Editing Marginalism (section)

== History ==
{{Expand section|date=June 2008}}

=== Proto-marginalist approaches ===
Perhaps the essence of a notion of diminishing marginal utility can be found in [[Aristotle]]'s [[Politics (Aristotle)|''Politics'']], wherein he writes {{Blockquote|external goods have a limit, like any other instrument, and all things useful are of such a nature that where there is too much of them they must either do harm, or at any rate be of no use<ref>[[Aristotle]], ''Politics'', Bk 7 Chapter 1.</ref>}}

There has been marked disagreement about the development and role of marginal considerations in Aristotle's' value theory.<ref>Soudek, Josef; "Aristotle's Theory of Exchange: An Inquiry into the Origin of Economic Analysis", ''Proceedings of the American Philosophical Society'' v 96 (1952) pp. 45–75.</ref><ref name="kauder">Kauder, Emil; "Genesis of the Marginal Utility Theory from Aristotle to the End of the Eighteenth Century", ''Economic Journal'' v 63 (1953) pp. 638–50.</ref><ref>Gordon, Barry Lewis John; "Aristotle and the Development of Value Theory", ''Quarterly Journal of Economics'' v 78 (1964).</ref><ref name="schumArist">Schumpeter, Joseph Alois; ''History of Economic Analysis'' (1954) Part II Chapter 1 §3.</ref><ref>Meikle, Scott; ''Aristotle's Economic Thought'' (1995) Chapters 1, 2, & 6.</ref>

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.<ref>[[Karl Přibram|Přibram, Karl]]; ''A History of Economic Reasoning'' (1983).</ref>

Eighteenth-century Italian [[Mercantilism|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.<ref name="pribramItalMerc">Pribram, Karl; ''A History of Economic Reasoning'' (1983), Chapter 5 "Refined Mercantilism", "Italian Mercantilists".</ref> 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): {{Blockquote|It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price.<ref>Whately, Richard; ''Introductory Lectures on Political Economy, Being part of a course delivered in the Easter term'' (1832).</ref>|sign=|source=}}

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".<ref>Bernoulli, Daniel; "Specimen theoriae novae de mensura sortis" in ''Commentarii Academiae Scientiarum Imperialis Petropolitanae'' 5 (1738); reprinted in translation as "Exposition of a new theory on the measurement of risk" in ''Econometrica'' 22 (1954).</ref> This paper appeared in 1738, but a draft had been written in 1731 or in 1732.<ref>Bernoulli, Daniel; letter of 4 July 1731 to Nicolas Bernoulli ([http://www.cs.xu.edu/math/Sources/Montmort/stpetersburg.pdf#search=%22Nicolas%20Bernoulli%22 excerpted in PDF] {{webarchive|url=https://web.archive.org/web/20080909221757/http://www.cs.xu.edu/math/Sources/Montmort/stpetersburg.pdf |date=9 September 2008 }}).</ref><ref>Bernoulli, Nicolas; letter of 5 April 1732, acknowledging receipt of "Specimen theoriae novae metiendi sortem pecuniariam" ([http://www.cs.xu.edu/math/Sources/Montmort/stpetersburg.pdf#search=%22Nicolas%20Bernoulli%22 excerpted in PDF] {{webarchive|url=https://web.archive.org/web/20080909221757/http://www.cs.xu.edu/math/Sources/Montmort/stpetersburg.pdf |date=9 September 2008 }}).</ref> In 1728, [[Gabriel Cramer]] produced fundamentally the same theory in a private letter.<ref>Cramer, Garbriel; letter of 21 May 1728 to [[Nicolaus I Bernoulli|Nicolaus Bernoulli]] ([http://www.cs.xu.edu/math/Sources/Montmort/stpetersburg.pdf#search=%22Nicolas%20Bernoulli%22 excerpted in PDF] {{webarchive|url=https://web.archive.org/web/20080909221757/http://www.cs.xu.edu/math/Sources/Montmort/stpetersburg.pdf |date=9 September 2008 }}).</ref> 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",<ref>Finally some recognition that the guidance isn't clear.</ref> 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.<ref>[[Edwin Robert Anderson Seligman|Seligman, Edwin Robert Anderson]]; "On some neglected British economists", ''Economic Journal'' v. 13 (September 1903).</ref>

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.<ref>White, Michael V; "Diamonds Are Forever(?): Nassau Senior and Utility Theory" in ''The Manchester School of Economic &amp; Social Studies'' 60 (1992) #1 (March).</ref>

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.<ref>Dupuit, Jules; "De la mesure de l'utilité des travaux publics", ''Annales des ponts et chaussées'', Second series, 8 (1844).</ref>

