Microeconomics, History of
Paola Tubaro, University of Greenwich, Greenwich, UK
2015 Elsevier Ltd. All rights reserved.
Abstract
This article provides a brief overview of the history of microeconomics, starting from the late eighteenth century when its key
foundations were laid. Without intending to be comprehensive, the article outlines landmarks and milestones in the building
of the basic principles of todays knowledge, highlighting challenges faced and open questions. Focus is on the contribution
of each historical phase to the understanding of two foundational issues in microeconomics the theory of individual
economic decision making and the market mechanism as a coordinating device. At the end, the article discusses the current
state of microeconomics and recent tendencies.
Introduction
Microeconomics stands as one of the two main pillars of
todays economic science, the other being macroeconomics.
Microeconomics seeks to understand how individuals, house-
holds, and companies make decisions; the factors that shape
these decisions; and how these decisions affect others. Its object
is decision making at low, or micro, level, in contrast to
macroeconomics, whose focus is the behavior of national
aggregates such as gross domestic product, ination, and
unemployment.
At the heart of microeconomics is a social and scientic
mystery. In modern market economies characterized by
private property and freedom, decisions to produce, sell, work,
buy, and consume are made by multiple individuals, house-
holds, and companies autonomously and independently from
one another; each actor chooses under limited, or even inex-
istent, knowledge of the choices of others. Yet someones
decision to buy, say, a pint of milk can only translate into an
actual purchase if someone else simultaneously decides to sell
a pint of milk. So if buyer and seller do not coordinate ex ante,
how can their decisions engender actual, mutually benecial
transactions, rather than result in disappointment and frustra-
tion? The market mechanism is the device that accomplishes
this result: by establishing the relative price of goods and
factors, it informs individual decisions, adjusts the quantities
traded, and achieves ex post coordination. Microeconomics,
through the supply-and-demand framework of analysis, looks
at how this happens. It also studies the effects of institutions
such as government regulation and taxation on individual
choices and market outcomes.
In essence, microeconomics is as old as economic thought
itself: Classics in the eighteenth and nineteenth centuries laid
out the theoretical elements that have progressively molded
economists understanding of individual decision making and
the market mechanism. Yet the micro label and the repre-
sentation of microeconomics as a separate enterprise, explicitly
distinct from macroeconomics, emerged much later. According
to Humberto Barreto (2012), its rst traces are in a 1933 article
by Ragnar Frisch for whom the micro approach would try to
explain in some detail the behavior of a certain section of the
huge economic mechanism, while the macro would instead
give an account of the uctuations of the whole economic
International Encyclopedia of the Social & Behavioral Sciences, 2nd edition, Volume 15
system taken in its entirety (Frisch, 1933: p. 2). The work of
John M. Keynes (1936) in those same years, with its strong
focus on aggregate relations and an extremely simplied
representation of individual behaviors, popularized the belief
that the macro level of analysis differs in nature from the
microlevel, and contributed to further differentiating the two
subdisciplines.
Since then, it took another 50 years before economists
formally acknowledged the micromacro taxonomy. In the
classication of subject elds of the Journal of Economic Litera-
ture, a reference for the profession worldwide, micro- and
macroeconomics were subsets of a broad theory category in
the original 1960 version, and were brought up a level and
highlighted as major independent categories in a substantial
revision of the system in 1991 (Barreto, 2012). They remain
two major areas today, allowing the development of new or
renewed subelds within them. The teaching of economics has
followed suit, with current curricula typically separating micro-
and macroeconomics courses, both being part of the core
training of new economists.
Perhaps ironically, a parallel movement has been increas-
ingly blurring the distinction between the micro and macro
approaches. Economists have grown more and more uncom-
fortable with the idea that different theoretical principles apply
to the study of individual decisions and the aggregates that
(ultimately) result from them. Since the late 1980s the
microfoundations movement in macroeconomics, champ-
ioned by Robert Lucas (born 1937), aims to reconcile these
two traditions and rebuild macroeconomics so as to make it
consistent with the principles of microeconomics.
