Proto-marginalist approaches Perhaps the essence of a notion of diminishing marginal utility can be found in
Aristotle's
Politics, wherein he writes There has been marked disagreement about the development and role of marginal considerations in Aristotle's' value theory. A great variety of economists concluded that there was
some sort of inter-relationship between utility and rarity that effected economic decisions, and in turn informed the determination of prices. Eighteenth-century Italian
mercantilists, such as
Antonio Genovesi,
Giammaria Ortes,
Pietro Verri,
Cesare Beccaria, and
Giovanni Rinaldo, held that value was explained in terms of the general utility and of scarcity, though they did not typically work-out a theory of how these interacted. In
Della Moneta (1751), Abbé
Ferdinando Galiani, a pupil of Genovesi, attempted to explain value as a ratio of two ratios,
utility and
scarcity, with the latter component ratio being the ratio of quantity to use.
Anne Robert Jacques Turgot, in
Réflexions sur la formation et la distribution de richesse (1769), held that value derived from the general utility of the class to which a good belonged, from comparison of present and future wants, and from anticipated difficulties in procurement. Like the Italian mercantilists,
Étienne Bonnot de Condillac saw value as determined by utility associated with the class to which the good belongs, and by estimated scarcity. In
De commerce et le gouvernement (1776), Condillac emphasized that value is not based upon cost but that costs were paid because of value. This last point was famously restated by the 19th-century proto-marginalist
Richard Whately, who wrote as follows in
Introductory Lectures on Political Economy (1832): Whately's student
Nassau William Senior is noted below as an early marginalist.
Frédéric Bastiat in chapters V and XI of his
Economic Harmonies (1850) also develops a theory of value as ratio between services that increment utility, rather than between total utility.
Marginalists before the Revolution The first unambiguous published statement of any sort of theory of marginal utility was by
Daniel Bernoulli, in "Specimen theoriae novae de mensura sortis". This paper appeared in 1738, but a draft had been written in 1731 or in 1732. In 1728,
Gabriel Cramer produced fundamentally the same theory in a private letter. Each had sought to resolve the
St. Petersburg paradox, and had concluded that the marginal desirability of money decreased as it was accumulated, more specifically such that the desirability of a sum were the
natural logarithm (Bernoulli) or
square root (Cramer) thereof. However, the more general implications of this hypothesis were not explicated, and the work fell into obscurity. In "A Lecture on the Notion of Value as Distinguished Not Only from Utility, but also from Value in Exchange", delivered in 1833 and included in
Lectures on Population, Value, Poor Laws and Rent (1837),
William Forster Lloyd explicitly offered a general marginal utility theory, but did not offer its derivation nor elaborate its implications. The importance of his statement seems to have been lost on everyone (including Lloyd) until the early 20th century, by which time others had independently developed and popularized the same insight. In
An Outline of the Science of Political Economy (1836),
Nassau William Senior asserted that marginal utilities were the ultimate determinant of demand, yet apparently did not pursue implications, though some interpret his work as indeed doing just that. In "De la mesure de l'utilité des travaux publics" (1844),
Jules Dupuit applied a conception of marginal utility to the problem of determining bridge tolls. In 1854,
Hermann Heinrich Gossen published
Die Entwicklung der Gesetze des menschlichen Verkehrs und der daraus fließenden Regeln für menschliches Handeln, which presented a marginal utility theory and to a very large extent worked-out its implications for the behavior of a market economy. However, Gossen's work was not well received in the Germany of his time, most copies were destroyed unsold, and he was virtually forgotten until rediscovered after the so-called Marginal Revolution.
Marginal Revolution Marginalism as a formal theory can be attributed to the work of three economists,
Jevons in England,
Menger in Austria, and
Walras in Switzerland.
