The Influence of Marginalist Revolution in the Economy History - Essay Example

The Influence of Marginalist Revolution in the Economy History A high current concern in the sources and basis of neo ical theory and marginalistrevolution itself is rationally motivated. For instance, Philip Mirowski (1988) formulates three fundamental reasons for investigating the topic: The first is antiquarian: it is concerned with tracing the intellectual antecedents of a given innovation. The second is epistemological: the methods of great discoverers are held to provide an exemplar for currently accepted methods of research. The third is ontological: the occurrence of independent simultaneous discovery is used to suggest the substantiality and reality of the phenomenon identified. (p. 14) As it was mentioned by one of the trendsetters of the movement, William Stanley Jevons: "The theory in question has in fact been independently discovered three or four times over and must be true" (cited in Hutchison, 1978). Let's name one more reason which would be grounded on the practical basis as developing of the viewing of the phenomenon of marginalist revolution provides us with an abundant source of theoretical assumptions which may be of great help while inciting up-to-date serves which are considered obscured or slighted by modern theory (Mirowski, 1988, p. 19). Moreover any uncertainty or confusion over the origins and results of marginalist revolution would give rise possible grave misunderstandings in its description and overviewing. A lot of textbooks on the history of economic thought give only obscure information on its origin and sometimes even refuse to consider it as an integral historical phenomenon: Therefore, to try to explain the origin of the marginal utility revolution in the 1870's is doomed to failure: it was not a marginal utility revolution; it was not an abrupt change, but only a gradual transformation in which the old ideas were never definitively rejected; and it did not happen in the 1870s (Blaug, 1978, p. 322). Some authors challenge that there was any consolidated and deliberate movement. "In its stead, it portrays a haphazard and fragmented agglomeration of economic theorists, whose only common denominators were the twin notions of diminishing marginal utility and utility-determined prices"(Bowley 1973, p. 44). Moreover Bowley stated that none of the notions was especially new in the 1870s, we and may conclude that there was no interruption in the economic concepts of that time and the economic theory has realized one uninterrupted discipline from those time until nowadays (Bowley 1973, p. 49). Thus with the aim of proper investigation of the topic let's determine key fundamentals of marginalism. Briefly speaking it is the theory that determined economic value as a derivation from marginal utility and marginal cost which are considered to be basic marginal concepts. Through the prism of marginalism the most essential thing for the process of decision-making is "the marginal or last unit of consumption or production" (Hutchison, 1978, p. 91). For instance, one car is very helpful for everyday life. An additional car might become helpful if the first one is being repaired or for spares, but it is not as helpful as the first one. The third car has less utility than the previous two cars. Taking into consideration the price of cars, we may claim that many people are not inclined to own three cars as the benefit they are going to receive on the third automobile would be unlikely to go beyond the price (Verdon, 1996, p. 201). William Stanley Jevons from England, Carl Menger from Austria and Leon Walras from Switzerland singly formed the idea of marginal utility nearly in 1870. While discussing who of those three experts had taken the leading place in formulating the theory, Jevons' counterpart found a work of Prussian economist H. H. Gossen (Howey, 1960, p. 7). Gossen was considered as the initial author, and his work was restated using less mathematical methods in order to make it more comprehensible to the public. His relations between value in exchange and marginal utility were eventually propagated by the three above-mentioned European economists (Howey, 1960, p. 12). Such considerable advancement in the sphere of economic thought is identified as the Marginalist Revolution or Neoclassical Revolution. Among the chief problems of the Marginalist theory of value is the idea of subjective scarcity. In the center of their answer to well-know diamond-water paradox is the remark that even though water is highly important to human life, the price of water is comparatively low. Diamonds are negligible and not decisive for human life, thus their price is essentially higher. The Marginalist explanation of this famous "water-diamond" paradox is based on the idea which differs from the Classical one that diamonds have higher value than water because it costs more to produce them (Verdon, 1996, p. 89). Marginalist proposed the idea that diamonds are scarcer comparing to water. Though there are some objections to this differentiation because if it costs more to produce diamonds, then they are expected to exist in somewhat less quantities around, thus assumptions exist that the cost of production and scarcity seem to come to the same idea (Verdon, 1996, p. 43). Adam Smith touched crux of the paradox in the same direction in his fruitful work called An Inquiry into the Nature and Causes of the Wealth of Nations. Thus he in some way implies this assumption when he writes: [T]he value of [precious] metals has, in all ages and