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Macroeconomics, 9/e

Campbell R. McConnell, University of Nebraska, Lincoln
Stanley L. Brue, Pacific Lutheran University
Thomas P. Barbiero, Ryerson University

The Nature and Method of Economics

Origin of the Idea

Origins of • Economics• Marginal Analysis • "Ceritus Paribus"

1.1 Origin of the term "Economics" - Ch. 1, page 2

The term "economy," from which we get "economics," comes most directly from the Old French word "economie," meaning "management of a household." The French adopted the term from the Latin word "oeconomia," which was in turn derived from the Greek word "oikonomia." Oikonomia came from the word "oikonomos," which separates into "oikos," meaning house, and "-nomos" meaning managing.

The oldest recognized written work in the field of economics is Oeconomicus, a book on farming and household management, written by the Greek philosopher Xenophon (430?-355? B.C.).

Despite the Greek origins of the term, economics was not an important field of study for the ancient Greeks, who, despite occasional references to economic matters, were more interested in philosophy and ethics.

1.2 Marginal Analysis - Ch. 1, page 5

Marginal analysis plays a central role in economic theory, and has for many decades. The first formal expressions of marginal thinking appear in the writings of David Ricardo, who referred to the margins of cultivation in agriculture. Ricardo demonstrated that each additional (marginal) unit of an input (such as fertilizer), would add to total output, but at a diminishing rate and not indefinitely. In short, the world's food supply cannot be grown in a flowerpot, a concept formally known as diminishing marginal returns.

While formal marginal analysis started with Ricardo and other classical economists, it exploded with the marginalist school of economic thought and economists such as William Stanley Jevons, Carl Menger, Friedrich von Wieser, and Eugen von Bohm-Bawerk. While Ricardo focused on marginal returns in production, these marginalists focused on utility, attempting to explain how the marginal utility of a good related to its quantity, value, and price.

Later marginalists, specifically Francis Edgeworth and John Bates Clark, directed their analysis to issues of production and distribution. Edgeworth formalized and offered a tabular representation of diminishing marginal returns. Clark, applying the concept to labor productivity, stated that:

The last tool adds less to man's efficiency than do earlier tools. If capital be used in increasing quantity by a fixed working force, it is subject to a law of diminishing productivity ...The diminishing productivity of labor, when it is used in connection with a fixed amount of capital, is a universal phenomenon.

Marginal analysis continues to be an integral part of economic theory, and economists are indebted to the many who have contributed to the development and refinement of marginal thinking.

1.3 "Ceteris Paribus" - Ch. 1, page 8

The Latin phrase "ceteris paribus" and its use in economic commentary are centuries older than the formal discipline of economics. The first recorded use of the phrase in an economic context was in "De Officiis," written by Cicero in 44 B.C. Cicero (106-43 B.C.) wrote that "the proper way to render aid is - if cetera are paria - to bring it to one who needs it most, and not to one whom we expect to be useful for us." In the late 13^th century, the Franciscan friar Petrus Olivi (1248-1298) asserted that goods requiring more labor or greater risk to produce would - ceteris paribus - command a higher price.

In the "modern" era of economic thought, first use of the term is attributed to Sir William Petty. Petty wrote that

If a man can bring to London an ounce of silver out of the earth in Peru, in the same time that he can produce a bushel of corn, then one is the natural price of the other; now if by reason of new and more easie mines a man can get two ounces of silver as easily as formerly he did one, then corn will be as cheap at ten shillings the bushel as it was before at five schillings, ceteris paribus.

Today the concept of ceteris paribus is so ingrained in economic thinking that the assumption is often used without being explicitly stated, much to the chagrin of those teaching introductory economics.

Sources: Erich Kaufer, Journal of Economic Perspectives, Spring 1997, p. 190-191 (Cicero and Olivi quotes); Charles Henry Hull, ed., The Economic Writings of Sir William Petty vol. 1, p. 50-51.

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