LECTURE No. 11. Marginalism

1. The theory of marginalism. Methodological principles of marginalism

Marginalists, like representatives of other economic trends, had their own methodological principles. They, in fact, did not derive those principles of methodology that are now customarily attributed to this theory. Methodological principles are mentioned in passing in their theories. If the methodological principles are evaluated from the position of modernity, then the following can be distinguished.

1. Mathematization. It allowed the use of analysis tools used in mathematics. Although this principle does not apply to the Austrian school.

2. The equilibrium approach is an attempt to estimate the equilibrium state of the market, despite short-term changes in any variables in the economy.

3. Individualism. Marginalists evaluated the economic behavior of each individual person (individual), and not of a country or class, as suggested by the mercantilists or the classics.

4. Limit analysis is the analysis of limit values. If, after adding one more unit of goods, the overall level of profit or utility is not added, then this state is already the equilibrium state.

5. Economic rationality. Marginalists have constantly sought to prove that business entities always want to maximize what they are most interested in.

Buyers are always interested in usefulness and quality, and manufacturers are always interested in profit.

6. Statistical approach. Marginalists were more interested not in the economy itself, but in how it constantly changes. For them, the most important question was how a system consisting of selfish, constantly wanting to do everything only for themselves, people manage to exist and not collapse.

2. Marginalist theory of value and its advantages

The marginalist approach to the theory of value is opposed to the classical approach, that is, the price of a product should be based on demand, and not on costs. Marginalists attached great importance to the taste and preference of consumers, so the theory of consumer choice became the first main theory. On the one hand, marginalists believed that the price is a subjective assessment of the product (someone is expensive, someone is not), and on the other hand, it is very difficult to compare the cost of subjective goods. Yet the main theory of marginalists is the theory of marginal utility. One of the main problems that marginalists studied was the idea of ​​the proportions of the exchange of goods. This problem was solved by the theory of marginal utility.

Alfred Marshall believed that it was almost impossible to do this in natural terms, but you can indirectly measure everything in money and come to some kind of agreement. He was a supporter of cardinalism (if you compare goods by utility, and then add or subtract the utility of another good, you can get the true utility of the goods).

V. Pareto - an opponent of A. Marshall - denied that a person can measure the utility of each product. In his opinion, the maximum that a person is capable of, if at all, is to arrange the goods that are needed in a list from the most necessary to the not very necessary. He also believed that it was simply impossible to add up the utility of a product. His approach is called ordinalism.

The most important advantage of the marginalist revolution is its universality. Classical cost theory was almost impossible to apply to world trade. Marginal utility theory has created a theoretical language that can be applied to other economic theories and problems, and also explained the proportions of exchange.

3. Marginalist revolution. Causes and consequences of the marginalist revolution

The marginalist revolution "turned over" economic science as a whole, that is, it changed its methods and the very subject of study.

60 After the marginalist revolution (after the 1870s), according to many modern scholars, the era of modern economic thought began.

Perhaps one of the reasons for the revolution can be called the publication of a book by William Jevons called "The Theory of Political Economy" at the time when the works of Karl Menger were published. This was the impetus for the beginning of the marginalist revolution.

It is believed that marginalism is opposition to the economic teachings of Karl Marx. This can also be attributed to one of the causes of the marginalist revolution.

According to the views of many scholars, the marginalist revolution prevailed, most likely for reasons that come from within economics itself. Such reasons include the following:

1) "parsimony" of this theory (one principles of research);

2) analytical tools, the same for all problems (economic and non-economic);

3) universality of the method and tools of analysis (formation of a single language).

The consequences of the marginalist revolution can be summarized as follows:

1) creation of economic associations, magazines;

2) abstract level of analysis;

3) simplification of the human image;

4) simplification of the image of the world.

At first, marginalists were divided into schools according to the language they speak, i.e. Austrian (German) (represented by Karl Menger, Eugen Böhm-Bawerk, Friedrich von Wieser), Lausanne (French) (represented by V. Pareto ) and English (represented by William Stanley Jevons, Francis Isidro Edgeworth, F. G. Wicksteed). Over time, Alfred Marshal and his followers were added to the last of the groups, and the group began to be called the Cambridge School. Then J. B. Clark was added to it, and the school was renamed again (this time to the Anglo-American school).

English marginalists - William Jevons and Francis Edgeworth.

William Stanley Jevons (1835-1882) - dropped out of college at the University of London, where he studied chemistry and metallurgy, when his father went bankrupt in 1847. Because of this, he had to go to work at the mint, which was located in Sydney in Australia. His job allowed him to devote time to his hobbies. William Jevons was interested in such sciences as meteorology and economics. Even at a young age, Jevons was very interested in photography and collecting statistical data, and was also interested in the problems of railway transport. He lived in Australia for five years and then decided to return to London to finish his studies at his university, although after returning he chose to study economics. The first of his works brought him virtually no success. They were called “On the General Mathematical Theory of Political Economy” and “Note on Statistical Methods for Studying Seasonal Fluctuations” (1862). His next works became more famous. This is a work on the price of gold (1683), as well as a work called "The Coal Question" (1865). In the second paper, William Jevons looks at what problems might arise if England runs out of coal. Yet his most famous books are The Theory of Political Economy (1871) and The Principles of Science - a treatise on logic and scientific method (1874). William Jevons worked as a teacher from 1863 to 1880, first for 13 years in Manchester and then for 4 years in London.