nations, arisen chiefly from their scarcity, and that their scarcity has arisen from the very small quantities of them which nature has any where deposited in one place, from the hard and intractable substance with which she has almost every where surrounded those small quantities, and consequently from the labour and expence [sic] which are every where necessary in order to penetrate and get at them. (cited in Mirowski, 1988). Adam Smith is considered to fight with what appeared to be named the contradiction of "value in use" and "value in exchange." Water is essential for human existing and it is of tremendous value in use. Diamonds are not so important for life though their price, their so called value in exchange, is much higher than the price of water (Mirowski, 1988, p. 35). The thing that puzzled Smith is now efficiently illustrated on the first pages of every college introductory textbook on economics for freshman. "Smith had failed to distinguish between "total" utility and "marginal" utility" (Verdon, 1996, p. 111). The evolution of this conception modified economics in the end of the 19th century, and the results of the marginalist revolution are considered still to go on specifying the key framework for up-to-date microeconomics (Verdon, 1996, p. 110). The marginalist interpretation looks as follows: The "total utility" or satisfaction with water goes beyond that of diamonds. Of course, it is obvious all of us would rather exist without diamonds than without water. Though many of us would give their preference to obtain a prize in the form of a diamond rather than one more bucket of water. In order to make such a choice, we don't pay attention on whether diamonds or water totally gives more satisfaction, but whether more quantity of one item provides us with greater supplementary satisfaction than more quantity of the other item (Bowley 1973, p. 82). Our answer for such a question on marginal utility will be highly influenced by the quantity of each item we already possess. As while the first item, water, we consume every day in great quantities, is of tremendous value for us, the second item is not. Thus the impetuous decreasing of utility of marginal units goes on without stopping while we are consuming more and more (Blaug, 1978, p. 317). What is interesting about the marginalist interpretation of notion of scarcity is that they were tending to understand it as not just something that is "rare", but rather that is considered as rare by consumers. It was one well-known example about addled eggs that may be "rare", but if we don't want to possess addled eggs, then an addled egg will be just too many for us and thus addled egg will not obtain high value. But, if our wish to possess diamonds is actually very intense, then in this sense, even a great quantity of diamonds may appeared to be "too few" in our perception, and in such a way diamond will have a high price (Hutchison, 1978, p. 74). Therefore the marginalist or neoclassical interpretation of concept of scarcity is really different from the Classical interpretation: "the subjective element of desire is an integral part of their story" (Mirowski, 1988, p. 29). Consequently there are two important components of marginalist value theory the first one implies that the relative values of items result from their relative scarcity and the second one proposes that subjective wishes are an inalienable component in identifying the relative scarcity (Howey, 1960, p. 88). Though both of the ideas appeared in the period of 1871-1874, they were not always considered to be connected with one another. Some experts thought that rarity generated value without taking into account its subjective or objective nature; though others believed that subjective concepts such as utility or demand were essential for setting a price, but did not directly interrelate it to scarcity (Verdon, 1996, p. 90). The representatives of Classical theory and among them Adam Smith, David Ricardo, John Stuart Mill, Karl Marx, etc. considered neither of the marginalist ideas right. Flocking after the model formed by Richard Cantillon in 1755, they claimed that subjective wishes and scarcity may become essential components in forming temporary or short-run or market prices, but they claimed that the long-run, or natural, or equilibrium prices were formed just by relative production costs and usually by relative costs on labor (Verdon, 1996, p. 123). Though they had assented that rarity might become an essential component of value in few cases, "rare statues and pictures, scarce book and coins, wines of a peculiar quality" (Ricardo, 1817, cited in Verdon, 1996), so these are those goods which are impossible to produce and their value is controlled by "monopoly prices". But the cases they were going to take into account were so unique that they could be just disregarded without any prejudice. At the best, and this idea is confirmed above-mentioned Smith's quotation, they were ready to consider scarcity as a basis of value only if we assume that it is the result of high production costs. Of course, whatever "poor" part they assigned to scarcity, they did not include it into the key theoretical lay-out (Verdon, 1996, p. 117). As it was mentioned above there was a slightly different story with utility. As the Classicals mixed utility of goods and usefulness. They consented that goods must possess usefulness if they are to be produced. The mercantilist Nicholas Barbon was among the first who distinctly stated that price was affected by utility: "the Value of all Wares arise from their Use; Things of