Chapter9 THEMARGINALISTSCHOOL JEVONS MENGER VONWIESER ANDVONBO HM BAWERK Introduction AlthoughCournot Dupuit vonThu nen andGossenprovidedpath breakingmarginalanalyses marginalismasamoreclearlydefinedschoolofeconomicthoughtoriginatedwithW StanleyJevonsinEngland CarlMengerinAustria andLe onWalrasatLausanne Switzerland WilliamStanleyJevonswasborninLiverpool England Heinventedalogicmachine exhibitedbeforetheRoyalSocietyin1870 thatcouldyieldaconclusionmechanicallyfromanygivensetofpremises Jevonswasalsofamousasahistorianofscience andhemadeoutstandingcontributionstothedevelopmentofindexnumbers 9 1WILLIAMSTANLEYJEVONS 1835 1882 Guidedbywin winconcept JevonsonValueTheoryJevonscalledRicardo thatablebutwrong headedman who shuntedthecarofEconomicscienceontoawrongline UnlikeRicardo whomightsaythatpearlshavevaluebecausepeopleneedtodiveforthem Jevonsissayingthatpearlshavevaluebecausebuyersgetutilityfromthemandthatpeoplediveforpearlsbecausepearlshavesuchvalue Thespecificlevelofutilityassociatedwiththepearlsdependsonthenumberofpearlspeoplepresentlypossess Guidedbywin winconcept JevonsonValueTheoryToexplainJevons svaluetheory wemustthereforebeginwithhistheoryofthelawofdiminishingmarginalutility TheoryofdiminishingmarginalutilityJevons stheoryofdiminishingmarginalutilityissimilartotheearlierideasofGossenandDupuit Jevonssaidthatutilitycannotbemeasureddirectly atleastwiththetoolsathand Thissubjectivepleasureorsatisfactioncanbeestimatedonlybyobservinghumanbehaviorandnotinghumanpreferences Guidedbywin winconcept ThetotalutilitythataconsumerreceivesfromeachquantityofcommodityXisshownbyTUintheuppergraph Thelowergraphshowsthemarginalutility MU orthechangeintotalutility aseachunitofthecommodityisadded Marginalutility whichisequivalenttoJevons sfinaldegreeofutility declinesasmoreofcommodityXisconsumed ThetotalutilityofquantityX1isTU1 themarginalutilityofunitX1isMU1 Jevons sLawofDiminishingMarginalUtility b Rationalchoice theequimarginalruleJevons sexampleissimplyaspecialcaseofGossen ssecondlaw theconsumerwishingtomaximizeutilitywillallocatemoneyincomeinsuchawaythatthemarginalutilityofthelastdollarspentonallcommoditiesisequal Jevonsemployedhisnotionoffinalutility marginalutility toformalizeageneraltheoryofrationalchoice Symbolicallythisisstatedas MUx Px MUy Py MUn Pn Theroleofdiminishingmarginalutilityisimportanthere c TheoryofexchangeJevonsalsousedhisprincipleofutilitymaximizationtoexplainthegainsfromexchange Supposethatoneparty tradingbody hasonlycornandanotherhasonlybeef Howisitthatexchangewillbenefiteach Atwhatpointwillexchangecease Onceagaintheequimarginalrulecomesintoplay d Jevonsonlabor RecallthatJevonsheldutilitytobethedeterminantofexchangevalue Costofproductiondeterminessupply Supplydeterminesfinaldegreeofutility Finaldegreeofutilitydeterminesvalue Laboritselfisasubjective psychologicalcost a painfulexertion Theproblemofeconomicsis tosatisfyourwantswiththeleastpossiblesumoflabour Toaccomplishthis theworkermustcomparethepainofworkandthepleasureofearnings JevonspresentedhistheoryoftheoptimalamountofworkgraphicallyasshowninFigure Jevonstheorizedthattheworkercomparesthemarginalutilityofearningsfromthejob MUe withthemarginaldisutilityofwork MDUw Theoptimalamountofworkisshownbym wherethemarginalutilityofearnings qm equalsthemarginaldisutilityofwork dm d Jevonsonlabor OtherTopicsAddressedbyJevonsJevonsaddressedseveraladditionaltopicsthatdeservediscussion First althoughhedidnotfullydevelopageneraltheoryofdistributionbasedonmarginalproductivity nordidheadequatelyexplainthelawofdiminishingreturnsonwhichsuchatheoryofdistributioncouldbebuilt hedidunderstandtherudimentsofbothideas Second Jevonscontributedtothetheoryofinsuranceandgambling JevonsonPublicPolicy Jevonsfavoredfreepublicmuseums concerts libraries andeducation Hebelievedthatchildlaborshouldberestrictedbylawandthathealthandsafetyconditionsinfactoriesshouldberegulated Jevonsopposedregulatingthehoursoflaborofadultmales Jevonssupportedacautiousextensionoflegislationtoimprovepublicsanitationbutwasundecidedaboutwhetherimprisonmentfordebtshouldbeabolished 9 2CARLMENGER 1840 1921 AsaprofessorattheUniversityofVienna Mengerpublishedhispathbreakingtreatise PrinciplesofEconomics Menger simmediateandlastingimpactoneconomicswassubstantial TwoofMenger smoresignificantcontributionswerehistheoriesofvalueandimputation Menger sValueTheory LikeJevons Mengerbasedhisvaluetheoryontheconceptofutility ContrarytoJevons however hedeliberatelymadenouseofmathematicsinformulatinghistheory andheavoidedconstructingituponaBenthamitebase Menger sValueTheory Thetableshowsthehypotheticalvaluesofmarginalutilityforvariousnumbersofunitsof10commodities orclassesofcommodities IthroughX Menger sValueTheory AnimplicitassumptionofMenger stableisthateachunitofeachcommodityrepresentsthesameexpenditureofmoneyoreffortorsacrifice 1inourexample AnotherimplicitassumptionofMenger stableisthattheeconomizingindividualisabletoranksatisfactionsnotonlyordinallybutcardinallyaswell Themeasureofvalue saidMenger isentirelysubjective There