Real Cost and Opportunity Cost
Jevons, as we saw previously, developed the notion of the ‘final degree of utility (or disutility)', which corresponds to marginal utility (or disutility). The exchange value of each good was thus equal on the one hand to its marginal utility and on the other hand to the marginal disutility of the labour necessary to obtain it (even indirectly, i.e. through exchange with a good directly produced by the economic agent under consideration). In this way, for each good the quantity produced and/or consumed was determined simultaneously with its exchange value.
Under the simplifying assumption that production of each good required only labour, at first sight this approach gave a result analogous to the classical theory of labour value. In fact, each individual attributes the same disutility to the last dose of labour employed in the production of each commodity; as a consequence, the exchange ratio between different commodities is equal to the ratio between the quantities of labour necessary to produce each of them. We should recall, however, that each economic subject was seen as an island: ‘labour differs infinitely’, Jevons (1871, p. 187) said, between one economic agent and another, in terms of quality and efficiency; furthermore, different individuals may have different evaluations of the pain intrinsic to the same dose of labour. For these reasons, labour cannot be the cause or the origin of value: the ‘real cost' that concurs in explaining the value of the commodity is understood as disutility rather than as labour time.
Also when introducing the notion of capital, Jevons was inclined to reject links with labour. According to Jevons, in fact, capital is not accumulated labour, as the classical economists considered it. The source of capital is the duration of its employment in production and the intention of its owner, while its value depends on a prospective evaluation of what can be obtained through its employment. In other words, Jevons determined the value of capital starting from the value of the product, with a procedure opposite to that of the classical economists. Thus, his notion of capital was defined in such a way that it could be referred to the isolated individual as well as to society as a whole. According to Jevons (ibid., p. 229), indeed, division of labour and exchanges were ‘irrelevant complications’, which could not substantially modify his theory of value, based on individual choices.
Philip Henry Wicksteed (1844-1927), in his book on The Common Sense of Political Economy (1910), took to its logical consequence the subjective approach, conceiving the theory of value as one of individual choices by connecting value to the opportunity cost of each good: in the presence of scarce resources, to obtain utility along a certain road (by producing and consuming a given good) implies foregoing the possibility to obtain utility in some other way (producing and consuming some other good).
Francis Ysidro Edgeworth’s (1845-1926) main theoretical contribution concerned the contract curve, illustrated for the case of two individuals and two commodities available in given quantities and defined as the set of allocations of the two commodities between the two individuals that could not be modified without worsening the conditions of at least one of the two individuals. Edgeworth (1881, 1925) thus anticipated the notion of Pareto optimality; furthermore, in building the contract curve he utilised contour lines of utility maps to represent preferences, christening them with the name that has since become familiar of indifference curves. With respect to these curves, we also owe to Edgeworth explicit introduction of the assumption of convexity towards the origin of the Cartesian axes (and demonstration that this assumption, while stemming from the postulate of decreasing marginal utility, is not necessarily implicit in it). In his analysis, Edgeworth - like Menger - began with the case of bilateral monopoly to go on to competition and demonstrated that the indeterminacy of equilibrium in the case of two participants in the exchange recedes when the number of economic agents participating in the exchange increases.
As holder of the Drummond chair at Oxford from 1891 to 1922 and as editor and then co-editor (with Keynes) of the Economic Journal from its foundation in 1891 up to his death, Edgeworth played an important role in the professionalisation of economics and the rise to dominance of the new theories of value and distribution. However, given the extremely convoluted style of his writings, together with his proverbial reservedness, he remained in the shadow of Alfred Marshall, the great academic leader of England in those times, whom we will discuss later.