8.1 The marginal revolution: Jevons, Menger, and Walras
4 min read•august 9, 2024
The marginal revolution marked a pivotal shift in economic thinking during the 1870s. Jevons, Menger, and Walras independently developed , challenging and introducing mathematical rigor to the field.
These pioneers laid the foundation for , emphasizing subjective value and marginal analysis. Their work revolutionized how economists approached consumer behavior, production theory, and market , shaping modern microeconomic thought.
Pioneers of Marginal Analysis
Key Figures and Their Contributions
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- developed mathematical economics and applied marginal utility theory to consumer behavior
- Published "The Theory of Political Economy" in 1871
- Introduced the concept of final degree of utility, which later became known as marginal utility
- Applied mathematical methods to economic analysis, including supply and demand curves
- founded the and independently developed marginal utility theory
- Published "Principles of Economics" in 1871
- Emphasized subjective value and in economic analysis
- Developed the theory of imputation, explaining how the value of goods is derived from their ability to satisfy human needs
- formulated and contributed to mathematical economics
- Published "Elements of Pure Economics" in 1874
- Developed a system of simultaneous equations to model economic equilibrium
- Introduced the concept of tâtonnement (groping) to explain how markets reach equilibrium through a process of trial and error
Historical Context and Impact
- Marginal revolution occurred in the 1870s, marking a shift from classical to neoclassical economics
- Challenged the proposed by classical economists (Adam Smith, David Ricardo)
- Introduced more rigorous mathematical methods to economic analysis
- Laid the foundation for modern microeconomic theory and consumer behavior analysis
- Influenced subsequent economic thought, including the development of welfare economics and game theory
Marginal Utility and Value Theory
Foundations of Marginal Utility
- Marginal utility measures the additional satisfaction gained from consuming one more unit of a good or service
- principle states that as consumption increases, additional satisfaction decreases
- Mathematically expressed as , where MU is marginal utility, U is total utility, and Q is quantity consumed
- Subjective theory of value posits that the value of a good or service depends on individual preferences and circumstances
- Contrasts with objective theories of value (labor theory of value)
- Explains why different individuals may assign different values to the same good
- Accounts for variations in prices based on supply and demand dynamics
Applications of Marginal Analysis
- Marginal analysis involves examining the effects of small changes in economic variables
- Used to determine optimal allocation of resources and decision-making
- Applied in various fields, including production theory, consumer choice, and public policy
- Consumer behavior modeling uses marginal utility to explain purchasing decisions
- Consumers maximize utility by equalizing marginal utility per dollar spent across all goods
- Expressed mathematically as , where MU is marginal utility and P is price for goods A and B
- Production theory employs marginal analysis to determine optimal output levels
- Firms maximize profits by producing until marginal revenue equals marginal cost
- Expressed as , where MR is marginal revenue and MC is marginal cost
Schools of Thought
Austrian School of Economics
- Founded by Carl Menger, emphasizes methodological individualism and
- Rejects mathematical modeling in favor of logical deduction and verbal reasoning
- Key figures include Eugen von Böhm-Bawerk, Friedrich von Wieser, and Ludwig von Mises
- Methodological individualism asserts that economic phenomena result from individual actions and choices
- Contrasts with methodological holism, which focuses on aggregate social structures
- Influences Austrian approach to understanding market processes and economic coordination
- explains economic fluctuations through monetary policy and credit expansion
- Developed by Ludwig von Mises and Friedrich Hayek
- Argues that artificially low interest rates lead to malinvestment and eventual economic downturns
Lausanne School and General Equilibrium Theory
- Lausanne School, led by Léon Walras and later Vilfredo Pareto, focused on mathematical economics and general equilibrium theory
- Emphasized interdependence of markets and simultaneous determination of prices and quantities
- Developed rigorous mathematical models to represent economic systems
- General equilibrium theory analyzes the simultaneous equilibrium of all markets in an economy
- Walrasian model uses a system of equations to represent supply and demand in multiple markets
- Demonstrates how changes in one market can affect equilibrium in other markets
- Later refined by economists like Kenneth Arrow and Gérard Debreu
- concept emerged from the Lausanne School
- Describes a state where no individual can be made better off without making someone else worse off
- Used as a benchmark for evaluating economic policies and resource allocation
- Mathematically expressed as the tangency between an indifference curve and a budget constraint in consumer theory
Key Terms to Review (22)
Austrian Business Cycle Theory: Austrian Business Cycle Theory (ABCT) explains the cyclical nature of economic booms and busts, attributing them to artificially low interest rates and excessive credit expansion by central banks. This theory emphasizes the importance of real savings and the proper allocation of resources, suggesting that misallocations occur when investment projects are financed by unsustainable credit rather than genuine savings. The theory connects to the concepts of subjective value and marginal utility introduced during the marginal revolution.
Austrian School of Economics: The Austrian School of Economics is a school of thought that emphasizes the importance of individual action, subjectivism, and the role of entrepreneurship in economic theory. It originated in the late 19th century and is known for its critique of mainstream economic theories, particularly regarding market dynamics and the effects of government intervention.
Carl Menger: Carl Menger was an Austrian economist and the founder of the Austrian School of Economics, known for developing the theory of marginal utility which revolutionized economic thought. His work laid the groundwork for the Marginal Revolution alongside contemporaries like Jevons and Walras, emphasizing the importance of individual choice and subjective value in understanding economic phenomena.
Classical Economics: Classical economics is a school of thought in economic theory that emerged in the late 18th and early 19th centuries, emphasizing the importance of free markets, competition, and the role of self-interest in promoting economic efficiency. This approach laid the groundwork for modern economic theory, influencing various schools of thought and shaping the understanding of how economies operate.