William Stanley Jevons first proposed the theory in an article in 1862 and a book in 1871. Similarly,
Carl Menger presented the theory in 1871. Menger explained why individuals use marginal utility to decide amongst trade-offs, but while his illustrative examples present utility as quantified, his essential assumptions do not. What the marginalists understood was that the exchange value of goods can be used to describe the use value of goods. Meghnad Desai puts it this way, "Individuals in their daily activity so managed their resources that they balanced the marginal utility--the utility (use value) derived from an extra unit of a commodity they consumed--with the price (exchange value) they paid for it". Thus, when consumption of a good goes up, the utility of that good decreases as it is consumed. Each person would continue to consume until the marginal utility would be equal to the price. Jevons also wanted to formulate a price theory that accounted for this marginal utility and discovered the following: cost production determines supply; supply determines final degree of utility; and final degree of utility determines value. Walras was able to articulate the utility maximization of the consumer far better than Jevons and Menger by assuming that utility was linked to the consumption of each good.
Second generation Although the Marginal Revolution flowed from the work of Jevons, Menger, and Walras, their work might have failed to enter the mainstream were it not for a second generation of economists. In England, the second generation were exemplified by
Philip Wicksteed, by
William Smart, and by
Alfred Marshall; in Austria by
Eugen Böhm von Bawerk and by
Friedrich von Wieser; in Switzerland by
Vilfredo Pareto; and in America by
Herbert Joseph Davenport and by
Frank A. Fetter. There were significant, distinguishing features amongst the approaches of Jevons, Menger, and Walras, but the second generation did not maintain distinctions along national or linguistic lines. The work of von Wieser was heavily influenced by that of Walras. Wicksteed was heavily influenced by Menger. Fetter referred to himself and Davenport as part of "the American Psychological School", named in imitation of the
Austrian "Psychological School". Clark's work from this period onward similarly shows heavy influence by Menger. William Smart began as a conveyor of Austrian School theory to English-language readers, though he fell increasingly under the influence of Marshall. Böhm-Bawerk was perhaps the most able expositor of Menger's conception. He was further noted for producing a theory of interest and of profit in equilibrium based upon the interaction of diminishing marginal utility with diminishing
marginal productivity of time and with
time preference. and with modifications including formal disregard for time-preference by Wicksell's American rival
Irving Fisher.) Marshall was the second-generation marginalist whose work on marginal utility came most to inform the mainstream of neoclassical economics, especially by way of his
Principles of Economics, the first volume of which was published in 1890. Marshall constructed the demand curve with the aid of assumptions that utility was quantified, and that the marginal utility of money was constant, or nearly so. Like Jevons, Marshall did not see an explanation for supply in the theory of marginal utility, so he paired a marginal explanation of demand with a more
classical explanation of supply, wherein costs were taken to be objectively determined. Marshall later actively mischaracterized the criticism that these costs were themselves ultimately determined by marginal utilities.
Marginal Revolution as a response to socialism The doctrines of marginalism and the Marginal Revolution are often interpreted as a response to the rise of the worker's movement,
Marxian economics and the earlier
(Ricardian) socialist theories of the
exploitation of labour. The first volume of
Das Kapital was not published until July 1867, when marginalism was already developing, but before the advent of Marxian economics, proto-marginalist ideas such as those of Gossen had largely fallen on deaf ears. It was only in the 1880s, when Marxism had come to the fore as the main economic theory of the workers' movement, that Gossen found (posthumous) recognition. Aside from the rise of Marxism,
E. Screpanti and
S. Zamagni point to a different 'external' reason for marginalism's success, which is its successful response to the
Long Depression and the resurgence of
class conflict in all developed capitalist economies after the 1848–1870 period of social peace. Marginalism, Screpanti and Zamagni argue, offered a theory of the
free market as perfect, as performing optimal allocation of resources, while it allowed economists to blame any adverse effects of laissez-faire economics on the interference of workers' coalitions in the proper functioning of the market. The most famous of these was that of Böhm-Bawerk, "" (1896), but the first was Wicksteed's "The Marxian Theory of Value.
