Neoclassical School - 3: Development of Economics in the USA

For most of the 19th century, the US economy was protected by high tariffs. While industrialists were happy to be protected by these high tariffs, farmers complained. The high tariffs were unlikely to be reduced after the crisis of 1873. Therefore, the main discussion in the US focused on monetary issues and control of business rather than tariffs.

The US was discussing silver, gold and paper money systems, and economists were putting forward ideas on how to control business organizations that had grown especially with the construction of railroads and how competition conditions were being created. The first economics department in the US was established at Harvard University in 1879. A periodical academic journal called Quarterly Journal of Economics was also published by Harvard. The US's interaction with the economy was with Germany rather than England. Just as US universities are preferred by many parts of the world today, especially for master's programs, German universities were receiving similar attention in those years.

John Bates Clark (1847-1938), author of "The Philosophy of Wealth (1886), was educated at the University of Heidelberg, Germany, as a student of Karl Knies (1821-1898). Karl Knies came from the historical school of Germany. Clark was working under the conditions of the US economy in the late 19th century.

Clark was also committed to the concept of marginal utility. He found it appropriate to call marginal utility effective utility. He was not under the influence of Jevons, Menger and Walras because he was under the influence of Germany. He claimed that the value of a commercial good was determined by society, not individuals. His focus, which shifted from the individual to society, was different from Jevons, Menger and Walras. He particularly examined the conditions of competition. Because the discussions on the control of businesses in the USA had guided his work.

Clark spoke of two types of competition: conservative and deadly competition. Conservative competition referred to the efforts of competing firms to provide better and lower-priced goods and services than each other. Deadly competition, on the other hand, referred to a behavioral model in which moral values were abandoned. Clark included moral values in his analyses of competition. At that time, the conditions of competition in the United States were deadly. This situation strengthened the tendencies towards monopolization in competition. Firms were trying to push each other out of competition at all costs. Clark argued that a fair distribution could be achieved through cooperative-style formations and the profit-sharing method, and that factors of production should receive their share in the distribution according to their marginal contribution to production. He expressed this argument in his work "The Distribution of Wealth (1899)".

Static equilibrium analysis was the backbone of Clark's work. The price and quantity equilibrium did not change until a new technology was introduced. A technological innovation first increased the capitalist's profits. Then, wage increases entered the process and began to reduce profits. The equilibrium was re-stimulated by a new technological development.

It should not be forgotten that Clark produced his work under the conditions of the US economy as it advanced into the 20th century. He formed his ideas on competition, morality and social issues under the conditions of that period. His work distanced himself from Christian socialist ideas and pointed out that capitalism had created a structure that could be defended by his own views, moving to a more just system. Clark is seen as the first representative of academic economics in the US.

Simon Newcomb (1835-1909) was an astronomer and mathematician. He became interested in economics after being affected by the falling prices and wages that followed the 1873 crisis and the Bland-Allison Silver Act of 1878. Naturally, he made an effort to adapt mathematical formulas to economics and laid the foundations of Fisher's famous quantity theory.

Newcomb argued that in an environment where prices fell but wages did not, employment and production would fall. As a precaution against this situation, he argued that a new dollar should be created and the value of this new currency should be tied to the index value of a basket of products consisting of a certain number of products. He stated that wages should also change in parallel with this index.

Newcomb left the quantity theory with the formula V (velocity of money in circulation) x R (amount of money in circulation) = K (quantity of purchases and sales) x P (price level) to Fisher, a mathematician, and when his interest in economics ended, he returned to his studies in astronomy.

Irving Fisher (1867-1947) used intensive mathematics in his doctoral thesis "Mathematical Investigations in the Theory of Value and Prices (1892)" when explaining value with marginal utility. He left the psychological decision-making element of individuals to the background. The farthest point he went in terms of psychology was the determination that each individual acts in accordance with his wishes. He did not go beyond this point in terms of psychology. Fisher's theories on marginal utility were of interest mainly after the 1930s, and did not attract much attention during the period they were put forward.

