An Outline of the history of economic thought - Chapter 6 potx

6 The Construction of Neoclassical Orthodoxy 6.1. The Belle E ´ poque With the end of the immediate effects of the agrarian crisis and the ‘Great Depression’ which had hit Europe between the end of the 1870s and the first half of the 1890s, Europe, the United States, and Japan launched themselves into a new wave of economic growth which sustained its rhythm until the First World War, and was particularly notable for the number of techno- logical innovations it produced. Some scholars speak of a second industrial revolution, a revolution carried over the thousands of kilometres of telep hone wires and electricity poles, on the wheels of millions of bicycle, motorcycles, and cars, and on the wings of the first aeroplanes, and which produced the mysterious concoctions of synthetic chemistry from carbon derivatives. The towns were bright with lights, and smooth roads were opened for the new means of transport. The mobility of the population inside and outside national borders increased enormously, almost as much as the mobility of capital, which, from the main financial centres of London, Berlin, and Paris, radiated to the most varied destinations. Countries which up to that time had remained at the margi ns of industrial growth—Sweden, Holland, Italy, Spain, Russia, Hungary, and Japan—leapt forward, while the European drive towards colonial expansion became more urgent, almost obsessive, even though it was not always economically profitable. Although the trade union movements, by this time well organized in many countries, were quite militant, sociop olitical institutions had become suffi- ciently flexible, and economic growth sufficiently self-sustaining, to allow many concessions to the workers, especially in regard to wages and working conditions, without provoking dramatic breaks in the expansive trend. This was also a period, therefore, of improvement in the standard of living of the lower classes, of urbanization, and of changes in consumption patterns. The simultaneous industrial growth in many economic areas necessitated some form of co-ordination of internati onal trade and finance. This require- ment was met by the Gold Standard, a monetary system that had evolved over the preceding centuries and that reached its high point in this period. With the Gold Standard, the national currencies were freely convertible into gold and the exchange rates tended to oscillate within a very thin band around the levels determined by the gold parities. This discouraged short- term capital movements, which are usually destabilizing, and encouraged, on the other hand, long-run foreign investments; at the same time it gave international trade the guarantee of safe and certain payments. It was not easy for individual countries to remain linked to the system, which required high levels of prosperity and sound monetary practices, but the periods during which this or that country left the system wer e brief. The Gold Standard was not such an automatic system as some literature has depicted it; but Great Britain had the financial resources and sufficient authority to put into practice the necessary adjustment mechanisms at the opportune moments. Technological innovations, financial stability, and relative social peace produced an impressive cycle of capitalist growth that was only surpassed, in intensity, duration, and number of countries involved, by the expansion from 1950 to 1973. The large factory, the new machine age, and the aspirin won over the popular imagination. Colossal international exhibitions held in the main industrial cities of the world enjoyed enormous public success, and also influenced literature, art, architecture, and music. The belle e´poque was a period of optimism and great economic transformation, even though it was marked, on the political side, by old and renewed national antagonisms; a situation that the new, potent military weapons made available by modern industry were to fuel until it exp loded in an armed conflict of unprecedented proportions. That conflict closed the belle e´poque. The marginalist scholars working between the end of the nineteenth century and the early 1920s conquered the academi c circles of almost all Western countries, and contributed to the creation of a new, dominant theoretical syst em. In Great Britain, Alfred Marshall, the most important figure of the period, established an authentic school of thought; but Francis Ysidro Edgeworth, Philip Henry Wicksteed, and Arthur Cecil Pigou also made first-rate contributions. In Austria, the rapid diffusion of the ‘Austrian’ approach was the work of Menger’s enthusiastic followers, Eugen von Bo¨hm-Bawerk and Friedrich von Wieser. In Italy, Maffeo Pantaleoni, Enrico Barone, and, above all, Vilfredo Pareto developed and popularized Walras’s teachings. In Sweden, Knut Wicksell and Gustav Cassel tried to blend the Austrian approach with Walrasian theory, giving rise to an original Swedish School. Finally, the two most important figures in the United States were Irving Fisher and John Bates Clark, to whom we owe the diffusion of the neoclassical theoretical system within the American academic and cultural circles of the time. The existence of various currents of thought and diverse national schools, often in bitter conflict among themselves, should not be under- valued. However, this should not prevent us from identifying a common denominator, a substantial unity of thought which, originating from the marginalist revolution, tended to emerge gradually and converge towards 197 the construction of neoclassical orthodoxy the construction of a unique theoretical system. As early as the be ginning of the twentieth century, pure economic theory was able to present itself as a compact doctrinal corpus; the turning-point in the early 1870s had finally produced a new theoretical system which would soon dominate the scene. 