The Marginal Utility School

The Marginal Utility School and Further Criticism of Classical Doctrine

The work of Hermann Heinrigh Gossen (1810-1858) anticipated the work of W. S. Jevons in England and the later Austrian school of thought. Gossen claimed that the value of things is proportional to the ability to provide enjoyments, but as the quantity available increases, the satisfaction of each succeeding unit decreases. The satisfaction that each unit gives is modified by the cost of production of that unit; hence value is represented by an equation of two unknowns—satisfaction in consumption and the cost of production—and value is established at that point where marginal utility and marginal disutility balance one another. The methods used by Gossen were statistical and graphic. He hoped that through quantitative methods economics might be lifted to the plane of an exact science.

The English-speaking world is better acquainted with those theories of value, very similar to Gossen's, presented in the works of W. S. Jevons (1835-1882). He had a varied career as assayer of the mint in Sidney, Australia, and later as lecturer and professor at Owens College and at University College, London. The unique contribution of Jevons to economic theory lies in his insistence upon the need for understanding consumption. Actually he stated little that was new in the theory of utility. The earlier works of Gossen set forth most of the theories developed by Jevons; but Jevons himself stated that he had no knowledge of Gossen's work until years after his own Theory of Political Economy was published in 1871. Jevons further emphasized both the infinite variety of human wants, as Lloyd had done earlier, and the idea of marginal utility which ultimately determined exchange value. As he explained it, the exchange value of two commodities could be determined by comparing the degree of utility possessed by the relative quantities available after exchange had been completed. For example: a man, A, has ten units of an article, while a man, B, has three units of another; A might be willing to give five units of his article for one of B's; but if he wished a second unit of B's article it is hardly likely he would part with five more units of his article, because that would leave him with none. Although B might be willing to make the second exchange at the ratio of 5 to 1, he would be less willing to do so at 3 to 1. Nevertheless a compromise might be reached where exchange could take place at some other ratio, say 4 to 1. It is obvious that value (or the exchange ratio) is determined by the degree of utility of the supply on hand at a given time. All of this and other manifestations of the value theory and utility, Jevons presented in the form of graphs, using artificial incidents and quantities to illustrate the application of his theory. Indeed, it is on this score that the most telling criticism of the whole marginal utility school of thought can be levelled. The school seeks mathematical certainty for its theories but has no adequate measure for utility which in the last analysis is largely an individual matter. The appearance of exactitude is lentirely misleading. To Jevons' credit it must be said that he recognized the difficulty of finding quantitative expression for his utilities, but he claimed that he overcame this by dealing with people in the mass, and with the relationship of many utilities rather than with the utility of one commodity alone. In a detailed analysis of utility, Jevons noted several different types. For example, the sum of the utility of all the available units of supply is total utility, that of the last unit consumed is final or marginal utility.

The work of the Marginal Utility School was carried on in Switzerland by Leon Walras, a Frenchman who spent much of his life as professor at the University of Lausanne. In 1874 he published his Elements d'Economie politique- pure. Value, he said, is the total utility of a given commodity, but its value in exchange is not judged merely on its own relation to supply but rather in a relationship to all other desirable things. The value of one object in terms of another will be judged by a comparison of the marginal utility of each. This, of course, is similar to Jevons' analysis. To some extent Walras tried to harmonize cost of production and utility theories of value, for he considered supply as well as utility, but formal connection is never made and his treatment rests essentially, as does Jevons', upon subjective matters given quantitative expression.