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The Marginalist Revolution: The Subjective Theory of Value

The Marginalist Revolution: An Overview

The term ‘marginalist revolution’ is commonly utilised to indicate the abandonment of the classical approach and the shift to a new approach based on a subjective theory of value and the analytical notion of marginal utility. The years between 1871 and 1874 saw publication of the major writings of the leaders of the Austrian marginalist school, Carl Menger (1840-1921); of the British school, William Stanley Jevons (1835-1882); and of the French (Lausanne) school, Leon Walras (1834-1910).

The marginalist revolution, however, had had important precursors. Moreover, the differences between the Austrian imputation approach, the French general economic equilibrium and Marshallian partial equilibriums were by no means negligible, as we shall see. Among the English economists, then, Alfred Marshall (1842-1924) followed apath differing from the radically subjective line taken by Jevons. There are, however, some basic elements common to these different lines of research, differentiating them from the classical approach illustrated in the previous chapters.

Sraffa (1960, p. 93) summed up the contrast with two images: the classical approach consists in the ‘picture of the system of production and consumption as a circular process’, while the marginalist approach aligns the perspective along ‘a one-way avenue that leads from “Factors of production” to “Consumption goods”’. The differences concern definition of the economic problem, the notion of value, the concept of equilibrium, the role of prices and the theory of distribution.

First of all, within the classical approach the economic problem was conceived as analysis of those conditions that guarantee the continuous functioning of an economic system based on the division of labour, and hence analysis of production, distribution, accumulation and circulation of the product. In the case of the marginalist approach, by contrast, the

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economic problem concerned the optimal utilisation of scarce available resources to satisfy the needs and desires of economic agents.

Secondly, the classical economists’ objective view of value, based on the difficulty of production, contrasts with the subjective view of the marginalist approach, based on evaluation of utility of commodities on the part of the consumers (and possibly on the disutility of labour or of abstinence from consumption on the part of producers).

Thirdly, as a consequence of these differences, the notion of equilibrium took on a central role in the marginalist approach: equilibrium corresponded to optimal utilisation of scarce available resources and was therefore identified by a set of values for all economic variables, prices and quantities simultaneously. The classical approach held the problem of relative prices distinct from the problem of decisions concerning accumulation and production levels; at the most, one might speak of equilibrium with reference to the levelling of sector profit rates stemming from the competition of capitals, while the term ‘balancing’, which did not imply a precise equality, was preferred when speaking of demand and supply (as in the expression ‘the balance between supply and demand’).

Fourthly, prices acquired the meaning of indicators of relative difficulty of production for the classical approach and of indicators of scarcity (relative to consumers’ preferences) within the marginalist approach.1

Fifthly, income distribution was a specific case of price theory in the context of the marginalist approach (where it concerned the prices of the ‘factors of production’), while within the classical approach it concerned the role of different social classes and their power relations.[1] [2]

With the marginalist approach, such common characteristics took on different forms in authors belonging to different currents within the marginalist approach. For instance, the French current of general economic equilibrium founded by Walras was based on the assumption of initial endowments of resources (different kinds of working abilities, lands, capital goods) considered as given in physical terms and matched with economic agents’ preferences. The English current of Jevons and Marshall, by contrast, tended to consider the quantities available of the different resources also as variables to be determined within the theory, utilising as exogenous data utility and disutility maps of the various economic agents. In particular, the balance between the utility of goods obtainable through productive activity and the worker’s toil and trouble, or in other words the disutility of work, determined the amount of work done and hence, given the production function, the amount of product. Finally the theorists of the Austrian school adopted a radically subjective viewpoint according to which the value of each good or service was deduced from its utility for the final consumer, directly in the case of consumption goods and indirectly in the case of production goods (by imputing to the means of production a share of the utility of the consumption good proportional to their contribution to the productive process, hence the expression ‘imputation theory’).

  • [1] The difficulty of production, though, did play a role within the marginalist approach, asmediation between original productive resources on the one hand and final goods andservices on the other; scarcity, too, played a role within the classical approach, throughconstraints concerning technology - as in differential rent - or levels of production,through the stage reached by the process of accumulation.
  • [2] Also within this approach, however, the determination of prices and of distributivevariables were connected, as was to become evident in Sraffa’s analysis. With someimprecision (within the general economic equilibrium approach, all variables are simultaneously determined), Walras 1874, p. 45, stated that, in opposition to the classicalapproach (‘the school of Ricardo and Mill’), in the new theory ‘the prices of productiveservices are determined by the prices of their products and not the other way round’.
 
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