6.2. Marshall and the English Neoclassical Economists 6.2.1. Alfred Marshall By a thoroughly personal route, Marshall managed to offer the neoclassical paradigm an alternative theoretical outlet to that proposed by Jevons and, above all, a wider cultural perspective. The method of partial-equilibrium analysis was his great invention and personal contribution to economics. Unlike Walras, and the whole Continental tradition in general, Marshall tended to favour realism and the explanatory power of the theory, rather than the logical coherence and formal elegance of its results. It is for this reason that he overlooked the interrelations among markets, in order to concentrate on the equilibrium conditions of a single productive sector . His favourite analytical instruments were the concepts of ‘industry’ and ‘rep- resentative firm’. An industry is a group of firms producing the same good; a representative firm is an ‘average’ firm endowed with the most important characteristics of the industry. Of course, Marshall was aware of the numerous relationships of inter- dependence that link markets to each other. Walras, on the other hand, had recognized the practical usefulness of the partial-analysis method. The fact is that the two great economists were focusing on different audiences: Marshal l on the intelligent common man and, especially, on the businessman (this is why the formal mathematical aspects of his work are relegated to the appen- dices); Walras on colleagues and scholars in general (the notable mathem- atical apparatus of the Elements is accessible only to a few). It is important to point out that Marshall applied the partial-analysis method to goods mar- kets but not to productive-factor market s. For the latter, he too, like Walras, formulated a ‘general-equilibrium’ model in which the relations between the products and the factors of production play an essential role. Marshall is the classic example of the right economist in the right place at the right time. Victorian England was sailing at full speed through the final years of the nineteenth century. And, with economic growth, a great optimism spread about the destiny of the industrial society. Real average wages increased constantly and technical progress gradually reduced the length of the working week. A typical Cambridge intellectual, Marshall studied theology, mathemat- ics, and physics before finally coming to economics. He arrived just about the time when English academic circles were beginning to be influenced by the 198 the construction of neoclassical orthodoxy theories of Darwin and Spe ncer. Marshall studi ed Darwin’s theory of evolution, Christian moral philosophy, and Bentham’s utilitarianism, and managed to blend these three great streams of thought into an original synthesis. The result was a philosophy of evolutionary progress which implied that the whole society would tend to improve in material terms, and not only the strong and courageous few, as the social Darwinists had argued. In regard to his mathematical background, Marshall certainly benefited from being taught by the great physicist Maxwell and the mathematician Clifford. It was these influences that impelled him to introduce into eco- nomics the modern diagrammatical methods of setting out theory. Marshall’s main contribution to economics is the Principles of Economics. The book was published in 1890, but the first draft goes back to the early 1870s, the period when the marginalist revolution was beginning. It was an enormous success and gradually, especially in England, displaced Mill’s Principles as the basic textbook in the main universities; a great deal of the methodology used in that book continues to dominate microeconomics textbooks today. In particular, the famous ‘Marshallian cross’ has preserved its mystique. With it, the great economist tried to combine the theory of production of the classical authors with the neoclassical theory of demand which he himself ha d formulated. It is important here to point out that neither Jevons nor Walras had managed directly to connect the theory of utility to the theory of demand. Instead, Marshall, with the hypothesis of a constant marginal utility of money, related the marginal-utility schedule of one good to the consumer’s demand schedule, and in so doing formulated the theory of the ‘consumer surplus or rent’. The theory offered a way of measuring the return, in terms of utility, that the consumer draws from exchange activity. The idea is to compare the marginal demand price that the subject is prepared to pay for a given quantity of good with its market price. D(q) is the demand curve, p is the current market price, and q the quantity demanded. At price p 0 the consumer buys q 0 by spending a sum of money equal to the area Op 0 Cq 0 . However, he would be prepared to pay p 2 to obtain the quantity q 2 , p 1 to obtain the quantity q 1 , an d so on. This means that his actual outlay is lower than what he would be prepared to pay to obtain the desired quantity. Geometrically, this difference, which measures the consumer’s surplus, is shown by the area of the triangle D 0 p 0 C in Fig. 6. The most important scientific approach of the period in which Marshall was educated was that of Newtonian physics, an approach whose logical coherence and theoretical