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, [[William Stanley Jevons|Jevons]] in England, [[Carl Menger|Menger]] in Austria, and [[Léon Walras|Walras]] in Switzerland.{{citation needed|date=July 2012}} [[William Stanley Jevons]] first proposed the theory in an article in 1862 and a book in 1871.<ref>[http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/jevons/mathem.txt “A General Mathematical Theory of Political Economy”] {{Webarchive|url=https://web.archive.org/web/20061215140931/http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/jevons/mathem.txt |date=15 December 2006 }} ([http://www.eco.utexas.edu/~hmcleave/jevonsmath.pdf PDF]{{Dead link|date=October 2022 |bot=InternetArchiveBot |fix-attempted=yes }}), ''The Theory of Political Economy'' (1871).</ref> Similarly, [[Carl Menger]] presented the theory in 1871.<ref>''Grundsätze der Volkswirtschaftslehre'' (translated as [https://mises.org/document/595 ''Principles of Economics'' PDF])</ref> 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.{{vague|date=July 2012}}<ref name="georgescu-rogen"/> [[Léon Walras]] introduced the theory in ''Éléments d'économie politique pure'', the first part of which was published in 1874. The American [[John Bates Clark]] is also associated with the origins of Marginalism, but did little to advance the theory.{{citation needed|date=July 2012}} This new way of thinking was a very drastic shift in thinking from the classical school of economics, founded in part by Adam Smith, David Ricardo and Thomas Malthus. The classical school of economics believed in a concept called the labor theory of value which emphasized the idea that the amount of time it took to produce a good determined the value of that good. This concept's rival, marginal utility on the other hand, focused on the value that the consumer received from the good when determining its value.<ref>{{cite book |last1=Backhouse |first1=Roger |title=The New Palgrave Dictionary of Economics |chapter=Marginal Revolution |date=17 August 2017 |pages=3886–3888 |publisher=Palgrave Macmillan UK |doi=10.1007/978-1-349-58802-2_1023 |doi-broken-date=1 November 2024 |isbn=9781349588022 |chapter-url=https://link.springer.com/referenceworkentry/10.1007/978-1-349-58802-2_1023}}</ref> 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".<ref>{{cite book |last1=Desai |first1=Meghnad |title=Marx's Revenge: The Resurgence of Capitalism and the Death of Statist Socialism |publisher=Verso Books}}</ref> 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.<ref>{{cite book |last1=Sandmo |first1=Agnar |title=Economics Evolving: A History of Economic Thought |publisher=Princeton University Press}}</ref> 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 ====
{{Austrian School sidebar |expanded=theory}}
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 (economist)|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 Fetter|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 School|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.<ref name="salerno">Salerno, Joseph T. 1999; "The Place of Mises's Human Action in the Development of Modern Economic Thought". ''Quarterly Journal of Economic Thought'' v. 2 (1).</ref>

Böhm-Bawerk was perhaps the most able expositor of Menger's conception.<ref name="salerno" /><ref>Böhm-Bawerk, Eugen Ritter von. "Grundzüge der Theorie des wirtschaftlichen Güterwerthes", ''Jahrbüche für Nationalökonomie und Statistik'' v 13 (1886).  Translated as ''Basic Principles of Economic Value''.</ref> 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 product]]ivity of time and with [[time preference]].<ref name="bawerk_capital"/> (This theory was adopted in full and then further developed by [[Knut Wicksell]]<ref>Wicksell, Johan Gustaf Knut; ''Über Wert, Kapital unde Rente'' (1893). Translated as [https://mises.org/books/valuecapital.pdf ''Value, Capital and Rent''.]</ref> and with modifications including formal disregard for time-preference by Wicksell's American rival [[Irving Fisher]].<ref>Fisher, Irving; ''Theory of Interest'' (1930).</ref>)

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 economics|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.<ref name="schumMarshScis" />

==== 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 socialism|(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.<ref name=":0">{{cite book|title=An Outline of the History of Economic Theory |author-last1=Screpanti |author-first1=Ernesto |author-link1=Ernesto Screpanti |author-last2=Zamagni |author-first2=Stefano |author-link2=Stefano Zamagni |publisher=[[Oxford University Press]] |year=2005 |pages=170–173}}</ref>

Aside from the rise of Marxism, [[Ernesto Screpanti|E. Screpanti]] and [[Stefano Zamagni|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 [[Perfect competition|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.<ref name=":0" />

