A Journal for Western Man

 

William Stanley Jevons and Alfred Marshall on the Role of Marginal Utility in Economics

G. Stolyarov II

Issue XCIX- May 12, 2007

-----------------------------------

Principal Index

-----------------------------------

Old Superstructure

-----------------------------------

Old Master Index

-----------------------------------

Contributors

-----------------------------------

The Rational Business Journal

-----------------------------------

Forum

-----------------------------------

Yahoo! Group

-----------------------------------

Gallery of Rational Art

-----------------------------------

Online Store

-----------------------------------

Henry Ford Award

-----------------------------------

Johannes Gutenberg Award

-----------------------------------

CMFF: Fight Death

-----------------------------------

Eden against the Colossus

-----------------------------------

A Rational Cosmology

-----------------------------------

Links

-----------------------------------

Mr. Stolyarov's Articles on Helium.com

-----------------------------------

Mr. Stolyarov's Articles on Associated Content

-----------------------------------

Mr. Stolyarov's Articles on GrasstopsUSA.com

-----------------------------------

Submit/Contact

-----------------------------------

Statement of Policy

-----------------------------------

 

            William Stanley Jevons (1835-1882) saw utility as purely subjective and as the fundamental determinant of the economic value of goods. For Jevons, an economic good could be absolutely anything, provided that the thing in question was perceived by economic actors to help in increasing their pleasure and/or avoiding pain. According to Jevons, individuals make economic decisions at the margin, with respect to the utility they could derive from the last unit of the good in question, i.e., that good’s “degree of utility.”

            When choosing among different goods, the economic actor, according to Jevons, will optimize the utility gained by following the Equimarginal Rule. With two goods, the Equimarginal Rule suggests that a utility-maximizing actor will pick such quantities of Good X and Good Y that the marginal utility of X equals the marginal utility of Y: MUX=MUY.

            Jevons also suggested modeling utility with functions on which calculus could be used. If u(x) is the function representing the economic actor’s total utility for a good, u’(x) is the function representing his marginal utility for that good. Jevons used the calculus and his understanding of marginal utility to develop a theory of market exchange and a theory of labor supply. In market exchange, equilibrium occurs for goods X and Y when the ratios of the marginal utilities of X and Y for all individuals i are equal to the ratio of the price of X to the price of Y:

MUXi/MUYi = PX/PY for all individuals i.

            Thus, argued Jevons, the prices of goods are entirely determined by economic actors’ marginal utilities. Jevons’s theory of labor supply posits labor as having an initial an initial disutility to the producer, followed by a gradual increase of marginal utility as he works, followed again by a diminution of marginal utility. Jevons combined this insight with the diminishing marginal product of labor to conclude that the laborer will only work until the marginal utility of the last unit produced is exactly equal to the marginal disutility of the unit of labor used to produce it.

            Alfred Marshall (1842-1924) agreed with Jevons that marginal utility determines the demand for a good, but he believed, contrary to Jevons, that objective costs of production determine the supply of a good. Thus, for Marshall, marginal utility theory was only half of what was needed to adequately describe economic value and market prices. Marshall believed that, in the long run, the market prices of most goods will be equal to their costs of production, because if the price were higher, additional firms would enter the market, and competition would bring the price down to the cost of production, at which point no further entry is profitable. In this way, Marshall believed that he had saved Adam Smith’s and David Ricardo’s view that long-run exchange value equals cost of production. Under this model of long-run exchange value, demand, driven by marginal utility, only affects quantity sold and not the price.

            Jevons’s approach of viewing marginal utility as the ultimate determinant of all economic value is preferable to Marshall’s view of marginal utility determining only the demand side. Jevons’s theory is more conducive to explaining the origins of producers’ decisions to produce a given good as opposed to another. That is, producers produce a good because they expect consumers to derive subjective utility from that good. While producers are certainly faced with costs of production, these costs are a consequence of the decision to produce, of which considerations of utility are the cause.

            Furthermore, Jevons’s view of subjective cost is more realistic than Marshall’s view of objective cost. It is not the case that each producer incurs the same disutility from giving up a given unit of input. Rather, this subjective disutility is determined by the producer’s individual, unique views of what constitutes pleasure and pain and how they can be maximized.

G. Stolyarov II is a science fiction novelist, independent philosophical essayist, poet, amateur mathematician, composer, contributor to Enter Stage Right, Le Quebecois Libre,  Rebirth of Reason, and the Ludwig von Mises Institute, Senior Writer for The Liberal Institute, weekly columnist for GrasstopsUSA.com, and Editor-in-Chief of The Rational Argumentator, a magazine championing the principles of reason, rights, and progress. Mr. Stolyarov also publishes his articles on Helium.com and Associated Content to assist the spread of rational ideas. His newest science fiction novel is Eden against the Colossus. His latest non-fiction treatise is A Rational Cosmology. Mr. Stolyarov can be contacted at gennadystolyarovii@yahoo.com.

This TRA feature has been edited in accordance with TRA’s Statement of Policy.

Click here to return to TRA's Issue XCIX Index.

Learn about Mr. Stolyarov's novel, Eden against the Colossus, here.

Read Mr. Stolyarov's new comprehensive treatise, A Rational Cosmology, explicating such terms as the universe, matter, space, time, sound, light, life, consciousness, and volition, at http://www.geocities.com/rational_argumentator/rc.html.