strength nobody doubted. The task Marshall set himself was to make economic science conform to the dominant scientific method, highlighting the robustness of its foundations, the continuity of its growth, and the universality of its principles. This helps us to understand why he was opposed to the controversies about fundamental questions: he 199 the construction of neoclassical orthodoxy believed that these could weaken the scientific status of the discipline. It was for this reason that Marshall did not accept Jevons’s attack on Ricardo, going so far as to argue that it was only because of an inappropriate use of language that Ricardo could have given the impression of not considering demand as a determinant of value. At the same time, Marshall maintained that the theory of supply and demand was not the scientific basis of eco- nomics. The central problem of economics, according to him, is not the allocation of given resources, but rather how the resources become what they are. The ‘science of activities’, as he called it, should have been a necessary supplement to the ‘science of wants’, but—as he stated in the Principles—if one of the two ‘may claim to be the interpreter of the history of man it is the science of activities and not that of wants’ (p. 90). Furthermore, the positive functions of competition were not defined by Marshall in terms of efficient allocation of resources, but rather in terms of the stimulus com- petition gives to the discovery of impr oved methods of production. 6.2.2. Competition and equilibrium in Marshall The invention of the theory of perfectly competitive equilibrium has been traditionally attributed to Cournot. Cournot developed a notion of partial equilibrium by studying a market isolated from the rest of the economy. He distinguished between two kinds of equilibrium: single-producer markets and many-producer markets—in other words, a monopoly equilibrium and a competitive equilibrium. The competitive equilibrium was seen as a limiting situation, namely as the state of the market that would be realized if none of p p 2 p 1 p 0 0 q 2 q 1 q 0 q C D(q) D 0 Fig.6 200 the construction of neoclassical orthodoxy the economic agents had monopolistic power. As we saw in Chapter 5, this way of conceptualizing the competitive equilibrium was rejected by Walras. The Walrasian system assumes that the agents formulate their own plans and implement their own choices by taking prices as given. Marshall’ s conception of competition and equilibrium is completely different from that of Walras, and rather nearer to that of Cournot. First of all, Marshall clearly distinguished between market behaviour and normal behaviour. The former concerns the quantity of goods actually bought and sold at a given moment and at a given price. The latter, instead, reflects what the single agent decides to buy or sell ‘normally’ over a certain time-span. The normal decisions depend on the ‘normal’ level of prices the agent expects to prevail during the period considered. Knowing, from experience, that the market price is usually different from the normal price, the agent will base his own daily decisions (if the day is the unit of time under consideration) on the current market price. However, his fina l aim is to realize, within the time span considered, his own normal decisions. The gap between market price and normal price will induce the agent to anticipate or delay the buying or selling of a certa in good, but will not change his own ideas of what normal behaviour is, the latter constituting a sort of fixed reference point. Marshall considered normal prices to be subjective evaluations of the prices that are expected to prevail on the market at a particular time in the future; it is on the basis of these expected prices that the single entrepreneur decides on the size and type of plant to adopt. Marshall was very reticent about the mechanism of formation and revision of normal prices, but denied that these could be obtained in a direct way from obse rved market prices, as their average or by extrapolating from their past trend. If there is a causal link between market and normal prices, it seems to run from normal to market prices and not vice versa. Second, there is a marked difference between Walras and Marshall in regard to their definitions of competition. In the Walrasian conceptualiza- tion, the agen t in perfect competition is a price-taker: he considers the prices as given and not capable of being directly influenced by his own behaviour. Marshall, on the other hand, believed that a perfectly competitive market is one in which a large number of agents operate; each has objectives which conflict with those of the others, and will try to pursue them without entering into coalitions or blocs and without using special bargaining powers. Mar- shall’s ‘perfect competition’ does not presuppose that each agent takes the price of goods as given, nor that the firms are identical (even though they must be ‘similar’). The small differences among firms play, in Marshall’s system, the same role as that of the genetic variations in Darwinian theory. Marshall distinguished between demand price, p d , i.e. the maximum price at which the demand reaches a pre-determined level, and supply price, p s , i.e. the minimum price that induces the sellers to offer a quantity equal to that predetermined. Given a certain level of demand, the market is in 201 the construction of neoclassical orthodoxy disequilibrium if the demand price differs from the supply price. A dis- equilibrium situation tends to trigger the follo wing reactions. If p d > p s , the sellers