This article provides a brief overview of the history of
microeconomics, starting from the time in which its key
foundations were laid, although the micro terminology was
not yet in use. Despite the interest of the early literature, which
dates as far back as antiquity and the Middle Ages (see, e.g.,
Hutchison, 1988), a detailed account of it would be beyond the
scope of this article, and the more traditional convention of
starting from the late eighteenth century is followed. The article
overviews historical developments since then, without
intending to be comprehensive, but aiming only to outline
landmarks and milestones in the building of the basic princi-
ples of todays knowledge, highlighting the challenges faced
and the questions that remain open. Focus is on what each
http://dx.doi.org/10.1016/B978-0-08-097086-8.03060-9 331
332 Microeconomics, History of
historical phase contributed to the understanding of the two
foundational issues in microeconomics namely, the theory of
individual economic decision making and the market mecha-
nism as a coordinating device. At the end, the article discusses
the current state of microeconomics and recent tendencies,
again distinguishing between the study of individual behaviors
and the market mechanism.
The Origins: Self-Interest and the Invisible Hand
in Adam Smith
The Scottish philosopher Adam Smith (172390) is widely
regarded as one of the founders of economics; though not
alone in this enterprise, he exemplies at best the novelty and
relevance of eighteenth-century thought in dening what
would become the basic principles of microeconomics. In his
Wealth of Nations (1776), Smith was the rst to explicitly
characterize individual economic behavior as self-interested
behavior, admitting that it is peoples desire for a gain that
explains work, production, and ultimately the existence of an
economic system:
It is not from the benevolence of the butcher, the brewer, or the
baker that we expect our dinner, but from their regard to their own
interest. We address ourselves, not to their humanity but to their self-
love, and never talk to them of our own necessities but of their
advantages.
(Smith, 1776/1981: pp. 2627)
The idea that businesspeople act to satisfy their self-interest
may seem dauntingly simple, and to some extent brutal in its
apparent amorality. Yet over time, it has proven fertile in
informing economists imagination and their capacity to
explain individual decision making. It is not a sheer defense of
selshness in present-day parlance, one would simply say
that people respond to incentives, that is, advantages or gains
that can derive from given decisions or actions. By and large,
modern microeconomics assumes that individuals motiva-
tions when they make decisions are their expected gains by
those decisions.
But Smith, a moral philosopher, could not neglect motiva-
tions other than self-interest in shaping economic decision-
making. Indeed his self-interest must be understood in
conjunction with another behavioral principle, that of sympathy
between human beings who, by putting themselves imagina-
tively in the place of others, understand their feelings and
expectations and are moved to act accordingly (e.g., to give to
those who are in need). While Smiths critics initially opposed
sympathy and self-interest, todays scholarship sees them as two
instances of a common framework for thinking about human
behavior, in which the individually centered, self-interested
component is accompanied by an interpersonal dimension, so
that it becomes possible to account for various forms of behavior,
from gain-seeking actions to philanthropy. Reconciliation of
these two aspects of Smiths thought makes him the father of
microeconomics in a broader sense: A recent trend in todays
research on economic decision making (see below) tends to
explicitly integrate forms of prosocial behavior into the analysis.
Incidentally, the Smithian model of individual behavior
had the merit of supporting an egalitarian perspective in the
nineteenth-century political debates. If the same scheme holds
for all individuals, they are all equal and have the same capacity
for decision making; observed differences, if any, depend on
chance and history. This egalitarian view was shared by most
economists of the time and strongly contrasted the (then also
widespread) hierarchical stance that regarded the lower classes
of society and supposedly inferior ethnic/racial groups as less
capable of making decisions and thus in need of guidance
(Peart and Levy, 2005). Interestingly, the infamous dismal
science designation of economics was originally an accusation
against economists antislavery orientation, resulting from their
belief that all humans are equal (Levy, 2001).
Smiths work also contributed to shaping economists view
of the market as a coordinating device that ensures, ex post, that
individual decisions are consistent with one another and
generate an orderly result. Smiths invisible hand metaphor
has often been recognized as an effective representation of this
mechanism:
by directing [.] industry in such a manner as its produce may be of
the greatest value, he [man] intends only his own gain, and he is in
this, as in many other cases, led by an invisible hand to promote an
end which was no part of his intention. By pursuing his own interest
he frequently promotes that of the society more effectually than
when he really intends to promote it.
(Smith, 1776/1981: p. 456)
Because individuals are not isolated but part of a larger
human community, their actions have unexpected or unin-
tended consequences at the system level. Individuals take into
account only their self-interest, yet their choices affect others
and trigger a chain of interactions that eventually affect the
society as a whole, well beyond their original intentions.