Scholars have suggested that the success of the generation who followed the preceptors of the Revolution was their ability to formulate straightforward responses to [[Marxist economic theory]].<ref name="screpanti">{{cite book|author-last1=Screpanti |author-first1=Ernesto |author-link1=Ernesto Screpanti |author-last2=Zamagni |author-first2=Stefano |author-link2=Stefano Zamagni |title=An Outline of the History of Economic Thought |date=1994}}</ref> The most famous of these was that of Böhm-Bawerk, "{{lang|de|Zum Abschluss des Marxschen Systems}}" (1896),<ref>{{cite book|author-last=Böhm-Bawerk |author-first=Eugen Ritter von |author-link=Eugen von Böhm-Bawerk |title=Zum Abschluss des Marxschen Systems |language=de |trans-title=On the Closure of the Marxist System |publisher=Staatswiss. Arbeiten. Festgabe für [[Karl Knies|K. Knies]] |date=1896}}</ref> but the first was Wicksteed's "The Marxian Theory of Value. ''Das Kapital'': A Criticism" (1884,<ref>{{cite magazine|author-last=Wicksteed |author-first=Philip Henry |author-link=Philip Wicksteed |title=Das Kapital: A Criticism |magazine=To-day |number=2 |date=1884 |pages=388–409}}</ref> followed by "The Jevonian Criticism of Marx: A Rejoinder" in 1885).<ref>{{cite magazine|author-last=Wicksteed |author-first=Philip Henry |author-link=Philip Wicksteed |title=The Jevonian criticism of Marx: a rejoinder |magazine=To-day |number=3 |date=1885 |pages=177–179}}</ref> The most famous early Marxist responses were [[Rudolf Hilferding]]'s {{lang|de|Böhm-Bawerks Marx-Kritik}} (1904)<ref name="hilferding">{{cite book|author-last=Hilferding |author-first=Rudolf |author-link=Rudolf Hilferding |title=Böhm-Bawerks Marx-Kritik |language=de |date=1904 |trans-title=Böhm-Bawerk's Criticism of Marx}}</ref> and ''The Economic Theory of the Leisure Class'' (1914) by [[Nikolai Bukharin]].<ref name="bukharin">{{cite book|author-first=Nikolai |author-last=Bukharin |author-link=Nikolai Bukharin |title=Политической экономии рантье |date=1914 |url=http://www.marxists.org/archive/bukharin/works/1927/leisure-economics/ |trans-title=The Economic Theory of the Leisure Class}}</ref>

=== Eclipse ===
In his 1881 work ''Mathematical Psychics'',<ref>[http://socserv.mcmaster.ca/econ/ugcm/3ll3/edgeworth/mathpsychics.pdf ''Mathematical Psychics'']</ref> [[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.<ref>[[Eugen Slutsky]]; "Sulla teoria del bilancio del consumatore", ''Giornale degli Economisti'' 51 (1915).</ref> Because of [[World War I|the World War]], the [[October Revolution|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]]<ref>Hicks, John Richard, and Roy George Douglas Allen; "A Reconsideration of the Theory of Value", ''Economica'' 54 (1934).</ref> 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,<ref>[[von Mises, Ludwig Heinrich]]; ''[[Theorie des Geldes und der Umlaufsmittel]]'' (1912).</ref> 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")<ref>Hicks, Sir John Richard; ''Value and Capital'', Chapter I. "Utility and Preference" §8, p. 23 in the 2nd edition.</ref> about decreasing marginal rates of substitution<ref name="hicks_vc">Hicks, Sir John Richard; ''Value and Capital'', Chapter I. "Utility and Preference" §7–8.</ref> 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|Bohr model of the atom]]—perhaps pedagogically useful, but "old fashioned" and ultimately incorrect.<ref name="hicks_vc" /><ref name="samuelson">Samuelson, Paul Anthony; "Complementarity: An Essay on the 40th Anniversary of the Hicks-Allen Revolution in Demand Theory", ''Journal of Economic Literature'' vol 12 (1974).</ref>

=== Revival ===
When Cramer and Bernoulli introduced the notion of diminishing marginal utility, it had been to address [[St. Petersburg paradox|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 P. Ramsey|Frank Ramsey]] (1926),<ref>Ramsey, Frank Plumpton; "Truth and Probability" ([http://cepa.newschool.edu/het//texts/ramsey/ramsess.pdf  PDF] {{webarchive|url=https://web.archive.org/web/20080227205205/http://cepa.newschool.edu/het//texts/ramsey/ramsess.pdf |date=27 February 2008 }}), Chapter VII in ''The Foundations of Mathematics and other Logical Essays'' (1931).</ref> [[John von Neumann]] and [[Oskar Morgenstern]] (1944),<ref>von Neumann, John and Oskar Morgenstern; ''[[Theory of Games and Economic Behavior]]'' (1944).</ref> and [[Leonard Jimmie Savage|Leonard Savage]] (1954).<ref>Savage, Leonard Jimmie; ''Foundations of Statistics'' (1954).</ref> 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 [[Occam's razor|Ockhamistic argument]].<ref name="samuelson" /> It should perhaps be noted that in expected utility analysis the law of diminishing marginal utility corresponds to what is called [[risk aversion]].