will react by increasing the volume of supply either by an increase in the production levels or by a reduction in the levels of inventories; vice versa, in the case in which p d < p s . In this way the existence of a disequilibrium produces first a variation in the quantities and only later, and as a con- sequence of these changes, a variation of prices. In general, Marshall’s sellers prefer to increase their own profits by acting on quantities rather than on prices, for the obvious reason that price manoeuvres may be difficult in situations close to perfect competition. The method that Marshall adopted led him inevitably to an analysis of the conditions of supply: in the movement towards equilibrium he admitted variations in quantities, not only of the products but also of the factors, if these are reproducible. This is a point of contact with Ricardian economics, but it is only a partial contact. Marshall did not accept the producibility point of view to the point of accepting the Ricardian theory of value. He adopted a theory based on real costs, but these were reduced to labour and ‘waiting’, as in the work of Senior and Mill. It is not by chance that Schumpeter considered Marshall’s theory of real costs as ‘the olive branch presented to his classical predecessors’ (History of Economic Analysis, p. 1057). 6.2.3. Marshall’s social philosophy In The Present Position of Economics, his inaugural lecture for the 1885–6 academic year, Marshall put forward the view that the main duty of eco- nomics is the calculation of benefits of social and industrial change, bearing in mind the fact that the same amount of money measures a greater pleasure for the poor than for the rich. This is the same as saying that overall welfare increases if the the distribution of the ‘social dividend’ is adjusted in favour of the poor, up to the point of levelling marginal utilities for all subjects. The defence of redistributive economic policies proceeds, according to Marshall, from the utilitarian principle that the ultimate goal of economic activity is the maximization of collective welfare. As a good student of Mill, Marshall was the initiator, within the neo- classical stream of thought, of that tendency which tried to reconcile a moderate laissez-faire with a reformist programme; and, just like Mill, he rejected the argument, put forward by the most determined free-traders of the period, that the only way to improve the conditions of the poor was to stimulate the egoism of the rich. His compromise position induced him to introduce into his system of thought principles and norms which wer e in clear contradiction with the dominant Spencerian ideology, and which brought him more than a little criticism. In Marshall, unlike Walras, there is 202 the construction of neoclassical orthodoxy an inextricable interweaving among the economic, social, and cultural spheres of human activity, and a strong link between material and moral facts—a link that had important consequences for his way of conceiving, for example, State intervention in the economy. Marshall was c oncerned to consider the main bearings in economics of the law of the struggle for existence, according to which ‘those organisms tend to survive which are best fitted to util ize the environment’ (p. 242). In par- ticular, he was concerned to defeat the argume nt, put forward by the Social Darwinists of the period, that the State should not intervene in any way to modify the process of natural selection. From Social Darwinism however, he borrowed the evolutionist conception of history, a conception well sum- marized in the quotation appearing on the first page of the Principles: ‘Natura non facit saltus.’ Human progress is slow, and moves forward in small steps. Attempts to change society quickly are doomed to failure and, if pursued, only produce misery. Marshall admitted that over the course of the slow evolution of the social institutions a particular structure could emerge which would lend itself to the exploitation of one social group by another. However, the survival of such a structure through time would prove that its merits outweighed its defects. This argument would apply especially to modern capitalism. Notwith- standing all its social costs and injustices, capitalism ensures productive and allocative efficiency and contributes to the elevation and progress of man- kind. Marshall thought that human nature, as it had developed over cen- turies of war and violence, and of ‘sordid and gross pleasures’, could not be changed in the course of a single generation. In fact, when Marshal l spoke of ‘sordid and gross pleasures’ he had already abandoned the pure utilitarian premisses. As we have seen with Mill, a social philosophy that discriminates between healthy and sordid pleasures is basically incompatible with utilit- arian philosophy. Marshall believed that the social and political dimensions of human action should always be taken into account by economics. The implications of this view for economic policy are notable. The State has the right and the duty to intervene in the economic sphere to regulate the market mechanism and to correct its distortions. His proposals for the introduction of corrective mechanisms such as co-operative movements, profit-sharing, arbitration on wages, and similar mechanisms into the English political-economic system seemed very modern to his contemporaries. 