Strikingly enough, Smith argues that this spontaneous process
does not lead to chaos but to harmony: Self-interest may not
seem a noble motivation, yet it triggers consequences that
benet society even more than those arising from benevolence.
Thus, there is no need for a strong state power that would
impose social order from above, as had been argued by Thomas
Hobbes (15881679). The idea of unintended consequences
and the possible reconciliation of individual self-interest and
social good, rst articulated by Smith, have been at the core of
subsequent microeconomic reection which is another
reason why Smith is credited as a founder of the discipline.
Early Developments: Marginalism,
Supply-and-Demand, Formalization
To further develop Smiths approach, economists faced the
formidable problem of how to operationalize the principle of
self-interested action so as to apply it to the solution of concrete
economic problems. They rst thought about it in terms of the
self-interested businessperson who makes production-related
decisions: In his On the Principles of Political Economy and Taxa-
tion (1817/2004), the highly inuential British writer David
Ricardo (17721823) discussed how cost-effective substitution
of machinery for workers, or of imports for nationally produced

goods through international trade, affects a rms prots and
workers welfare. Ricardos writings hardly touched on the study
of household and consumer behavior, though: As many econ-
omists of the time, he was mainly interested in production
forces, working conditions, and their differential impact on
income distribution. Emphasis was on the effects of the whole
economic system on individual behavior, rather than the
reverse, and a fundamental heterogeneity distinguished
economic agents consumers vs rms. While the latter were
already envisaged as cost-minimizers or prot-maximizers,
placing emphasis on how they acted for their own advantage,
less attention was drawn to the individual decisions of the
former, and demand was mainly seen as an aggregate rather
than an individual construct, for example, by assuming that
population growth largely determines demand for food.
Even the authors who, following developments in philos-
ophy and psychology, introduced the notion of utility to
account for the pleasure and pain that consumers derive from
goods, found it difcult to integrate it into economic models.
Utility initially appeared as a qualitative, subjective construct
devoid of any objective, quantiable attributes very different
then from the rms prot or income, which centuries-long
advances in accounting enabled to measure in straightfor-
ward way. The solution came in the mid-nineteenth century,
from reinterpreting utility not as an absolute but as a relative
magnitude, varying from one individual to another and for
each individual, depending on the available quantity of a good.
It turned out that measurability and quantication were not
even necessary, insofar as utility could be expressed as a vari-
able or a function of other variables, allowing comparisons
(larger/smaller, more/less, positive/negative, etc.). One could
thus distinguish the total amount of utility from marginal
utility namely, the change in the level of utility that results
from a given increase in the quantity of the good. Marginal
utility was thought to diminish with the quantity consumed,
reecting the capacity of individuals to order the possible uses
of successively acquired units: For instance, one would reserve
the rst gallons of water for drinking and the successive ones
for personal hygiene, for housekeeping, and nally for watering
plants. In passing, this assumption solved what earlier thinkers
considered a paradox the fact that useful goods such as water
or air have low market value: The reason is their abundance,
which means that the last increment in quantity generates an
extremely small increase in utility. These results suggested an
interpretation of self-interested behavior in terms of attempts
to raise ones utility to its highest possible level and were
obtained independently, in 187174, by William S. Jevons
(183582) in Britain, Carl Menger (18401921) in Austria,
and Lon Walras (18341910) in Switzerland.
The importance of thinking in terms of marginal variations
rather than total magnitudes proved so useful to account for
utility and demand that it was subsequently extended to
supply. In fact, notions of marginal productivity and marginal
cost of production, as opposed to total productivity/cost, had
already been introduced, but in a patchy fashion; they were
rened and generalized in the 1890s by, among others, John B.
Clark (18471938), Philip H. Wicksteed (18441927), and
Knut Wicksell (18511926). Marginal reasoning seemed so
important that the economic thought of this time period is
often referred to as marginalism.
Microeconomics, History of 333
On the coordinating mechanism, emphasis was increas-
ingly placed on the symmetry of supply-and-demand factors
and on the resulting market equilibrium. While Ricardo had
stressed supply factors in the determination of prices and
quantities traded, the mid-nineteenth century developed a view
according to which individual demand and supply are derived,
respectively, from agents calculations of utility (for consumers)
and prot/cost (for rms), and market supply and demand are
obtained by aggregating all individual values. When market
supply equals demand, the market is in equilibrium that is,
the decisions of all households and all rms are consistent with
one another. The French mathematician Antoine-Augustin
Cournot (180177) was the rst, as early as 1838, to illus-
trate these principles with the help of pricequantity diagrams
in which the demand of a good decreases, and the supply
increases, with its price; The intersection of the supply-and-
demand schedules identies equilibrium, that is, a price at
which supply equals demand and the market clears. This
partial equilibrium approach, focusing on the study of a single
competitive market, was further developed and popularized
a few decades later in England by Alfred Marshall (1842
1924); it is now a standard part of undergraduate microeco-
nomics education.