no Use, have no Value, as the English phrase is, They are good for nothing." (Barbon, 1690, cited in Bowley, 1973). John Locke and John Law supported this idea. Richard Cantillon, like the other Classicals, confirmed that goods must possess utility for being produced. Despite this fact they were sure that utility itself did not formed the relative price of goods. The natural price of goods, to their mind, must be determined by the relative production costs (Mirowski, 1988, p. 71). Utility just determines the fact that goods will be produced. For Classicals it was the only crux of the concept. They simply cut the role of utility so short that it was considered of no other possible use beyond that (Mirowski, 1988, p. 50). Thus these were Classicals who theorized that value was formed by the production costs. According to this (Smith's labor theory of value) diamonds cost much because it is necessary to apply much labor in order to find and mine them. Supposing a long-run steadiness, prices, thus, should represent production costs per unit and a level of profit that should be made level between different sectors (Verdon, 1996, p. 99). It's not a secret that "some economists, particularly many classical economists still believe this. However, this does not explain why emeralds, which are harder to find and more expensive to extract than diamonds, are not valued as highly, nor why large, easily extracted and easily found diamonds are worth much more than small, hard to extract ones" (Verdon, 1996, p. 86). Though there is also a mind that background of marginalism spring from Ricardo's theory of land-rent, where the price of land is highly influenced by the productivity of the least productive cultivating land so called marginal land. "Thus, all else equal, as the demand for agricultural crops increases, the price of land rises as farmers move to less productive land" (Hutchison, 1978, p. 75). It was Anne Robert Jacques Turgot who suggested a novel interpretation of the diamond-water paradox. He inferred that value is subjective from the point of view of the eyewitness. In such a way things do not possess an inseparable value, they possess value just to such an extent as we desire them: "Comparison of value, this evaluation of different objects, changes continually with the need of the person" (Verdon, 1996, p. 106). If water is abundant, then we highly value diamonds. But if you are in a desert, you would obviously value water over diamonds. Those experts who approve subjective value theory, and primary modern economists are among them, consider it is a confutation of intrinsicist value theories, like labor theory of value, which became a cornerstone of Marxism (Mirowski, 1988, p. 52). Behavioral economists distinctly try to investigate and model in what way subjective framework of decisions influence the value which a person places on goods and outcomes. Representatives of the Austrian School of economics, Carl Menger and Eugen von Bhm-Bawerk, develop subjective value more specifically, contributing to the theory of marginalism. Marginal utility (marginal benefit) is a so-called additional utility (redress or benefit) that is obtained by a consumer from an additional quantity of goods or services. The notion was originated from efforts of nineteenth century economists to illustrate the basic economic fundamentals of price. The notion was coined by the Austrian economist Friedrich von Wies. Another Austrian economist Eugen von Bhm-Bawerk proposed apparently the most notable illustration of the marginal theory of value, which is often used by textbooks on economics. Roughly speaking it looks like: A pioneer farmer had five sacks of grain, with no way of selling them or buying more. He had five possible uses: as basic feed for himself, food to build strength, food for his chickens for dietary variation, an ingredient for making whisky and feed for his parrots to amuse him. Then the farmer lost one sack of grain. Instead of reducing every activity by a fifth, the farmer simply starved the parrots as they were of less utility than the other four uses; in other words they were on the margin. And it is on the margin, and not with a view to the big picture, that we make economic decisions (Verdon, 1996, p. 114). The idea of diminishing marginal utility implies the marginal utility of each additional item of goods the value of which is less than that of the previous item. For instance, if you possess few slices of bread then the marginal utility of an additional one will be high. But if you possess many slices then the marginal utility of an extra slice will be low. Nowadays diminishing marginal utility is a general and usual notion in economics, though it is not supposed far and wide. It complies with the bulge of the indifference curves. On the indifference curve it is the good along the x-axis whose marginal utility starts to diminish with an increase of every unit, whereas the marginal utility of the good along y-axis keeps increasing with loss of every 'y' unit, which makes the customer less willing to trade-off 'y' for 'x' as he accumulates more of 'x' and is left with less of 'y' (Verdon, 1996, p. 201). Thus it is Neoclassical economists who obtain demand curves from indifference curves, where diminishing marginal utility is one of the inferences. And despite of the fact that the scarcity of factors of production is still taken into account as one of the components, these are marginal benefits that are obtained from goods and individual demand that are considered as the driving force of all the process and the definitive