12 THE STATE OF
MICROECONOMICS:
An Historical Perspective
K. H. Hennings
The state of microeconomics is in many respects unsatisfactory. This is as it
should be. Only a stagnant discipline does not present new problems that need
to be solved by at least partial change. It is natural, therefore, to ask in what
respect microeconomics as a discipline has been changing, and whether ideas
have been cast away in the process which it might be worthwhile to take up
again. I will indeed contend that microeconomic analysis has undergone
important changes in the last hundred years, and that some of its aspects which
are found wanting today are in fact the result of these changes. In particular, I
will argue that some of the answers provided by modern microeconomics are
unsatisfactory because the problems that are posed today differ from those
posed a hundred years ago.
The development of microeconomic analysis is intimately tied to the
development of neoclassical economic theory. It is true that there is hardly a
textbook on microeconomic theory which does not invoke the name of Adam
Smith. It is equally true that there are some pertinent truths about markets,
about entrepreneural behavior, and about the force of competition in the
Wealth of Nations, as there are in Richards Cantillon's Essai sur la Nature du
Commerce en General (written in the 1730s, published in 1755, and known to
Adam Smith), and, it should be added; in John Stuart Mill's mid-19th century
L. Samuelson (ed.), Microeconomic Theory
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© Kluwer-Nijhoff Publishing 1986
266 MICROECONOMIC THEORY
restatement of classical doctrines in his Principles of Political Economy (1848).
On the whole, however, classical political economy had little to say about
microeconomics if that term is taken to designate an analysis of the economic
behavior of individual economic agents such as consumers, firms, or en-
trepreneurs, and especially their interaction in markets.' Microeconomic
analysis in this sense came to the fore with the growth of neoclassical economic
theory in the 1870s and 1880s. Indeed, between the 1880s and the 1930s
microeconomic analyses were the very core of economic theory. This was so
much the case that the term "microeconomics" became common only in the
1940s, when the Keynesian Revolution and the ascent of aggregative analyses
made it necessary to distinguish between microeconomics and macroecon-
omics. Boulding's textbook on Economic Analysis (1948) was, as far as I am
aware, one of the first to put these "two main branches to modern economic
analysis" on an equal footing. 2 The distinction is older, and goes back at least
as far as Wicksell, who devoted one half of his course on economics to
microeconomic analyses, and the other half to monetary economics.
Significantly, however, Wicksell subtitled the first half "theoretical economics,"
because to him and his contemporaries economic theory was almost synony-
mous with microeconomic analyses. One reason why macroeconomics came to
acquire a standing equal to microeconomics in the 1940s was that the
microeconomic analyses, which had been almost all there was to economic
theory, had undergone changes which altered the questions asked and answers
provided so much that it came to be thought that certain problems could not be
analysed within the framework they provided.
In order to illuminate these changes, consider Alfred Marshall's Principles of
Economics (1890), 3 and compare it to more recent microeconomic textbooks"
There is much in the moderns which is not in Marshall; and there is much in
Marshall which is not in modern textbooks. In some cases old wood has been
discarded, or uninteresting disquisitions put aside. In other cases important
and interesting analyses have been changed almost out of recognition. Three
examples should be singled out: Marshall's discussion of wants; his analysis of
supply and the role of firms; and his concept of equilibrium.'
To Marshall, wants (or preferences, to use the modern term) are not
exogenous: economic agents acquire them by virtue of social interaction, i.e., by
participating in economic activity:
Speaking broadly therefore, although it is man's wants in the earliest stages of his
development that give rise to his activities, yet afterwards each new step upwards
is to be regarded as the development of new activities giving rise to new wants,
rather than of new wants giving rise [0 new activities (Marshall [1920, p. 76]).
Preferences change endogenously, and as Parsons [1931] was the first to