The advantage of Marshalls partial equilibrium approach is
that it provides a tractable framework to study the relationship
between price and quantity; however, it is based on the
restrictive assumption that changes in the price of a good affect
the quantity of that good only, disregarding the possibility that
a variation in the price of a good will impinge on the demand
and supply of substitutes and complements of that good too.
Hence, it can be taken at most as an approximation, not as
a rigorous analytical device. A rival view focusing on interde-
pendencies among markets was simultaneously developed by
Walras (1874/1977), who represented economic agents that
allocate their budgets to the purchase of multiple goods so that
changes in the market price and/or quantity of one good are
likely to have repercussions on the markets for other goods. His
notion of general equilibrium which would inform large parts
of microeconomics, is directly derived from this view and
corresponds to a situation in which supply equals demand on
each market, so that all clear simultaneously.
A derived question is whether and how actual trade prac-
tices will drive prices and quantities toward equilibrium.
Marshall and Walras provided different answers, consistent
with their respective views. Walras (1874/1977) proposed
a model of auctions in which at given prices, all traders declare
the quantity of each good that they wish to buy or sell at those
prices; if with these quantities, supply equals demand on each
market, then this is the general equilibrium and trade takes
place; if not, prices are adjusted in such a way that they
diminish where supply exceeds demand and increase in the
opposite case; at the new prices, traders announce again the
quantities that they wish to buy or sell, and the process
(ttonnement) starts again, until equilibrium is reached. In
short, transactions take place simultaneously, at equilibrium
only, so that the same prices apply to all traders. Instead,
Marshall (1920) had in mind a sequence of bilateral trans-
actions on a single market, in which each pair of traders
negotiates a price and each transaction withdraws some units
from the market so that lesser quantities are available for later
334 Microeconomics, History of
trades in other words, the conditions under which traders
negotiate are altered at every step. Such changes gradually
dampen price adjustments until they reach the level that
corresponds to the intersection of supply and demand. Here,
transactions occur sequentially, in disequilibrium, at prices that
may differ from a pair of traders to the other. These different
approaches strongly affected later developments (see below).
These theoretical developments, often referred to as neo-
classical economics (in contrast to Ricardos classical theory), the core of what came to be known as microeconomics, and
accompanied a growing tendency to formalization. Deeply
intertwined with the development of microeconomic thought
since its early phases, formalization is an approach to theory-
building which, starting from the denition of theoretical
constructs and of linkages between them, derives logical
conclusions from given premises. In this sense, formalization is
an abstract process and must be distinguished from quanti-
cation, or the systematic effort to measure reality for purposes of
business or policy intervention, rather than theory-building, for
instance by counting the population in a census. While quan-
tication was already well under way at this time, it was
formalization that needed to be advanced. Writing in its
defense, Jevons claimed that The data are almost wholly
decient for the complete solution of any one problem, yet
we have mathematical theory without the data requisite for
precise calculation (Jevons, 1965/1871). Yet despite its
growing importance, formalization was still far from being
prominent at the end of the nineteenth century, when many
economists still privileged the verbal form and some overtly
criticized the use of mathematics, the most prominent example
being the German Historical School. It was only in the mid-
twentieth century, after the emergence of microeconomics as
a distinct theoretical enterprise, that formalization became
a standard practice.
Maturity: Constrained Optimization and Market
Equilibrium
The theoretical elements laid out in the nineteenth century
went through further elaboration and systematization in the
rst half of the twentieth century, when neoclassical micro-
economics blossomed and eventually arose as a major
subdiscipline in conjunction with macroeconomics. The
concept of utility was rened and utility gradually came to be
understood as rational, purposeful behavior choosing the
best possible means to achieve ones ends, an interpretation
that deprives utility of any identication with self-interest
narrowly interpreted, and even with pleasure, pain or any
other emotions and feelings. Consistency in choices turned out
to be all that was needed, and the microeconomic paradigm
that eventually emerged refrained from making psychological
assumptions. This more neutral interpretation of utility came
to dominate economics, notably through the revealed preference
approach (Samuelson, 1938) which enabled application of the
model to a variety of settings and behaviors (including non-
selsh ones and altruism).