Fisher was mainly concerned with issues related to money, capital and interest. In 1895, he transferred from the mathematics department of Yale University to the economics department and wrote "Appreciation and Interest" in 1896, "The Nature of Capital and Income" in 1906, "The Rate of Interest" in 1907 (rewritten as The Theory of Interest in 1930) and "The Purchasing Power of Money" in 1911. In his work written in 1896, he mentions the concept of real interest. For example, he explains that if the interest rate is 10% and inflation is 8%, the real interest is 2%. He explains the concept of real interest and the effects of real interest on saving and investment decisions. He claims that these decisions are affected by two issues: the current and future state of individuals' perspectives on consumption and the efficiency of capital. The level of consumption needs today and tomorrow and the level of return that will be generated today by the resource that will remain open due to the postponed consumption today determine the level of savings and investment.

Fisher developed the quantity equation inspired by Newcomb in "The Purchasing Power of Money". He made the quantity theory his own by including bank deposits, capital and interest in the equation. Today, no one mentions Newcomb's quantity equation. The reference is Fisher. The main argument in Fisher's equation is that the change in the money supply will affect the general price level in the long run, at the end of a transition period. Here, the relationship between inflation and interest is also defined. At the end of the transition period, a monetary change also affects production.

Fisher, like Jevons and Walras, tried to increase the scientific features of economics by intensively adapting mathematics to economics. He is the first example in the USA to switch from mathematics to economics and become a full-time academic. His approaches are not based on biology as in Marshall, but on physics and mechanics.

Another important figure who was inspired by economic and social developments in the USA was Thorstein Veblen (1857-1929). Veblen approached society from a Darwinian perspective. Among economists who adopted mechanical (physics) and evolutionary (biology) approaches, he preferred the side of evolution. He argued that human behavior varied according to the environment in which individuals were located (including those imposed by technological changes). Technological developments and changing conditions were changing individuals' habits of thought.

Veblen wrote "The Theory of the Leisure Class" in 1899, influenced by what he observed in American society at the time. He explained that conspicuous consumption could be used to determine a place for themselves in social life. Consumption could be used as a symbol of wealth. Veblen criticized the social structure that had such behavioral habits.

Veblen developed two important concepts while examining the industrial society side of the USA: the machine process and the enterprise. The existence of a standardized mechanical operation was much more important than manual skills for an efficient machine process. The entrepreneur did not ensure that the machine process worked smoothly, on the contrary, he wanted to cause it to break down and cause profitable speculations. Depression periods and manipulations provided profits by purchasing assets at low prices without performing any productive activities. Monopolistic tendencies created by purchasing other businesses or by advertising were also used as a way to make a profit without contributing to production. Veblen called monopolistic organizations created by the profit motive as parasites.

The machine process referred to a process in which the logic of cause and effect was constantly at work. Businesses were based on property. Veblen said that businesses dominated American society because businesses brought together different parts of the machine process. The existence of the machine process was necessary for business owners to make money. However, there were mutual contradictions between the two concepts. The logic of both concepts was different. On one side was the working class, and on the other side was the entrepreneurial class.

The entrepreneur saw property as a natural right, while the working class, not understanding the reasons that justified this natural right, was turning to socialism. In his work "The Engineers and the Price System (1921)," he claimed that the developments that would destroy the existing system would come from engineers, not workers. Because the cause-effect relationships of the machine process came to life on the knowledge of engineers. Like Marx, Veblen also said that the internal contradictions of capitalism would one day destroy the system. However, he claimed that engineers, instead of the working class, would play the leading role at this point.

Thorstein Veblen. Source: https://tr.wikipedia.org/wiki/Thorstein_Veblen

In Classical Economics and Neoclassical Economics, which Veblen defined as orthodox economics, human nature did not change. It was hedonistic, teleological and taxonomic.

Veblen was the first to use the term neoclassical in his article "Preconception of Economic Science." Until 1900, when the article was written, Neoclassicals were not aware that they were neoclassical.

With this article, we have completed the 5th article of the series. We are moving forward.