6.2.4. Pigou and welfare economics The principal aim of economics in Marshall’s Cambridge was understood in terms of welfare economics. The study of economic welfare must include, according to Marshall, the study of situations in which the market mech- anism ceases to produce the beneficial effects expected from it, i.e. the study 203 the construction of neoclassical orthodoxy of ‘market failures’. This was the main interest of Arthur Pigou, Marshall’s successor as professor of economics at the University of Cambridge. In the Economics of Welfare (1920), Pigou stated that the object of welfare eco- nomics is represented by the circumstances most conducive to the increase of economic welfare of the world or of a specific country. The hope was to discover which type of intervention, by the government or by private bodies, would most favour such circumstances. However, Pigou made an important change in emphasis: the analysis of the operatio n of the competitive process and the historical perspective, which were such important elements in Marshall’s syst em, gave way to formal analysis. Pigou’s most relevant contribution concerned his famous distinction between private and social costs. The main reason for the difference between the two categories was identified in the absence of constant returns. Pigou observed that, while industries with decreasing returns tend to become larger than is socially desirable, the industries enjoying increasing returns tend to remain too small. This led him to the conclusion that government inter- vention in the form of taxes and subsidies is ne cessary. Marshall hims elf intervened to criticize the conclusions reached by his student in 1912. He pointed out that the apparent inefficiency of industries with decreasing returns was due to the fact that Pigou was using static analysis to deal with dynamic questions. In fact, Marshall defined the law of increasing returns in terms of the improvements in the organization which usually accompany an increase in demand. And this is the meaning of the famous proposition according to which the part played by nature in pro- duction shows a tendency towards decreasing returns, whilst the part played by man shows a tendency to increasing returns; which is tantamount to saying that man continually fights to find new ways to loosen or overcome the bonds of nature. In theoretical terms, this implies a clear distinction between a static analysis, in which costs increase as a direct function of output, and a dynamic analysis, in which costs change through time owing to talent and hum an effort. This is exactly the road that led Marshall to admit the irreversibility of the long-run supply curve: it is not likely that economies of scale, once attained by means of general economic progress, will dis- appear, even if the output of the sector decreases. This implies the imposs- ibility of moving backwards and forwards along the same supply curve, and explains his suggestion that the curve should be redrawn each time ‘great additional economies a re introduced’. On the other hand it is important to point out that, with irreversible supply curves, the usual textbook description of the long-run equilibrium of a sector no longer makes sense. Marshall must have been aware of this, as in the fourth edition of the Principles he wrote: ‘The Static Theory of equilibrium is only an introduction to economic studies; and it is barely even an introduction to the study of the progress and development of industries which show a tendency of increasing return’ (p. 461). This insistence on growth and competition as the agents of progress 204 the construction of neoclassical orthodoxy is an important part of Marshall’s thought—a part which was not, however, perceived by his follower, obsessed as he was with the need to confer formal rigour on his master’s work. So Pigou, in his attempt to give an authorized interpretation of Marshall, ended up by translating his long-run analysis into the language of static competition, and this was later to pass into microeconomic textbooks. In the course of this translation, Pigou redefined the Marshallian representative firm as one in search of an equilibrium position, and identified the Marshallian equilibrium as the perfect competitive equilibrium. Moreover, the long-run equilibrium position of the firm was made to coincide with the minimum point of the famous U-shaped long-run average-cost curve, with which the whole problem of increasing returns was reduced to a mere question of external economies. By placing the concept of the equilibrium of the firm at the centre of his analysis, Pigou was finally led to define an industry as a collection of firms in static equilibrium. It was in this way that the most interesting parts of Marshall’s work, those concerned with dynamics, were left aside. All this was the work, not of an enemy, but rather of a ‘loyal but faithless Marshallian’, in the brilliant words of Robert son. 6.2.5. Wickste ed and ‘the exhaustion of the product’ Wicksteed’s name is irrevocably linked, not so much to his most ambitious work, An Essay on the Co-ordination of the Laws of Distribution (1894). This work contains the first explicit definition of the production function. There is also the first explicit formulation of the problem of the exhaustion of the product. We have already noted that we owe to Menger the idea of explaining all the distributive shares in terms of marginal productivity, but we recalled that Menger’s theoretical system, at that time, fell on deaf ears in England. While it is true that there are traces of the problem in the first edition of Marshall’s Principles, Wicksteed was the first scholar to treat the matter systematically. The same subject was tackled a few years later by Clark, Barone, and others, whom we will discuss later. Unlike the