Consistency involves the optimizing behavior of agents
under some constraints (budget for consumers, technology for
rms). Progressively, the constrained maximization model was
extended to the study of all individual decision units, on both
the demand and the supply side of the market, becoming the
basis of all analyses of individual economic behavior. The
contribution of Paul Samuelson (19152009) was essential to
these developments and mainly consisted in rewriting many
problems of economics as maximization problems, with
extensive use of mathematics. Samuelsons effort to show that
apparently diverse subjects have the same underlying structure
and can be treated with the same mathematical tools dened
gave it unprecedented unity and coherence. Higher abstraction
and technical difculty, however, were the price to pay for
increased scope and greater logical coherence making the
eld inaccessible to wide audiences and hard to communicate
outside a narrow circle of specialists.
With time, these revisions proved successful in that they
made constrained maximization so powerful that it began to be
thought of as a basis for understanding all human behaviors
not just those traditionally regarded as falling within the realm
of market transactions. The work of Gary Becker (19302014),
in particular, is founded on the idea that individual behavior
follows the same fundamental principles in different areas, so
that the same explanatory model microeconomic optimiza-
tion should always be applicable. Becker thus extended the
sphere of microeconomic analysis to the study of new areas,
ranging from crime and discrimination to marriage and the
family (Becker, 1992). Beckers analysis initially raised many
eyebrows, but gradually came to exert a huge inuence on the
economics profession as well as on neighboring disciplines.
The optimization model was not beyond dispute, though:
At least since the 1950s, Herbert Simon (19162001) and
others contended that actual decision makers lack the cognitive
capacities to solve maximization problems and rather content
themselves with satiscing behavior, choosing options that
are not optimal but make them happy enough. Along these
lines, they developed a bounded rationality approach as an
alternative to the seemingly strong rationality requirements of
the individual maximization model. Yet it was difcult to
identify universal principles enabling to devise general models
of nonmaximizing behavior, so that bounded rationality
assumptions often maintained an ad hoc, hardly generalizable
character. Partly for this reason, the optimization model
retained its prominence for long.
More recently, a current of thought known as behavioral
economics has provided abundant evidence against the indi-
vidual optimization model. Starting from a seminal contribu-
tion (1979) by Amos Tversky (193796) and Daniel
Kahnemann (born 1934), it has been shown that people make
decisions based on simplied heuristics such as routines and
habits rather than rigorous logic, and use mental emotional
lters to respond to changing circumstances. In contrast to the
microeconomic paradigm that aims at a value-neutral, highly
abstract representation of decision making, behavioral
economics reintegrates psychological elements into the anal-
ysis, explicitly investigates pro-social behavior, and compares
and contrasts it with self-interest and selshness renewing, in
a sense, with the older tradition initiated at the time of Adam
Smith.
Regarding market models, after World War II it was the
general equilibrium model that most attracted the attention
of economic theorists, largely due to the introduction into

economics of highly advanced formal tools and of a new way of
thinking about mathematics, based on topology, convex set
theory, and xed-point theorems (Weintraub, 2002). The new
tools allowed for a sophisticated renement of Walrass
approach, named the ArrowDebreuMcKenzie model after its
main contributors. A major achievement in the 1950s was
a formal proof of existence of equilibrium. The difculty was
that it was not enough to show that the system of simultaneous
equations representing equality between supply and demand
in all markets has a solution: For this solution to be meaningful
economically, and not only mathematically, it was also
necessary to prove that equilibrium prices and quantities are
nonnegative. By demonstrating that it is indeed the case, it was
established that the notion of a set of prices that clear all
markets is consistent (i.e., the notion of equilibrium of
a system of interrelated competitive markets is not void).
Another success for general equilibrium theory was the
mathematical proof of the so-called two theorems of welfare
economics a modern reinterpretation of Smiths invisible
hand. The rst theorem states that a general equilibrium
corresponds to a socially optimal allocation of resources, and
the second states that, under some conditions, any socially
optimal allocation of resources can be sustainable by a general
equilibrium. These results amounted to rigorously establishing
the desirable properties of the free market mechanism that
earlier economists like Adam Smith had put forward only
intuitively or metaphorically. In sum, the new approach
completely transformed general equilibrium theory, allowing
to make it rigorous, to generalize it, to simplify it, and to
extend it in new directions (Debreu, 1984: p. 267).
