Talk:Marginalism/Archive 1

Neoclassical v. Austrian

I don't find the distinction (that some previous author drew) between "neoclassical economics" and the "Austrian economists" to be as strong as suggested. I don't know much about Austrian economics, but the neoclassicals put a big emphasis on the subjective side of the supply of the "factors of production." Jdevine 15:43, 15 Jul 2004 (UTC)

The difference was that Austrians rejected neoclassical economics use of cardinal utility, arguing that only ordinal utility was praxeologically valid. Neoclassical economics later reconstructed utility in terms of ordinal utility. Nevertheless, Austrians deny the validity of mathematical maniupulation (such as calculus) of utility curves based on ordinal utility. DrThompson 01:18, 11 Mar 2005 (UTC)

Marginal Utility and Marginal Rate of Subsitution

I find the whole discussion about diminishing marginal utility strange, esp. the claim '[diminishing marginal utility] corresponds to convexity of the indifference curves' must be false. The preferences, and hence the indifference curves, are invariant under arbitrary strictly increasing transformations. On the whole, the concept of diminishing marginal utility is vacuous, unless one is talking about von Neumann-Morgenstern utility functions or accepting cardinal utility, which I believe is quite rare in current mainstream economics.

The claim about convex indifference curves is correct. Indifference curves represent combinations of goods of equal total utility. When you apply a transformation of the utility function the utility of all the bundles on a indifference curve change to the same new amount.

217.210.4.92 21:40, 1 August 2006 (UTC)

It should be made clear the diminishing marginal utility is a relative statement. Ie, if you have 3 cars and no horses you might prefer to get a horse next but if you had 3 horses and no cars you would prefer to get a car. Thus speaking of diminishing marginal utility does not require cardinal utility functions. 21:02, 1 August 2006 (UTC)—Preceding unsigned comment added by 217.210.4.92 (talk • contribs)

I gather that Convexity of the indifference curves is not what is in dispute here, but rather that diminishing marginal utility is the issue of concern. As the previous poster noted, utility functions are invariant to monotone increasing transformations, and it is this fact that renders the concept of decreasing (or constant or increasing) marginal utility "vacuous". For example, the simple function u= ln(x) appears to exhibit 'diminishing marginal utility', but a simple monotone transformation such as exponentiating this function yields u=x, which represents the same preference ordering, but apprars to exhibit 'constant marginal utility'! It is for this reason that I think the article should be couched in terms of marginal rate of substtution instead of marginal utility.

UbiquitousUK 10:18, 12 February 2007 (UTC)

Nope. Were your critique of marginal utility correct (it isn't), then what would be appropriate would be to find a non-WP:OR source for the critique, and include that in the article.

But, in point of fact, the utility function that you exhibit simply does not allow for marginal rates of substitution, because it doesn't allow for substitution! :-D What you really want to talk about are quasi-concave utility functions, which indeed do allow for substitutions but which are exactly the same rabbit out of a hat (not just a similar rabbit) as is axiomatic convexity of indifference curves. What marginal utility provides is motivation for that convexity (either a la Edgeworth, or — better — a la J Huston McCulloch).

However, one wants to use the generalized notion of utility — usefulness, and understand that the diminishing thereof is not dependent upon quantification but upon priority. (Id est that it is diminished ipso facto when-and-in-the-sense-of one moves/moving from n^th highest priority to (n+1)^th highest priority. —SlamDiego_←T 17:36, 1 July 2007 (UTC)

Supply-side

I think there should be more attention payed to the supply-side of the market in this article. The way it is now it appears to claim that neoclassical economists try to explain the price of things by looking only at the demand where as they really view the supply-side is an equally important part of the story.

Also it should be made clear that the pice being equal to marginal utility is not an assumption but something that follows from the assumption of individuals as rational and utility-maximising. This can be explained in simple non-mathematical terms, and is so done in any introductory textbokk in microeconomics, but i will leave the write-up of that explanation to someone more competent in English than I am.

217.210.4.92 21:29, 1 August 2006 (UTC)

Also it should be made clear that the pice being equal to marginal utility is not an assumption but something that follows from the assumption of individuals as rational and utility-maximising.

This quote illustrates that marginalism is circular. People want what they want. This doesn't need mathematics, does it?! In fact, it doesn't even need voicing! And obviously the 'supply side' is important to price, but the admission of this leaves the door open to the hated LTV. The problems with the article are nothing but the problems with marginalism itself and hence insoluble.--Jack Upland 05:15, 6 April 2007 (UTC)

Duplication

I consolidated Neoclassical_Revolution, Marginal utility, economic subjectivism, Marginal_theory_of_value and diamond-water paradox into marginalism, eliminating quite a bit of duplication and repetition.

