In practice these theories did not always work, and it was noticed that prices in the market did not necessarily reflect the value so described, as people were often ready to pay more than an object was supposed to cost. So, the classical theory of value, according to which value was a property of an product, was gradually substituted by theories in which value was reflecting the relationship between the product and the person purchasing the product. This two-fold relationship later came to be called supply and demand. This was a real breakthrough, and it is known now as the Marginal Revolution in economics. The theories which developed from these ideas later came to be called neoclassical economics.
The framework of the Marginal Revolution and the neoclassical economics is as follows. Individuals, both buyers and producers, make choices at the margin. Buyers tend to maximize their gains from getting goods up to a certain point where what they gain from an extra unit is balanced by what they give up to obtain it. Thus they maximize and optimize «utility» – the satisfaction which they get while consuming goods and services. In the same way workers provide labour to employers by balancing the gains from offering the marginal unit of their services (the wage they are supposed to get) with the the loss of leisure.
In the same way producers maximize profits by balancing the revenue they generate with the cost of producing the marginal units of a product. They also hire workers up to the point where the cost of additional hands is balanced by the value of output that those hands might manufacture.
So, the neoclassical theories take economic agents into consideration. These agents optimize their gains against all relevant constraints. In this context value results from the collision of unlimited desires with constraints, or scarcity. The decision problems are reconciled in markets, prices being the signals whether the conflicting desires can be reconciled.
At some price of refrigerators, for example, I want to buy a new refrigerator. At that same price others may also want to buy refrigerators. But producers may not want to manufacture as many refrigerators as all buyers want. So, this may lead us to «bid up» the price of refrigerators, ousting out some buyers and encouraging some producers to produce more of the product we want. The price changing, the imbalance between buy orders and sell orders is reduced. This is how optimization under constraint and market interdependence lead to an economic equilibrium. This is the neoclassical outlook.
Слова и выражения:
accept – принимать
breakthrough – прорыв, открытие
collision – столкновение
constraint – ограничение, сдерживающий фактор
desire – желание
equilibrium – равновесие
framework – конструкция, структура
gain – приобретение; приобретать
gradually – постепенно
imbalance – дисбаланс
interdependence – взаимозависимость
involve – включать в себя, вовлекать, втягивать
leisure – досуг, отдых
margin – предел, маржа
marginal – предельный, маргинальный
maximize – увеличивать
neoclassical – неоклассический
optimize – оптимизировать
outlook – взгляд, мировоззрение
property – свойство, качество
reconcile – примирять
relevant – соответствующий, соотносимый
scarcity – недостаток
signal – сигнал
substitute – заменять, подменять
tend – стремиться, следовать тенденции, устанавливать тенденцию
utility – полезность, практичность, выгодность
value theory – теория стоимости
two-fold – двусторонний
came to be called – стал называться
Marginal Revolution – Маржиналистская Революция (маржинализм – теория предельной полезности и производительности)
extra unit – дополнительная единица (продукции)
give up – оставлять, бросать
take into consideration – принимать во внимание
economic agents – участники экономической жизни, экономических процессов
in this context – в данном контексте
bid up – набавлять цену
oust out – вытеснять
buy order – заказ на продажу
sell order – заказ на покупку
Exercise 9
Answer the questions:
1. What view did the economists in the XIXth century accept?
2. What did the value of a product depend on, in accord with the classical value theory?
3. How were products distributed, according to this theory?
4. Whose ideas did the classical theory have roots in?
5. Why didn\'t the classical theory work in practice?
6. What theories were the classical theories substituted by?
7. What is value, in the neoclassical view?
8. Where do buyers and sellers make their choices, according to the neoclassical view?
9. What is «utility», in the neoclassical sense of the word?
10. Who do neoclassical theories take into consideration?Rational Expectations Theory
The theory of rational expectations is based on the assumption that in many economic situations the outcome depends partly upon what people expect to happen. The value of a currency, for example, depends to a great extent on what people expect that currency\'s rate of depreciation to be. That is because people hurry to give up a currency that they expect to lose value, thereby contributing to its depreciation. In the same way, the price of shares depends partly on what the shares\' buyers and sellers believe it to be in the future.
The relation between expectations and outcomes is two-fold. In forming their expectations, people try to forecast what will actually occur, and the results of their forecasting, provided that they were correct, help them form expectations for the future outcomes. There is continual feedback from past outcomes to current expectations, as in recurrent situations the way the future unfolds from the past tends to be stable, and people adjust their forecasts to conform to this stable pattern.
The theory of rational expectations states that outcomes do not differ regularly from what people expected them to be. Of course, sometimes people make forecasting errors, but those errors will not persistently occur. The rational expectation theory thus provides a trustworthy basis for some economic theories which have evident political implications. Those are the «random walk» or «efficient markets» theory of securities prices, the theory of the dynamics of hyperinflations, the «permanent income» and «life-cycle» theories of consumption, the theory of «tax smoothing,» and the design of economic stabilization policies.
Traditionally economists believed that there was a positive relationship between people\'s consumption and their current income. The rational expectation theory debates this issue stating that people consume out of their «permanent income,» which can be defined as the level of consumption that can be sustained while leaving wealth intact. This has changed the way economists think about short-term stabilization policies, such as temporary tax cuts, designed to stimulate the economy. Formerly economists believed that tax cuts would increase disposable income, thus causing people to consume more. Now, in accord with the permanent income model, it is believed that temporary tax cuts have little effect on consumption because people are relating their consumption decision to their wealth, not their current disposable income.
Слова и выражения:
conform – согласовывать(ся), приспосабливать(ся)
continual – продолжающийся, постоянный
contribute – прибавлять, доставлять, привносить
current – текущий, современный
disposable – имеющийся в наличии
dynamics – динамика
error – ошибка
evident – очевидный
expect – ожидать
expectation – ожидание
feedback – обратная связь
formerly – раньше, изначально
happen – случаться
hurry – спешить
hyperinflation – гиперинфляция
intact – нетронутый
occur – случаться, происходить
outcome – результат, исход
partly – частично
persistently – настойчиво, постоянно
positive – позитивный, положительный
provided – при условии (что)
rational – рациональный
recurrent – вновь повторяющийся
smoothing – смягчающий
stabilization – стабилизация
sustain – поддерживать, длить(ся)
temporary – временный
thereby – посредством этого
traditionally – традиционно
trustworthy – надежный
unfold – раскрыть(ся)
wealth – богатство, состояние, благосостояние
to a great extent – в значительной степени
rate of depreciation – степень обесценивания, норма амортизации
two-fold – двусторонняя
random walk – подчиняющееся случайности движение ( наименование теории ценообразования на фондовом рынке )
permanent income – постоянный доход
current income – текущий доход
tax cuts – сокращение налогов
in accord with – в соответствии сExercise 10
Answer the questions:
1. What assumption is the theory of rational expectations based on?
2. What does the value of a currency depend on, according to this theory?
3. What do the prices of shares depend on, in the context of this theory?
4. What is the relation between expectations and outcomes?