History of Economics

Introduction

The works of Jevons, Walras and Menger often become associated with the term revolutionary. The works of the three were first in developing knowledge on utility theory in a professional manner. The term revolution scientifically refers to a response to a failed existing theory. Marginal revolution presented by the three applies the concept of marginal utility. The three become considered fathers of marginal utility revolution, since they discovered an almost similar approach to value theory (Ekuland and Herbert, 2007). This occurred in the 19^th century. Marginal revolution replaced the labor theory of value forwarded by neoclassical school of thought. Marginal utility is the usefulness gained or lost from an increase or decrease in the utilization of a good.

Marginalists Jevons and Walras focused on improving the foundations on which economic theory rested. They believed that this could be achieved through mathematical methods. They argued against classical theories of economics, since they believed they were based on casual observation and introspection (Cesarano, 2006). Their arguments also became based on a lack of precision by classical theories in their works. The main focus of the marginal revolution was to develop the utility theory in a scientific and mathematical way. They focused on introducing mathematical analysis, while explaining economic theories, since they believed economic relationships were based on a functional form.

In developing utility theory, the focus was on two themes, such as the development of a positive demand theory empirically and theoretically. The utility theory also focused on providing a means for drawing the relationship between markets, institutional outcomes and the level of satisfaction. Jevons, Walras, and Menger arrived at the same conclusion on marginal utility by applying different methods.

As much as Menger, Jevons and Walras were all involved in the marginal revolution, there existed slight differences in their discussions. The arguments provided by the three marginalists and the differences in their discussions are articulated below.

W.S Jevons

Jevons utility theory argument became focused on two goals, such as introducing mathematical application into economic analysis and application of mathematical methods in developing choice theory based on utility theory.

His first argument focused on integrating a mathematical approach in economics. He argued that economics as a study focuses on functions and quantities, and that economics has a deductive structure. He claimed that it was implicit that economic theories had to be mathematical in nature. He argued that economic relationships could be derived as functions, and that calculus could be applied in describing and explaining them (Cesarano, 2006). He argued that a mathematical approach to describing economic theories would provide more precision compared to casual observation, experiment and introspect.

It was correct to form an economic theory that was in a mathematical form. Economic relationships could be specified in functional form and the rules of calculus could be applied to economics.

Apart from his argument on mathematical approach in economics, Jevons argued that utility theory was best when analyzing consumption behavior. He argued that there were difficulties in analyzing consumption behavior by using classical theories. Understanding consumption behavior through utility theory could help eliminate this difficulty, he argued.

Leon Walras

Like Jevons, Walras was in agreement that mathematics should be used in analyzing economic theories. He was in constant support of use of mathematical functions in defining and deriving economic theories. Similar to Jevons, he believed in the need to create a foundation for the theory of consumer choices basing on behavior of economic agents. Walras derived definition of utility theory basing it on a structure of competitive equilibrium. 

He believed strongly in the need to create a positive economic theory that would be complete and integrated. This was driven by his desire for generality and completeness. According to Walras, equilibrium price was dependent on economic agents, such as analysis, tests and endowments. He argued that equilibrium would shift if only these elements changed (Walker, 2002).

In solving the competitive equilibrium problem, Walras isolated essential structural features, since he examined the problem in a spare and transparent environment. He employed the utility function as a method that could be used in summarizing the wants and tastes of the customers.

Carl Menger

Carl Menger also became associated with the rise of the marginal utility theory. Menger defined the concept of diminishing marginal utility. He used the concept of utility to summarize wants or preferences. His view on the utility theory is considered modern as compared to those of Jevons and Walras. His discussion on utility theory was entirely non-mathematical. Menger believed in basing economics on the theory of individual decision-making, rather than mathematical functions.

Carl Menger is considered the founder of Austrian school of economics. He contested classical economists’ value of labor theories. His approach showed that goods obtain their value from their usefulness in satisfying human wants and do not obtain their value from their production costs. He believed that market prices were superficial and had no link to marginal utility (Ekuland and Herbert, 2007). He observed human behavior and articulated that people require foresight and knowledge on the available means through which they could satisfy their wants.

He believed knowledge of human behavior was key to understanding and explaining economic theories. Unlike Jevons, Menger agreed with the fact that goods provided utility. According to him, goods attain their value on the basis that they serve various needs of differing importance. Menger argued that, the value of a good is equal to the least urgent use to which it is applied.

Differences in Menger’s vision of marginal utility

Although Menger, Jevons, and Walras had relatively similar views on the theory of value, they significantly differed in the role of mathematics in economics. They all strongly objected to the classical theory of value which became based on objective costs of production whether capital or labor costs (Cesarano, 2006). Menger believed that economic theories could not be based on mathematical functions, since they were dependent on human behavior for their explanation. He postulated that human behavior, such as wants and needs were the deeper forces that derived economic functions, such as prices. In his argument, Menger claims that human behavior cannot be proved by using mathematical functions. This is because human beings are diverse, and cannot be controlled like in experiments in other forms of sciences.

One of the differences arising from the marginalists’ revolution theories is that Walras was the only one to infer his discussion on a generalized equilibrium system. Menger focused his analysis of economics on the study of institutions and conditions of disequilibrium (Ekuland and Herbert, 2007). Walras sought to explain demand and supply as determinants of prices in an economy. He also wanted to prove that the interaction of prices, demand and supply resulted in overall equilibrium. Walras tried to explain under what circumstances the general equilibrium is utilized.

In his analysis of the utility theory, Menger overlooked price issue, and did not assume that competition could be perfect. Unlike Walras and Jevons (Ekuland and Herbert, 2007), he did not base his explanation of marginal utility on market prices. He claimed that market prices were superficial and were determined by much deeper forces than mathematical functions. He insisted on the need for economics to investigate the deeper forces affecting human behavior than concerning itself with mathematical functions.

Menger based his analysis on satisfaction, while Jevons based his analysis on the concept of utility. Satisfaction described that economics was related mostly to the state of the mind of the human being. This is what Menger referred to as the ‘economizing man’. Jevons and Walras however, insisted that the utility was not an intrinsic quality but an abstract quality, whereby an object serves the purpose to the human being (Walker, 2002). Menger only considered the level of satisfaction as compared to the various needs which are highlighted. He drew his comparisons only on the different degrees of satisfaction. Menger strongly believed that people were rational enough to decide which goods were of most benefit to them. 

Revelation of Austrian vision through Austrian response to socialists’ argument

Marginalism became associated with arguments that became concerned with changes in the quantity used of a service or a good. Preferences must be done by assigning greater quantities to services, goods or applications that are of greater priority. At any given price, a potential buyer in the marginal theory has a rate of substitution of money for the service or good in question. The marginal utility principle gets used as a base from which the whole economic phenomena may be analyzed. Austrian economists, and especially Menger, emphasized the need to acknowledge primary role of needs of human beings as a driving force of economic mechanisms (Ekuland and Herbert, 2007). There is no doubt that the works of Jevons, Walras and Menger were pursued according to different analytical paths. Austrian economists can however, legitimately claim to be an independent and competitive stream of thought.

Jevons, Walras and Menger, Austrians have been struggling to assert their originality. This is first with respect to marginalism and later on to neoclassical economics. The Austrian conceptions of economic rationality, competition, and subjectivism are distinct from the neoclassical ones. Austrians are fully aware of the conceptual differences separating them from the mainstream economics. In this system of values, one’s whole economy is expressed in relation to their wants, outlook and all their economic combinations.