This scientist can be attributed to very versatile economists, because he was fascinated by both applied analysis and statistical research, as well as the methodology and logic of economic science. It was he who compiled a review on the development of the mathematical theory of marginal utility for each author separately, without diminishing the merits of each of them. It is also generally accepted that it was he who laid the foundations of modern logic in his writings. We should not forget about his contribution to the development of the theory of indices or the attempt to create the theory that the economic cycle depends on the activity of the sun. The publication of his book entitled "The Theory of Political Economy" at the time when the works of Karl Menger were published and served as an impetus for the start of the marginalist revolution.

According to Jevons, economics must also be mathematical, since it has enough numbers. The mathematical approach helps to make economic theory a more accurate science. This science should be based on statistical data.

Francis Isidro Edgeworth (1845-1926) is practically the most original economist of his time. Although his education was at home, it was the envy of many. For example, not everyone is able to learn six languages, including Latin. Also, a little later, he studied humanities at the universities of Dublin and Oxford. The range of his hobbies also does not leave anyone indifferent and causes a lot of surprises. This includes philosophy, ethics, ancient languages, logic, and even mathematics, which he had to master himself. Edgeworth was so proficient in these subjects that he even taught many of them. Meeting Alfred Marshall and William Jevons sparked his passion for statistics and economics. In 1891 he became professor of economics at Oxford and remained so until 1922. It was also during this time that he became a publisher and co-publisher with such a scholar as John Maynard Keynes. In the same year, Edgeworth was appointed chairman of the editorial board of the well-known Economic Journal. He wrote mostly articles for magazines, as well as articles for the Palgrave Dictionary (Dictionary of Political Economy, published in 1925). Francis Edgeworth is also known as the author of the book “Mathematical Psychology” (1881). The works of this scientist, both now and during his lifetime, were very difficult to understand, because his works are a rather complex mixture of quotes from Latin and Greek authors and very complex mathematics. Most of all, Edgeworth was concerned about economic problems that were associated with limiting competition, as well as price discrimination. Of all his contributions to economic theory, the most original is his contribution to the theory of exchange.

4. Utility theory by William Stanley Jevons

According to Jevons, the most important thing for the economy is to maximize pleasure. How useful the good we have depends on the amount we have: and =f(x). According to Jevons, the degree of utility is the utility of the increment of the good, which is equal to Δu / Δx, and if the increment is infinitely small - the derivative ux - di / dx. From the point of view of William Jevons, the most interesting thing for economists is the utility of the most recent increase in the good. He called this utility the last degree of utility. The greater the increase in the good, the more the marginal degree of utility decreases. This principle is called the first law of Gossen, but William Jevons considered himself the discoverer of this "great principle".

According to Jevons, the last degree of utility is an infinitesimal increase in goods. Representatives of the Austrian school considered this concept incorrect, and Jevons on this occasion was of the opposite opinion, albeit with a reservation. This concept should refer not to one person, but to the whole nation in general. A small problem arises here, because the law of diminishing marginal utility is created on the basis of and specifically for one person. But, according to Jevons, what is deduced in theory for an individual must be tested in practice.

According to Jevons, it is necessary to distribute the optimal consumption of goods in such a way that the last degree of utility remains the same:

where v is the last degree of utility;

p - probability;

q is the coefficient of proximity in time;

1, 2, n - time points.

William Jevons determines the price of a commodity in the same way as the representatives of the Austrian school determine the exchange value, that is, relying only on marginal utility. In such a process, the costs of direct participation, in fact, do not take. They are only able to indirectly influence the volume of goods offered on the market. On this occasion, Jevons even forms a chain of dependence, which can be represented as follows: supply is determined by production costs => last degree of utility is determined by existing supply => value is determined by the last degree of utility.

This so-called Jevons chain is "stretched" in terms of time, i.e. if it is time to determine the value, then the offer has already been determined earlier. Therefore, supply and demand cannot be determined at the same moment, as suggested by Alfred Marshall.

5. The Exchange Theory by William Stanley Jevons

Jevons derived the theory of exchange from his own theory of utility. The theory of exchange also became a theory of value. The concept of "value" is very multifaceted: it is both exchange value, and use value, etc. According to Jevons, one should use the word "value" for the concept of exchange value. Exchange value is a proportion in the exchange of heterogeneous goods (one for another). It is capable of becoming an exchange proportion in the open market, where everything is available to everyone.

