first to feel
the need to explain why this type of social order does
not lead to chaos. Millions of greedy, selfish individuals
who seek only the fulfillment of their goals and are
mostly free to do so without state control, resemble,
from the point of view of common sense, a foolproof
recipe for anarchy.
In this way Walras comes to demonstrate the principle
of the exhaustion of the product (if the production
function is homogeneous of the first degree, that is, if
there are constant returns to scale, then the product is
entirely divided among the production factors in
proportion to their respective marginal productivity),
the true point d'honneur of neoclassical theory.
Smith didn't just pose a question that was obviously
important, but he also pushed on the road leading to the
answer. The theory of general economic equilibrium, in the
classic formulation that Arrow and Debreu (1954 and 1959)
gave it, is practically the end of this road. But now that we
have reached that point, we find it less illuminating than
what we expected."
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 Vilfredo Pareto (1848-1923)
The greatest economist that Italy has expressed.
Engineer by training, he was also sociologist, political
scientist, philosopher, as well as an economist.
Of great mental versatility, Pareto was among the most
eclectic minds who lived in the second half of the
nineteenth and early twentieth centuries.
Main Pareto’s economic theoretical
innovations
Pareto efficiency or Pareto optimality (Cours 1896)
Ordinal utility approach (Manuale 1906)
Indifference curves (Manuale 1906)
Pareto’s main books
• Cours d’économie politique, 2 vols.
(1896-97)
• Les Systèmes Socialistes, 2 vols. (1902-
03)
• Manuale di Economia Politica, (1906).
French ed. Manuel d’économie politique,
(1909);
• Trattato di Sociologia Generale. 3 vols.
(1916). The Mind and Society: a Treatise
on General Sociology, (1935).
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