Volume I · First Edition · MMXXVI

economic.wiki

A living treatise on the architecture of value, exchange, and the slow accumulation of economic thought.

This is not a marketplace, a directory, nor a brochure. It is an open commonplace book for the discipline of economics — a digitised reading-room in which definitions, propositions, and the dense apparatus of footnotes form the navigational architecture itself. Each spread that follows is a self-contained typographic argument, set in the manner of the cloth-bound volumes from which our typographic tradition descends.

The reader is invited to scroll as one would turn the pages of a definitive text: deliberately, with attention to the marginalia, and with patience for the slow construction of an argument. We assume neither a hurried glance nor the casual eye of the consumer. We assume only the sustained attention of a reader willing to follow an argument through its consequences.

§ I. Prolegomena — pp. 1–4

§ II. Foundations of Value

On the Theory of Value

The question of what constitutes value precedes every other question in the discipline. From the labour theory of the classical economists to the marginalist revolution of the 1870s, the meaning of price has remained the central problem through which all subsequent doctrines have been compelled to pass †.

For Smith and Ricardo, the natural price of a commodity reflected the labour socially necessary for its reproduction; for Jevons, Menger, and Walras, the same price expressed the marginal utility of the last unit consumed (Fig. 1). The two formulations, though often presented as antagonistic, are better understood as complementary descriptions of the same economic surface viewed from opposite sides — the side of production and the side of consumption ‡.

Definition. The equilibrium price is that price at which the quantity supplied equals the quantity demanded, and at which no agent — given the prevailing distribution of preferences and endowments — can improve their position by altering their behaviour unilaterally. It is the still point of a moving system, identified only in the abstract.

We shall return to this definition repeatedly. It is, in a sense, the seed from which the remainder of the discipline grows: every model of trade, of production, of money, and of the business cycle is in part a commentary upon the conditions under which equilibrium is attained, sustained, or disturbed (cf. § IV).

Proposition I.

“The price of any commodity is, in the long run, the shadow cast upon the marketplace by the labour, the scarcity, and the patience that brought it into being.”

— Editorial Note, after Smith, Ricardo, and Böhm-Bawerk

§ III. The Marshallian Cross

Fig. 1. The Marshallian cross. The intersection of the demand schedule (D) and the supply schedule (S) determines the equilibrium price P* and equilibrium quantity Q*. After Marshall, Principles of Economics (1890), Book V.

§ IV. Money, Credit, and the Cycle

The Veil and the Engine

Money, the classical economists were fond of insisting, is a veil — an instrument that facilitates exchange without altering its underlying nature. The Wicksellian and Keynesian traditions, by contrast, observe that the veil is also an engine: variations in the price of credit alter the structure of production itself *.

Consider the rate of interest. In a barter economy it would not exist; in a monetary economy it expresses, simultaneously, the marginal productivity of capital, the social rate of time preference, and the willingness of central authorities to extend credit. The three need not coincide. When they diverge, the discrepancy is registered as a cumulative process — inflation, deflation, or, in the more troubling cases, an accumulation of misallocated investment that resolves only through correction.

Definition. The natural rate of interest is that rate at which the supply of voluntary saving equals the demand for productive investment, given the prevailing technology and preferences. The market rate is the rate actually observed. Their divergence, in the Wicksellian formulation, is the proximate cause of the price level’s movement.

From this elementary distinction follows a substantial portion of twentieth-century macroeconomic theory: Hayek’s account of the trade cycle, Keynes’s General Theory, the monetarist counter-revolution, and the rational-expectations synthesis are all, in part, attempts to specify the conditions under which the two rates re-converge (cf. Fig. 1, supra).

§ V. Index of Concepts

Index

  • Arrow–DebreuIII.2
  • Auction, WalrasianII.4
  • Böhm-Bawerk, E.I.3
  • Capital, marginalIV.1
  • Cobweb theoremIII.5
  • Comparative advantageII.7
  • Consumer surplusIII.3
  • Demand scheduleFig. 1
  • Edgeworth boxII.6
  • Equilibrium, generalII.4
  • ExternalityV.2
  • Friedman, M.IV.5
  • Game theoryVI.1
  • Hayek, F. A.IV.3
  • IS–LM modelIV.4
  • Jevons, W. S.I.5
  • Keynes, J. M.IV.6
  • Labour theory of valueI.2
  • Liquidity preferenceIV.6
  • Lucas, R. E.IV.7
  • Marginal utilityI.5
  • Marshall, A.II.1
  • Menger, C.I.5
  • Money, neutrality ofIV.5
  • Pareto efficiencyIII.4
  • Production possibilityII.3
  • Rational expectationsIV.7
  • Ricardo, D.I.2
  • Smith, A.I.1
  • Supply scheduleFig. 1
  • Time preferenceIV.2
  • Utility functionI.6
  • Walras, L.II.4
  • Wicksell, K.IV.3