Trading parties in the market can be both individuals and groups of any profession, and possibly the population of an entire country or continent. The concept of "trading parties" was introduced by William Jevons because he wanted to spread his theory in real markets, where there are a huge number of buyers and sellers. His theory of individual exchange is based on the theory of marginal utility. However, Francis Edgeworth soon came to the conclusion that such reasoning is at least incorrect, if not ridiculous, because the average marginal utility of a good for a group of people subsequently depends on the distribution of goods both before and after the exchange, so relying on such an explanation is practically impossible. Because of all this, Jevons failed to derive the marketable exchange value of goods from their marginal utility. Therefore, his theory only describes the case of individual exchange.

This diagram can be used to outline Jevons' theory of exchange. The abscissa shows the goods that are going to be exchanged. Let's say it's bread and fish. The amount of bread in our diagram increases from right to left, the amount of fish - vice versa. On the y-axis we plot the marginal utility of these two goods. Accordingly, we get that the marginal utility of bread now increases from left to right, and fish - from right to left. Let's call one side A, the other side B. Suppose that, before they exchanged, they had a units of fish (side A) and b units of bread (side B). After they exchanged part of their commodities for each other's commodities, the amount of their original commodities shifted to points a' and b' respectively. Based on this, the utility of grain is aa'gd, and the utility of meat at this point is aa'ch, so the net utility gain can be expressed as: hdgc. From this we can conclude that it is interesting for A to exchange up to the point m, respectively, the same is beneficial for B.

6. Labor Supply Theory by William Stanley Jevons

According to Jevons, work is a very unpleasant, rather dreary and painful occupation. Most often, labor is a negative utility. If you increase the time spent on labor, then the hardships of labor automatically increase. We can represent the net utility of labor in the following diagram:

When a person has started work, it takes a certain period of time to get involved in it and start enjoying it. In this diagram, it is represented by the segment ab. After a person has become involved in work, a certain period of time passes before the work begins to bother and cause dreary thoughts that this work must be done by a certain period of time. Such a magical gap is indicated on the diagram by a segment bc. Since human strength is still not unlimited, fatigue begins to manifest itself, therefore, both productivity and pleasure from one's work fall. The decline in performance is represented in the diagram by the segment cd. When should work be completed? To find out how to answer this question, you will need to draw a utility curve for the product, more precisely, a curve of the last degree. From the above scheme, it can be understood that work should be stopped at point m, because at this point the last degree of utility of the product (segment mq) is equal to the degree of unutility of labor (segment md). The same can be represented as the following formula:

where and - utility;

l - hardships of labor;

x is the volume of the product.

Based on the above, we can conclude that the theory of labor by William Jevons is purely subjective.

7. Francis Isidro Edgeworth's Exchange Theory

Francis Edgeworth was the first to present utility as a function of several goods, rather than one, as was usually done. The simplest is if there are only two goods: U = U(x, y). He presented indifference curves to the public, which display this function graphically. Many students of economics today are familiar with the Edgeworth chart. Although the diagram itself was not created by him, but by V. Pareto, based on his material ("angle" on the graph).

In addition, Edgeworth indifference curves are not at all like Pareto charts. But still he is considered a pioneer in this area of ​​economic theory.

I, II, III - Robinson curves in ascending order.

3, 2, 1 - curves of Friday in ascending order.

Using this scheme as an example, we can consider the case when the exchange is isolated. Here is the option that Edgeworth suggests. Robinson and Friday are on a desert island. Robinson asks Friday to sell him his labor (x2) for money (x1), which he is willing to pay. In the diagram, the amount of money and the amount of labor are plotted on the respective axes. For each of the participants in this transaction, the indifference curves increase, that is, the more one of them gives to the other, the more he asks from the first.

The place where the points meet on the Edgeworth indifference curves is called the contract curve (CC). These points are better than all the others, since everyone who participates in the exchange is in the most advantageous position and at the same time does not in the least constrain the other in his desires. If from point Q, which does not lie on the contract curve, we move along curve 2 to point CC, then Robinson will thus gain, and Friday will not lose anything. From this follows the conclusion that if the exchange is isolated, then any of the points of the contract curve is an equilibrium.

When the number of participants increases, price competition begins. This leads to the fact that the opportunity to reach equilibrium is reduced, since some points on the curve are already completely unattainable. When there are many sellers and many buyers, the price will tend to a point that corresponds to perfect competition. Under perfect competition, that is, when the number of buyers, as well as the number of sellers, is infinite, the equilibrium of exchange is precisely determined. This is the meaning of Francis Edgeworth's theorem.

Authors: Eliseeva E.L., Ronshina N.I.

<< Back: Austrian school (Austrian school: the theory of marginal utility as a theory of pricing. The economic views of Eugen Böhm-Bawerk. The teachings of Carl Menger. The economic views of Friedrich von Wieser)

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