The Marginal Utility School

The Marginal Utility School

Before completing the development of the thought of those economists who held with Cournot that a controlled market was more usual than a freely competitive market, we need to take note of another school of thought which influenced the considera­tion of question of competition, supply and demand, and price. For want of a better name this school is known as the marginal utility school. Briefly stated this school claims that utility is the fundamental characteristic of value, and as such its influence upon price and exchange is paramount. As we have noted in the chapter devoted to wealth and value, the credit for one of the iirst clear formulations of the conception of marginal utility goes to Hermann Heinrich Gossen (1810-1858). His work was ignored by later authors, a fact which distressed Gossen and caused him to withdraw his works from circulation. Gossen's basic conceptions were formulated in two laws. The first law stated: "The amount of one and the same enjoyment diminishes continuously as we proceed with that enjoyment without inter­ruption, until satiety is reached." The second law stated: "In order to obtain the maximum sum of enjoyment, an individual who has a choice between a number of enjoyments, but insuf­ficient time to procure all completely, is obliged—however much the absolute amount of individual enjoyments may differ—to procure all partially, even before he has completed the greatest of them. The relation between them must be such that at the moment when they are discontinued, the amounts of all enjoy­ments are equal." According to Gossen then, while it is impos­sible to satisfy all wants, the greatest satisfaction can be achieved by keeping the intensity of all wants at about the same level.

The development of the idea of utility was carried on by Jevons, Walras, and Menger. Our interest lies not so much in an exhaustive examination of their theories of utility as in discover­ing how they evaluated competition and the law of supply and demand as part of the economic process. The law of supply and demand is unquestioned in the writings of these economists. They assumed its validity and set themselves tasks first of expressing these forces of the market in quantitative terms and second of reducing demand to the psychological factors of which it was composed. Although Jevons labored over the relation of price to subjective utility, and actually produced several important ideas, his statements remained cumbersome and vague. He is best known for his formulation of the law of indifference, which is, briefly, that where there are two or more identical articles on sale at the same time, it is a matter of indifference to the buyer which he chooses. Therefore there can be only one price at a given time for similar articles.

Menger, and Walras, on the other hand, began with Gossen's idea that the desire to maximize utility, or to increase the sum total of satisfaction, was the basis for exchange. The utility of every commodity to the purchaser sets the upper limit to the price he is willing to pay. Each prospective purchaser will put a quantitative measure upon the utility of the commodity to be purchased. This will express not only the desirability of the article itself alone, but its desirability in relation to a known number of other things which also have utility. Menger proceeds to analyze price under different economic situations. In isolated exchange the price will be set somewhere between the buyer's and the seller's quantitative expression of the utility of the object. Price may be said to be indeterminate between these limits. In case of monopoly the seller will set the price at a point just above the price offered by that buyer who is necessary to clear the market, that is, the marginal buyer. However, the monopolist may choose to make individual bargains with each buyer.

Walras goes more deeply into the processes determining mar­ket price, although he uses the same concepts and much the same terminology as previous writers of the marginal utility school. To Walras, however, we owe the idea of scarcity as it applies to goods. It is the utility of a good accompanied by the fact of scarcity which gives an object value. Price, therefore, is the quan­titative expression of utility and limited supply. When supply and demand are equal as a result of competition, the price will be what Walras termed the called price—that is, a price set by competitive bidding at an auction. Walras believed that equilib­rium could be achieved, and he defended not only the freely competitive market but the doctrine of laissez-faire. The original­ity of this school lies only in the field of emphasis and the direction of its thinking. Whereas previous economists had been concerned with cost of production and supply, these men dealt with sub­jective utility and exchange in value. Thus there was common agreement among the members of this school on the importance of supply and demand and competition, but there was neverthe­less a growing realization of the importance of external control of the market as found for example in monopoly. The special field of investigation that the utility school followed supplemented the work already done.

By 1890 all the essential fields of inquiry and criticism concern­ing the assumptions made by Smith and Ricardo as to compe­tition and the law of supply and demand had been more or less catalogued. Some of them had been fully explored. There was first of all the socialist criticism that unbridled competition was detrimental, not beneficial. There was clear indication that some writers believed that a controlled market rather than a freely competitive market was typical, and that supply and demand never achieved or continued in equilibrium. Then there were some who said that cost of production and supply were the chief forces in determining price; while others took the opposite view, saying that utility and demand were most important.