Das Kapital: A Criticism" (1884, followed by "The Jevonian Criticism of Marx: A Rejoinder" in 1885). The most famous early Marxist responses were
Rudolf Hilferding's (1904) and
The Economic Theory of the Leisure Class (1914) by
Nikolai Bukharin.
Eclipse In his 1881 work
Mathematical Psychics,
Francis Ysidro Edgeworth presented the
indifference curve, deriving its properties from marginalist theory which assumed utility to be a differentiable function of quantified goods and services. But it came to be seen that indifference curves could be considered as somehow
given, without bothering with notions of utility. In 1915,
Eugen Slutsky derived a theory of
consumer choice solely from properties of indifference curves. Because of
the World War, the
Bolshevik Revolution, and his own subsequent loss of interest, Slutsky's work drew almost no notice, but similar work in 1934 by
John Hicks and
R. G. D. Allen derived much the same results and found a significant audience. Allen subsequently drew attention to Slutsky's earlier accomplishment. Although some of the third generation of Austrian School economists had by 1911 rejected the quantification of utility while continuing to think in terms of marginal utility, most economists presumed that utility must be a sort of quantity. Indifference curve analysis seemed to represent a way of dispensing with presumptions of quantification, albeit that a seemingly arbitrary assumption (admitted by Hicks to be a "rabbit out of a hat") about decreasing marginal rates of substitution would then have to be introduced to have convexity of indifference curves. For those who accepted that marginal utility analysis had been superseded by indifference curve analysis, the former became at best somewhat analogous to the
Bohr model of the atom—perhaps pedagogically useful, but "old fashioned" and ultimately incorrect.
Revival When Cramer and Bernoulli introduced the notion of diminishing marginal utility, it had been to address
a paradox of gambling, rather than the
paradox of value. The marginalists of the revolution, however, had been formally concerned with problems in which there was neither
risk nor
uncertainty. So too with the indifference curve analysis of Slutsky, Hicks, and Allen. The
expected utility hypothesis of Bernoulli
et alii was revived by various 20th century thinkers, including
Frank Ramsey (1926),
John von Neumann and
Oskar Morgenstern (1944), and
Leonard Savage (1954). Although this hypothesis remains controversial, it brings not merely utility but a quantified conception thereof back into the mainstream of economic thought, and would dispatch the
Ockhamistic argument. In his early response to marginalism,
Nikolai Bukharin argued that "the subjective evaluation from which price is to be derived really starts from this price", concluding: :Whenever the Böhm-Bawerk theory, it appears, resorts to individual motives as a basis for the derivation of social phenomena, he is actually smuggling in the social content in a more or less disguised form in advance, so that the entire construction becomes a vicious circle, a continuous
logical fallacy, a fallacy that can serve only specious ends, and demonstrating in reality nothing more than the complete barrenness of modern bourgeois theory. Similarly a later Marxist critic,
Ernest Mandel, argued that marginalism was "divorced from reality", ignored the role of production, further arguing: :It is, moreover, unable to explain how, from the clash of millions of different individual "needs" there emerge not only uniform prices, but prices which remain stable over long periods, even under perfect conditions of free competition. Rather than an explanation of constants, and of the basic evolution of economic life, the "marginal" technique provides at best an explanation of ephemeral, short-term variations.
Maurice Dobb argued that prices derived through marginalism depend on the distribution of income. The ability of consumers to express their preferences is dependent on their spending power. As the theory asserts that prices arise in the act of exchange, Dobb argues that it cannot explain how the distribution of income affects prices and consequently cannot explain prices. Dobb also criticized the
motives behind marginal utility theory. Jevons wrote, for example, "so far as is consistent with the inequality of wealth in every community, all commodities are distributed by exchange so as to produce the maximum social benefit." (See
Fundamental theorems of welfare economics.) Dobb contended that this statement indicated that marginalism is intended to insulate market economics from criticism by making prices the natural result of the given income distribution. ==See also==