Consumer surplus: Consumer surplus is the difference between what consumers are willing to pay for a good or service and what they actually pay. It represents the benefit or extra utility that consumers receive when they purchase products for less than their maximum willingness to pay. This concept is integral in understanding market efficiency and the welfare effects of pricing strategies, tying closely to theories of marginal utility and demand.
Diminishing marginal utility: Diminishing marginal utility refers to the decrease in the added satisfaction or pleasure that a consumer derives from consuming additional units of a good or service. As a person consumes more of a product, the utility or value gained from each additional unit tends to decline. This concept is crucial in understanding consumer behavior and helps explain how people allocate their resources among various goods and services.
Equilibrium: Equilibrium refers to a state in which supply and demand in a market are balanced, resulting in stable prices. It is the point where the quantity of goods supplied equals the quantity of goods demanded, leading to no inherent forces causing change in price or output. Understanding equilibrium is crucial in analyzing how markets function and how various economic factors interact within the framework of marginal utility and production.
General equilibrium theory: General equilibrium theory is an economic concept that analyzes the interplay between various markets in an economy, considering how supply and demand in one market can influence others. It aims to explain how prices are determined and how resources are allocated efficiently across all markets simultaneously, highlighting the interdependencies among them. This theory is essential for understanding the overall functioning of an economy, especially during the marginal revolution when economists began focusing on individual decision-making and utility.
Indifference Curves: Indifference curves represent a graphical tool used in microeconomics to illustrate the different combinations of two goods that provide a consumer with the same level of satisfaction or utility. These curves are crucial in understanding consumer preferences and choice, reflecting the ideas central to the marginal revolution and the evolution of neoclassical economic theory.
Industrial Revolution: The Industrial Revolution was a period of significant economic, technological, and social transformation that began in the late 18th century and continued into the 19th century, marked by the transition from agrarian economies to industrialized and urbanized societies. This shift fundamentally changed production methods, leading to the emergence of capitalism and market economies.
Labor Theory of Value: The labor theory of value is an economic theory that posits that the value of a good or service is determined by the amount of socially necessary labor required to produce it. This concept implies that labor is the primary factor in establishing the value of commodities, connecting directly to how goods are priced and exchanged in a market economy.
Law of demand: The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded by consumers increases, and conversely, as the price increases, the quantity demanded decreases. This fundamental principle illustrates the inverse relationship between price and quantity demanded, which is crucial for understanding consumer behavior and market dynamics.
Léon Walras: Léon Walras was a French economist best known for his development of general equilibrium theory, which analyzes how supply and demand interact across multiple markets simultaneously. His work marked a significant shift in economic thought during the marginal revolution, aligning with other economists like Jevons and Menger in emphasizing individual utility and marginal analysis.
Marginal utility theory: Marginal utility theory is an economic concept that explains how individuals make consumption choices based on the additional satisfaction or utility derived from consuming one more unit of a good or service. This theory revolutionized economic thought by emphasizing that the value of goods is determined not by total utility but by the incremental benefit received from each additional unit, leading to a better understanding of consumer behavior and market dynamics.
Marginalism: Marginalism is an economic theory that focuses on the additional benefits or costs associated with a particular decision, emphasizing the importance of marginal changes in consumption and production. This concept highlights how individuals and firms make choices based on the incremental impact of those decisions rather than total or average effects, which has significantly shaped modern economic thought.
Methodological individualism: Methodological individualism is the principle that social phenomena can be explained by analyzing the actions and decisions of individual agents. This concept emphasizes that collective behaviors and outcomes are ultimately grounded in the choices made by individuals, which serves as a fundamental approach in economic and social sciences. It supports the idea that understanding individuals' motivations and preferences is crucial for studying broader social dynamics, including economic theories and historical contexts.
Neoclassical economics: Neoclassical economics is a framework for understanding economic behavior that emphasizes the role of individuals' choices and the allocation of resources based on preferences, utility, and marginal analysis. This approach builds on classical economic theories and incorporates concepts such as supply and demand, rationality, and equilibrium to explain how markets function and how prices are determined.
Pareto efficiency: Pareto efficiency is an economic state where resources are allocated in a way that it is impossible to make any one individual better off without making someone else worse off. This concept emphasizes optimal distribution, where no further improvements can be made without trade-offs, highlighting the balance between equity and efficiency in resource allocation.
Price elasticity: Price elasticity refers to the measure of how much the quantity demanded or supplied of a good responds to a change in its price. It is a crucial concept in understanding consumer behavior and market dynamics, as it helps economists gauge how sensitive consumers are to price changes and influences the decision-making of producers. The marginal revolution brought forth new perspectives on utility and value, emphasizing the importance of consumer preferences in determining price elasticity.
Subjective value theory: Subjective value theory posits that the value of a good or service is determined by individual preferences and perceptions rather than any inherent property. This concept emerged during the marginal revolution, emphasizing how personal evaluations and choices shape economic behavior, marking a significant shift from objective theories of value.
Utility maximization: Utility maximization is the concept in economics that refers to consumers' efforts to achieve the highest level of satisfaction or utility from their consumption choices given their budget constraints. This principle is central to understanding consumer behavior, as individuals make decisions on how to allocate their limited resources in order to maximize their overall happiness or satisfaction.
William Stanley Jevons: William Stanley Jevons was a British economist and logician known for his foundational work in the development of marginal utility theory, which played a critical role in the Marginal Revolution of the late 19th century. He introduced the concept that individuals make decisions based on the additional satisfaction or utility gained from consuming one more unit of a good, rather than total consumption, reshaping economic thought and influencing later economists like Alfred Marshall and Léon Walras.