Ricardian approach, which adopts diverse theories to explain the different distributive shares, marginalist thought uses a single law, that of decreasing marginal productivity. All the factors are considered in the same way: they all receive a share of the national income which is proportional to their respective marginal productivities. The quantity produced is deter- mined by the sum of the resources employed, and depends on technological causes, while the remunerations of the factors are determined by the forces of supply and demand and depend on the structure of the markets. Produced income and distributed income are therefore independent magnitudes and determined according to different rules, so that there is no reason to expect them to be always equal. On the other hand, a situation in which the sum of the distributive shares is higher or lower than unity would be unacceptable 205 the construction of neoclassical orthodoxy [...]... study of the structure of factor markets, since it is in these markets that the prices of the factors and the quantities exchanged are determined From the marginalist point of view, therefore, the problem of distribution becomes that of formulating a theory of supply and demand of factors; a theory which is symmetrical to that of the supply and demand of goods, and which allows the demonstration of the. .. constant during the cumulation process Another important aspect of Wicksell’s thought concerns the theory of public finance and optimal taxation In Finanzteoretische Untersuchungen (18 96) , Wicksell applied marginal-utility theory to the public sector of the economy, reaching, on the one hand, the formulation of the well-known principle of benefit and contributive ability as the fundamental criterion of. .. in 1889 These two books make up the two parts of a treatise entitled Kapital und Kapitalzins The fortunes of the Austrian School at the end of the nineteenth and the beginning of the twentieth centuries were largely due to this book The work was to receive a mixed reception On the one hand, the neo-Bohm-Bawerkians of the 1 960 s ¨ and 1970s, led by P Bernholz and M Faber, tried to go beyond the limits... substance the quantity of which could be regarded as a ‘datum’ (p 5) This was a notable proposition, which anticipated the essential terms of the great debate on capital theory of the 1 960 s 6. 4.2 The Austrian School joins the mainstream The Austrian theoretical approach joined the mainstream of the neoclassical system in the 1920s and 1930s In order not to break our narration, and even at the cost of. .. the study of economics is utterly irrational’ (p 180) In other words, the economic sphere is defined by the impersonality of relations rather than by the self-interest of economic agents—a conclusion which today is more than ever at the centre of the debate on the anthropological foundations of economic discourse 6. 2 .6 Edgeworth and bargaining negotiation Edgeworth was a remarkable figure in the theoretical... versions of the quantity theory of money the price level varies in proportion to the variations in the quantity of money; but in these versions there is no relationship between the variations in the quantity of money, including bank credit, and the entrepreneurs’ production decisions Wicksell brought out this relationship and advanced the hypothesis that, in the absence of exogenous disturbances (those... the following year in the Quarterly Journal of Economics The shameful accusation was that it had broken away from the tradition of Marshallian thought: The Essay is a scanty and worthy account of the main assertions of the Austrian School; it is the creed of Prof Robbins, as a supporter of that school’ (p 377) The theoretical influence of the Austrian school reached its height in the early ‘thirties,... obtain significant results 6. 5.3 Barone, Pantaleoni, and the ‘Paretaio’ Pareto, in spite of his despotic and intolerant attitude towards the ideas of others, managed to surround himself with some of the best economic minds of his time, giving life to the famous ‘Lausanne School’ In Italy, the diffusion of marginalism was the work of two illustrious members of the school, Enrico Barone and Maffeo Pantaleoni... At the end of the First World War the third generation of Austrian economists came on to the scene There were two groups of scholars, one of which gathered around the key figure of Hans Mayer, the other around that of Ludwig von Mises In addition, we must recall two important figures who, albeit students of the second generation economists, came into a class of their own and did not share the Austrian... to the implication of the simple quantity theory, it is the quantity of money that adjusts to the price-level movements In his analysis, monetary equilibrium requires the satisfaction of the three following conditions: (1) equality between the natural and the bank rate of interest; or rather, since the natural rate is not an observable variable, the prevalence of a market interest rate capable of guaranteeing; . hand, the neo-Bo¨hm-Bawerkians of the 1 960 s and 1970s, led by P. Bernholz and M. Faber, tried to go beyond the limits set by the analysis of their master. On the other, economists like 215 the. M 0 the current- account bank deposits, V 0 the rate of turnover of the deposits, and T the transactions. No other mathematical formula in the whol e of economics, nor, perhaps, in any other discipline,. period, therefore, of improvement in the standard of living of the lower classes, of urbanization, and of changes in consumption patterns. The simultaneous industrial growth in many economic