The Marxist section could be more specific to marginalism, since endorsement of marginalism is not necessarily endorsement of capitalism. More informaiton in the Neoclassical section would be nice too. DrThompson 04:12, 11 Mar 2005 (UTC)

Marxist interpretation

I amended the statement that Marx distinguished between utility and use value (since these concepts are virtually identical) and said that Marx distinguished between exchange value and use value.

In general, there is a gulf between the labour theory of value and marginalism and there is no point muddying this as the article does.--Jack Upland 09:19, 1 December 2005 (UTC)

The charge of circularity

"Despite its mathematical framework, the theory is charged with being circular...." sounds odd. After all, arithmetic itself has been "charged with being" tautological. I say "arithmetic" because with other fields of mathematics the charge is more (or more obviously) specious. Anyway, why is it "despite" a mathematical framework -- rather than, perhaps, because of it -- that such chares are made against marginalism? --Christofurio 20:18, 23 December 2005 (UTC)

My point was that the supposedly rigourous logic underpinning marginalism is undermined by the circularity.--Jack Upland 05:01, 31 December 2005 (UTC)

It absolutely is not circular. That would mean that it assumed what is to be proved which it does not do. 217.210.4.195 12:03, 7 September 2006 (UTC)

And another thing! ... some of the statements passed off as factual in this story are simply, factually, false. "According to its critics, the theory concentrates on the exchange between individuals, ignoring the larger economy, and concentrates on the marketplace, ignoring production - even though businesses in practice calculate prices according to costs of production."

Although I suppose critics exist who say this, the part of that sentence that comes after the hyphen is presented as a simple statement of fact, what happens "in practice." But it doesn't. On Dec. 26, business "in practice" will be happy to get rid of their Christmas decorations for very low price, far below costs of production, because (a) the cost of holding on to them for 11 more months is high and (b) nobody will want them until then. Marxists focus on (a) whereas marginalists focus on (b), but any person even marginally intelligent and conscious will dissent from the statement that "businesses in practice calculate prices according to costs of production." --Christofurio 14:51, 24 December 2005 (UTC)

I agree, that sentence should be taken out as it is completely ignorant (general equilibrium is certainly marginal utility based and it incorporates all those things that it supposedly ignores). As to the circiularity charge, I think it's meant to refer to the price-taking assumption and the ultra-abstraction of a Walrasian auctioneer; so there's some validity there but it should be re-written to make the objection clearer. I'll leave it for a few more days in case anyone wants to comment and if not, I'll make the changes.radek 22:29, 25 December 2005 (UTC)

To pick the one-off end-of-year sales as the example of price-setting is rather convenient. You can find numerous examples of businesses (i.e. manufacturers) setting prices to cover their costs. If they didn't they would rapidly go broke. However, you ignored manufacturing, didn't you? Precisely the point made in the article - that marginalism fundamentally focusses on exchange between individuals (in this case the stock-taking retailer and the bargain-hunter).

In terms of editing/responding to the Criticism piece, that's OK but it's not valid to "correct" on the grounds that it violates marginalism. Every theory that's put forward on Wikipedia should give some indication of how the theory is criticised. A proponent of the theory saying critics are "ignorant" or "unintelligent" is no reason to delete criticism.--Jack Upland 05:01, 31 December 2005 (UTC)

Criticism of Utility

In the section on the Criticism of Marginalism the following has been added to the example of air being useful but free:

"The standard response to such objections is to note that something that is both very useful and very abundant may have a trivial marginal value. Where air is no longer abundant, as on the upper slopes of Mount Everest, it isn't free either. Mountaineers pay for their supply of it in bottled form."

I added a note that the price of bottled air could also be explained by the labour involved. Other responses could include:

• Oxygen cylinders are a different "commodity" from atmospheric air and are sold at the same price at any altitude. (I doubt there's a shop on the top of Everest!).
• The sherpas don't use cylinders but they still breathe the rarefied air for free!
• Who on earth would they pay anyway???
• Many vitally useful items are cheap (water, staple foods etc). Many fairly useless items (ornaments etc) are expensive. Why refer to the concept of utility when it is so inapplicable?

I don't know if there is a Wikipedia policy on this, but responses and counter-responses could continue indefinitely. I think the criticism should stand alone to some degree.--Jack Upland 03:55, 3 January 2006 (UTC)

Cost of production

However, this does not explain ...why large, easily extracted and easily found diamonds are worth much more than small, hard to extract ones.

