Vulgar Economy and the Marginal Revolution

As Anthony Waterman (1996) notes, one could go further back than Malthus as, Waterman argues, Keynes eventually did, taking into account Chapter XI of William Paley’s 1785 book The Principles of Moral and Political Philosophy.

In this chapter, Paley addresses the connections between agriculture and trade, noting how a surplus is generated in agriculture, which sustains those who engage in trade and produce articles to be sold to those engaged in agriculture. In this sense, it is the agricultural surplus which leads to a given level of population being sustained at a given standard of living, as it was the case for the classical authors from Petty to Ricardo, and for Malthus too, despite the differences between Malthus and Ricardo on the theory of value.

The seeming differences between Malthus and Ricardo can be traced back to Smith’s ambiguities, which Ricardo sought to clarify into a coherent theory where value is explained in terms of the process of production. Smith, by asserting that value comes from human labour without clarifying whether it was commanded labour or embodied labour, moved away from a strict and objective analysis of the production process which had been developed by Petty, Cantillon, and Quesnay. Ricardo focused again on the production process and on agriculture as the key to understanding the surplus in objective terms, as Petty, Cantillon, and Quesnay had done.

However, the economists who claimed to be the successors of Ricardo, often termed ‘Ricardian’ economists, abandoned the attempt to measure value in objective terms. Even before that, Jean-Baptiste Say had already interpreted Smith differently than Ricardo, resorting to supply and demand analysis to determine value, as Malthus did. Mill provided an important step in the consolidation of the idea that supply and demand are the ultimate determinants of value, as Malthus had argued against Ricardo. Nevertheless, Mill seemed to believe that he was following Ricardo, like many other ‘Ricardian’ economists throughout the nineteenth century who explained value in terms of supply and demand.

Moreover, the middle of the nineteenth century also witnessed the introduction of subjective elements into the measurement of the cost of production. Nassau William Senior argued that interest on capital is the remuneration for the abstinence of someone who decides to save and invest in order to obtain a future income, abstaining from present consumption. John Elliott Cairnes stresses that this abstinence is a sacrifice, on equal terms with the labour of the worker. For Senior and Cairnes, the cost of production is measured not only in terms of human labour but also in terms of abstinence (the ‘sacrifice’ of waiting).

Senior outlines four postulates from which economic laws can be deduced. The first of these postulates is that human beings attempt to obtain additional wealth with as little sacrifice as possible. The psychological notion of sacrifice thus takes centre stage in economic analysis in the middle of the nineteenth century. With the introduction of subjective elements by Senior and Cairnes into the analysis of the cost of production, we are thus far removed from the analysis of economists from Petty to Ricardo, where costs were measured in terms of objective factors that can be observed by looking at the production process, such as the quantity of land necessary for production (stressed by Petty, Cantillon, and Quesnay) or the quantity of labour embodied in the production process (stressed by Ricardo).

When the cost of production starts to include subjective elements, it becomes impossible to measure it by looking only at the production process. Rather, we must look to market exchange to find how subjective aspects are being valued in market exchange. In this context, supply and demand start to be seen as the ultimate determinants of value and wealth. It is simply not possible to measure value in objective terms (in terms of objective quantities of land and labour) once the cost of production includes subjective elements. The analysis developed by Mill, Senior, and Cairnes is thus much more in line with Malthus’s supply and demand approach, rather than with Ricardo’s objective analysis of the process of production (by Mill I mean John Stuart, since his father James seems to have adopted a more objective analysis, more in line with the classical authors from Petty to Ricardo).

The analysis of Malthus, Say, Mill, Senior, and Cairnes constitutes what Marx called ‘vulgar economy’, that is, a superficial study of supply and demand which, unlike classical political economy, does not consider the underlying causes that are to be found in the process of production. According to Marx’s distinction, ‘classical political economy’ is the period from Petty to Ricardo, as noted above, and ‘vulgar economy’ is the period from Malthus to Cairnes. In both periods, we find ambiguous figures, like Smith, who was, however, more in line with the classical analysis, and Mill, who was more in line with the vulgar analysis, despite his hesitations.

It is not only in the study of supply but also in the study of demand that subjective elements are brought into economic analysis throughout the nineteenth century. During this period, Augustin Cournot formalised supply and demand analysis through supply and demand curves. Also, authors like Jules Dupuit and Hermann Heinrich Gossen studied demand in terms of subjective preferences, introducing essential aspects of the notion of marginal utility.

However, it is only in the 1870s that value starts to be measured in terms of marginal utility, within the so-called marginal revolution undertaken by Carl Menger, Stanley Jevons, Leon Walras, and Marshall. The ideas advanced by these authors were not very different from those advocated by Dupuit and Gossen. Moreover, the differential method recommended by them—with the exception of Menger, who did not advocate the use of mathematical methods—had already been used by Cournot in order to address the theory of value, which had a great influence on Walras and Marshall, and by Johann Heinrich von Thunen, whom Marshall acknowledged as a central influence in his own work. But it is only in the 1870s that we find a widespread acceptance of the marginalist ideas.