source of the economic value (Verdon, 1996, p. 125). Marginal utility was properly used as a starting point by Austrian School, for instance, the idea that the supply of labor shows the subjective marginal utility of leisure and the marginal disutility of work. They assume marginalism more absolutely, providing a strong breakthrough from the factor-input theories of value (Mirowski, 1988, p. 58). Representatives of Austrian School stated the law of marginal utility in the time when psychologists paid much attention to Weber-Fechner law of sensation. This law claims that in that order when the depth of a sensation may reach an arithmetic progression, the stimulant itself has to reach a geometric progression. For instance, if being in a quiet surroundings, a human make note of even a very slight augmentation in noise level, though if the noise level in question is already essential, then a human need a larger augmentation in order to realize the difference (Howey, 1960, p. 21). In 1889 Friedrich von Wieser created his fruitful essay on "Natural Value". In 1890 Principles of Psychology by William James, the American psychologist, appeared and proposed a new exposition of the Weber-Fechner law that broadened the understanding of marginal utility in von Weiser's sense. James considered the Weber-Fechner law as an approximate "general conclusion about friction in the neural machinery" (Howey, 1960, p. 17); If our feelings [of weight, sight, sound, etc.] resulted from a condition of the nerve molecules which it grew ever more difficult for the stimulus to increase, our feelings would naturally grow at a slower rate than the stimulus itself An ever larger part of the latter's work would go to overcoming the resistances, and an ever smaller part to the realization of the feeling-bringing state (cited in Howey, 1960). Whichever the neurological essence, the outcome of diminishing marginal utility implies that rather than possessing a great quantity of one type of goods or a great quantity of another one, we chose possessing some quantities of both types of goods. If we have ideal substitutes this result has no affect (as these goods are actually the same) but if we have ideal complements it has a great affect (Verdon, 1996, p. 192). As for Karl Marx and his part in the light of the topic we know that he died before marginalism developed into the widespread interpretation of economic value and neoclassical economics superseded classical political economy. His theories were grounded on the labor theory of value, which differentiates use value and exchange value (Hutchison, 1978, p. 71). Some economists greatly influenced by the Marx's ideas, for example, Michal Kalecki Wlodzimierz Brus and Oskar Lange tried to combine the conceptions of classical political economy and neoclassical economics. They considered that Marx's conception need to obtain as a component a complex theory of prices, and neoclassical economics need to obtain as a component a theory of the social frames of economic activity (Hutchison, 1978, p. 82). Marxists often criticize capitalism for its commodity fetishism or the illusions created by competition arguing that capitalists dominate the working class and exploit them. They argue that although individual economic visions and decision-making play a role in Marx's theory, he thought that it was necessary to understand the totality of capitalist social relations before it was possible to understand this consciousness and action. Some Marxists argue that on one level there is no conflict between marginalism and Marxism: one could employ a marginalist theory of supply and demand within the context of a big picture understanding of capitalist exploitation of labor (Verdon, 1996, p. 213). Marginalism has been carped at for being just too abstract, with the notion of marginal utility being viewed as "unobservable, unmeasurable and untestable" (cited in Verdon, 1996). Though utility, in the sense of usefulness, has some kind of objectivity, vital stuffs such as air, water, and bread are free or cost a little, and marginal utility is something subjective as the "value" of an additional item of consumption would seem to be grounded on the individual's circumstances (Mirowski, 1988, p. 64). According to its critics, marginalism is individualistic and focuses too much on the market rather than production. The theory is attacked for downplaying the role of cost of production in price determination in favor of a focus on individual's tastes and preferences. In its most extreme Austrian version, marginalism denies that an objective, cost-based, component exists at all. Rather the Austrians argue that costs of production are merely just the manifestations of individual's preferences over labor vs. leisure and saving vs. consumption" (Verdon, 1996, p. 201). Though despite all the disadvantages this direction of economic thought development essentially changed course of economics. References Mirowski, P. (1988). Against Mechanism : Protecting Economics from Science. Totowa, NJ: Rowman & Littlefield Verdon, M. (1996). Keynes and the "Classics": A Study in Language, Epistemology, and Mistaken Identities. New York: Routledge. Blaug, M. (1978). Economic Theory in Retrospect. 3rd ed. Cambridge: Cambridge University Howey, R. S. (1960). The Rise of the Marginal Utility School. Lawrence: University of Kansas Press. Hutchison, T. W. (1978). On Revolutions and Progress in Economic Knowledge. Cambridge: Cambridge University Press. Bowley, M. (1973). Studies in the History of Economic Thought Before 1870. London: Macmillan. Read More