This is a silly argument as any LTV would suppose a standardised value for a commodity (such as Marx's notion of "socially necessary labour") and not claim that the price of each item varied according to its individual origin. The comparison of diamonds and emeralds ignores the higher level of work involved in cutting diamonds and the monopolistic nature of their supply (LTV being based on an equilibrium of supply and demand).--Jack Upland 23:44, 13 January 2006 (UTC)

External links

I removed the link to the marginalrevolution.com blog. The last 10 entries were:

• Hear Walt Whitman speak
• Why the War on Drugs is hard to win
• Bargaining in the Souk
• Scary sentence of the day
• Is American FDI more productive and am I dizzy?
• Bosnia and Herzegovina fact of the day
• Invisible hand podcasts
• Are neighborhood effects really family effects?
• Random thoughts from Marrakesh
• Why was British food so bad for so long?

Granted, they all touch on economics but none gives any insight into the meaning of marginalism. Therefore the link serves no purpose in this article.--Swift 20:41, 16 January 2006 (UTC)

Criticism section

Alright, I really think the criticism section as is has to go. It's mostly just plain wrong. Quickly, let me enumerate:

• All theory is to some extent divorced from reality. That's what makes it a theory - there's a need for simplifying assumptions and the like. This is no way particular to Marginalism. The same is true of LVT, or any economic theory. Hence, the criticism is vacuous.
• The theory does not ignore "the larger economy". General equilibrium is based on marginal utility theory and it is "large economy" as much as one can get.
• Marginalism does not deny the importance of costs of production. In its Austrian version it sees these costs as derived from subjective considerations but still important. In its "neoclassical" /Marshallian version these costs are the underlying technology of an economy. If anything it would be more precise to say that LVT ignores the importance of tastes in price determination.
• The fact that consumers maximize given prices and prices are determined by this maximization is not circular. It's just simultanous. Anyway, this is the price taking assumption, which is not implied by marginalism in any way - although in many applications it's added on.
• Marginalism does explain why a car is more expansive than a pencil. Marginal utility of a car is helluva higher than the marginal utility of a pencil. Having said that, marginalism says nothing about how equilibrium is reached. HOWEVEVER, that's a problem of equilibrium analysis not marginalism per se.
• The theory does not conflate use-value with exchange-value. True, it doesn't use this vocabulary very much. The second sentence in the paragraph makes it clear that the author does not know what he or she is talking about.

Having said all that, I do think the article should have a well written, robust, factually correct Criticism section. I'm not sure I'm up to it since my own knowledge is lacking in things like LVT. I dunno, one way to go would be to point out the many behavioral assumptions underlying marginalism. Jack, you seem to be much better versed in unorthodox theory than me so perhaps you could have a go. The New School website on History of Economic Thought would be a good place as a starting point: http://cepa.newschool.edu/het/ (though I don't know how the copyright works here).

Anyway, I plan on deleting this section whole unless some improvements are made.

More specifically, this http://cepa.newschool.edu/het/essays/margrev/phases.htm may be useful in clearing up some of the confusion radek 08:05, 3 February 2006 (UTC)

You are clearly a supporter of marginalism. As such, you naturally disagree with a criticism of it. This is not a valid reason to delete its criticism. But I am happy for the section to be improved. In response to your points:

I guess I am a supporter in so far I think it's a useful approach. That doesn't mean that I can't step back or that I can't accept valid criticism. Like I said, I do think the article needs a criticism section. But the criticism should be factually correct, relevant and precise, not pulled out of thin air. And I didn't delete it - this is why I brought it up here.

• All theories are generalised, but to be 'divorced from reality' is stronger than this, surely.

It is stronger. It is also an empty assertion. If you want to point out a SPECIFIC aspect of the theory that is unrealistic then go ahead however.

• On a theoretical level, marginalism is centred round an individual exchange. This is not negated by orthodox economists acknowledging the 'real economy' occasionally.

I don't understand what you mean here. Marginalism is about individual's preferences and subjective valuation as opposed to objective valuation like in LTV. The thing about orthodox economists seems to be a total non-sequiter. And anyway orthodox economists acknowledge the 'real economy' all the time - I mean, how could they not? So sorry, I have no idea of what you're talking about here.

• Similarly, orthodox economists may occasionally (grudgingly) acknowledge costs of production, but these aren't central to their theories - and this is a weakness.

Marshallian/Neoclassical economists typically spend a good bit of time talking about costs of production. Look at the Theory of the Firm for example. Some UNorthodox economists, such as the Austrians do think that it's all subjective utility and costs of production are just a manifestation of preferences (over work/leisure and saving). Alright how about something like this:

"One criticism of marginal theory of value is that it down plays the role of cost of production in price determination in favor of a focus on individual's tastes and preferences. In its most extreme, Austrian, version marginalism denies that an objective, cost-based, component exists at all. Rather the Austrians argue that costs of production are merely just the manifestations of individual's tastes over labor vs. leisure, and saving vs. consumption"

• The circularity exists in the fact that customers can't avoid the price issue. For instance, no one denies air is important, but no on pays for it. On the other hand if someone wants a car, they are aware that the market price is considerably more than a pencil. Demand is not independent of price.