In the 1950s and 1960s, such progresses put the Arrow
DebreuMcKenzie model at the center of the stage and
increased condence in its potential to provide the whole of
economics with rigorous mathematical foundations. However,
problems started with attempts at proving two other key
properties of equilibrium namely, stability and uniqueness.
The question of stability was meant to ensure that after an
exogenous shock, the market mechanism is capable of gener-
ating endogenous forces that bring it back to equilibrium; if
equilibrium exists but the market cannot nd it, then argu-
ments for free markets are harder to make. In addition, if
uniqueness is not guaranteed, it is unclear where an adjustment
process might drive the system after a shock; besides, some
equilibriums may be unstable. It became soon clear, though,
that formal proofs of stability and uniqueness could be ob-
tained only under excessively restrictive, unrealistic assump-
tions. Critics stressed that these results reveal that with all its
mathematical underpinnings, general equilibrium theory did
not truly succeed in improving knowledge of how the market
mechanism works and how prices adjust in response to varia-
tions of supply-and-demand conditions (Kirman, 1989; Ingrao
and Israel, 1990). Despite these shortcomings, general equi-
librium theory remained central for long, and is still in the core
of economists education; the publication in 1995 of a cele-
brated graduate textbook by Mas-Colell et al. (1995)
condensed and systematized the essence of the knowledge
available at the highest level.
At this point, the consolidation of the microeconomic
paradigm founded on constrained optimization of the indi-
vidual economic agent and the general equilibrium of all
Microeconomics, History of 335
markets appeared as a monolithic bloc a standard, more and
more rmly established mainstream allowing less and less
different perspectives. The micro-foundations movement, in its
effort to integrate core microeconomic principles into macro,
seemed to further reinforce the mainstreams primacy. Micro-
economics seemed at the same time successful, and stagnating,
unable to move any further.
Yet a closer look reveals that the evolution of microeco-
nomics in the decades that followed World War II was more
diverse than may seem at rst sight. Alternative and heterodox
economic theories, explicitly challenging neoclassical micro-
economics, have never ceased to exist even though their place,
relevance, and visibility seemed to somehow shrink over time.
A complete review of their approaches is beyond the scope of
this article; But it is worth briey mentioning two key devel-
opments which, initially not among the most vocally critical of
the state of microeconomics, have been highly successful and
over time, have progressively grown to be integrated into the
mainstream as it is today. First, the general-equilibrium image
of individuals making decisions in isolation from one another,
letting an impersonal market mechanism establish the prices
that will guide their decisions, progressively gave way to a more
active view of decisions as strategic reactions to other agents
own actions. In contexts in which interdependencies are strong,
such as imperfectly competitive markets, economic agents
anticipate the direct repercussions of their choices on others,
and of others choices on themselves. Game theory has proven
to be the appropriate technique to explore the structure of
strategic interactions and the direct effects of individual deci-
sions on one another. Initiated in the 1940s with, among
others, a seminal contribution of Oskar Morgenstern and John
von Neumann (1944), game theory experienced a rapid
development and an extraordinary expansion of its application
to economics since the 1980s.
Second, Marshalls partial equilibrium remained in the
shadow for a while, largely due to a devastating critique from
Piero Sraffa (1925) who questioned its logical consistency; But
it did not entirely disappear. The static supply-and-demand
diagram was used in some applied studies, while the
dynamic conception of sequential transactions between pairs
of buyers and sellers, underdeveloped in Marshalls own time,
was rened with the help of novel, nonmathematical tech-
niques. It underpinned the pioneering laboratory experiments
on markets that were implemented by Edward Chamberlin
(1948) and Nobel Prize Vernon L. Smith (1962). Although
experimental research remained a tiny niche within economics
for long, it kept alive the Marshallian approach, in its dynamic
connotation. Partial equilibrium experimental markets gained
renewed interest in the 1990s, and the properties of the
exchange dynamics that they generate are sometimes referred
to in the literature as Marshallian dynamics (Friedman and
Rust, 1993).
Interestingly, the rst experimental markets inspired by
Marshalls dynamic orientation were being devised at the same
time in which set-theoretical mathematical techniques were
being implemented to model Walrasian systems. These tools
were rudimentary at the beginning (Chamberlin simply relied
on his students and a blackboard to perform his market
experiment), but they became more sophisticated over time
with the increased availability of software for computer-based
336 Microeconomics, History of
experiments, and are thriving today. They embody a view of
economics that gives less weight to the logical rigor of
formalization than to the theorys t with empirical data,
assessed with objective, well-dened, and replicable (labora-
tory-based) measures.
State of the Art and Future Perspectives
The mainstream edice of neoclassical microeconomics erected
throughout the twentieth century is still largely in place, and is
still the basis of most economics teaching; yet its scientic
underpinnings have undergone a process of profound
rethinking and revision. Both general equilibrium analysis and
the individual optimization paradigm have come under re
from critics of diverse obedience, including (but not limited to)
behavioral economists. Research in general equilibrium theory
now experiences a slow but neat decline; and studies of the
principles of individual decision making tend to follow the
behavioral rather than the neoclassical approach.
Yet far from languishing, the eld is renewing itself at an
unprecedented pace. The current tendency is to increasing
diversication of approaches, methods, and topics, seemingly
reversing the trend toward unication of the different parts of
microeconomics observed in the twentieth century. Against the
decline of once dominantgeneral equilibrium theory,
partial-equilibrium and experimental approaches are on the
rise, and game theory has become the essential mathematical
structure and support of a broad range of economic analysis. A
case in point is market design the study of how to dene,
enforce, and monitor trading rules that maximize the efciency
of exchange, for example in auctions. Part of the motivation for
these studies in the 1990s and early 2000s was the need to
design trading mechanisms that would help governments to
privatize companies or state infrastructures, or to allocate
property rights the 3G auction in the United Kingdom being
regarded as one of the most successful examples (Binmore and
Klemperer, 2002). The design of an auction for the Bank of
Englands liquidity insurance operations is another case in
point (Klemperer, 2010). These studies depart from the general
equilibrium tradition by, rst, using insight from game theory
to highlight the importance of trading institutions to yield
socially desirable outcomes, instead of abstracting them away;
and second, by concentrating on single markets rather than
global interdependencies Marshalls partial equilibrium Chamberlin, E.H., 1948. An experimental imperfect market. Journal of Political
perspective.
Partial equilibrium approaches also underlie a growing
body of research on Internet markets, especially with the study
of so-called two-sided markets. This expression designates
markets in which two different sets of agents interact through
an intermediary or platform, and the decisions of each set of
agents affect the outcomes of the other set of agents, typically
through an externality (Rysman, 2009). Internet and media
companies operating between advertisers and consumers are
a typical example, along with the payment card industry
(between merchants and customers). Pricing is usually asym-
metric, and depends on the price sensitivity the elasticity
of demand of each side; it often turns out that one side
does not pay, or is even rewarded for using a service (with cash-
back for credit card use for example), while the other, more
price-inelastic side faces a high mark-up (Rochet and Tirole,
2003, 2006). Research in this area is booming and top
microeconomic theorists are increasingly often consulted by, or
serve as chief economists of, major Internet companies.
These examples bring to light a second major tendency in
todays renewal, that for microeconomics to become
much more practically oriented and empirically informed. If
nineteenth- and twentieth-century microeconomics left aside
quantication to adopt formalization (an approach that
purports to develop hypotheses and explanatory arguments
independently of, or prior to, confrontation with empirical
data), recent research uses empirical investigation methods to
test theories against data, thereby typifying a third and more
recent use of mathematics, namely validation and verication,
testing (formal) theory against (quantitative) data according
to some version of the scientic method. To do so, new
sources of information are being exploited, notably
experimentation and analysis of survey and administrative
data with the help of increasingly sophisticated
microeconometric techniques. These techniques are now
recognized parts of the eld and attract an increasing number
of young economists.
The future of microeconomics is, in sum, still open, with
promising developments in several subelds and still greater
potential for further success, and with access to an ever-wider
and more diverse set of tools, techniques, theories, and
datasets. Yet the precise directions of its future developments
are still unclear many paths can be taken, and the major
task of choosing which ones to take lies ahead of
microeconomists in the near future.
See also: Behavioral Economics, History of; Capital: History of
the Concept; Equilibrium: History of the Concept; Prospect
Theory.
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