Again, I'm not sure what you're talking about. Marginal utility is marginal utility. It has nothing to do with prices per se. Combined with a budget constraint marginal utility generates a demand function. Of course demand is not independent of price - this doesn't make anything circular.

• An artist might 'value' a pencil more than a (polluting) car/automobile, but is not by that fact either obliged or willing to part with more money.

And what does this have to do with anything?

• The use of the concept of 'marginal utility' to explain price does, in fact, indicate that the 'marginalists' conflate 'exchange value' and 'use value' - and whether or not they use these terms is completely irrelevant.--Jack Upland 09:06, 3 February 2006 (UTC)

Ok, this one I think I understand. I think it would be more proper to say that marginalists do not distinguish between exchange value and use value in a systematic manner. So something along this line would definetly be acceptable criticism.

Let me also just say that I'm not interested in pushing any ideological points - I just want to make the article better. This means two things. One, it should have a criticism section. Two, the criticisms should be fairly sound. I'm totally willing to compromise on this.radek 02:32, 4 February 2006 (UTC)

In specific reference to the essay you directed me to, it is premised (as is your argument) on the notion that marginalism is correct: those who developed the theory have sparks of insight and those who disagreed are ignorant and confused. We also learn that 'utility' doesn't mean 'usefulness'. Apparently it means desire (and apparently no one desires water). But how this relates to price is unclear. This is perhaps best summed up by the essay itself:

Marginal utility, let us be frank, is hardly a scientific concept: unobservable, unmeasurable and untestable, marginal utility is a notion with very dubious scientific standing.

In other words, everything you object to in the 'Criticism' is correct.--Jack Upland 00:42, 4 February 2006 (UTC)

It would seem that the quote you cite speaks against the essay being pro-marginalist. Anyway, the essay is not based on the premise that marginalism is correct, rather it just takes it seriously rather then dismissing it out of hand. And the New School is pretty unorthodox with a mixture of Marxian and Post-Keynsian economists. While it does think folks like Jevons and Walras insightful I don't think it considers folks like Ricardo or Marx ignorant at all. And if you read down to Paretian Revival some of the issues in the quote are addressed. However. We can put something like the quote in the criticism section: that utility is unobservable. that utility is not measurable (this is actually realistic in my opinion - the difference between cardinal and ordinal utility). that utility is generally untestable (though predictions derived from marginal theory certainly are). And I really don't understand all this stuff about air and water. The marginal utility of a bit of air is essentially zero. Hence its price is essentially zero. And I happen to both desire and pay for water.radek 02:57, 4 February 2006 (UTC)

I will look at changing the section in line with what you say. Your statement about costs of production is particularly useful (though I wonder how a backhanded acknowledgement of the LTV - i.e. the importance of costs of production - really supports marginalism as a valid theory). That being said, I didn't pull the criticism out of 'thin air': these are in summary some of the points I have seen raised against marginalism. Your constant rejoinder that you 'don't understand' is no reason for deletion! While both you and the New School might qualify your support for marginalism, you essentially dismiss any fundamental criticism as confused and ignorant (or in the case of Classical Economics just outdated). I don't understand how you can assert that marginal utility has nothing to do with price. It seems that marginal utility means whatever its proponents say it means at any point in the argument.--Jack Upland 22:11, 4 February 2006 (UTC)

Ok, the criticism part is looking much better. Thanks for making the changes. I'm still a bit confused about this charge of circularity and the statement that knowing prices is necessary to evaluate utility. Perhaps you are thinking of Veblen goods? I haven't thought through whether or not the charge of circularity would apply in this case or if it is just another instance of 'simultaneity'. At any rate in general only a relatively small number of goods would be considered as such hence the theory would still have broad applicability outside a few special cases. When I contemplate consuming an apple - which has no luxury/anti-luxury characteristics - I don't consider its price (or more precisely I only consider its price because of my budget constraint, not because of my preferences). So perhaps the criticism should be qualified with something like "Marginalist theory becomes circular and hence is generally not applicable in cases where the relevant goods have utility aspects which directly depend on their price or status, for example Veblen goods. The relevance of the theory depends then on how many of these types of goods are present in the real world."radek 02:56, 10 February 2006 (UTC)

I've been through this argument several times in these pages. Your apple example conflates 'use value' and 'exchange value'. Your comment on budget constraints presupposes you know the price of the apple. Hence your argument is itself circular. Similarly with your earlier discussion of the automobile versus the pencil - faced with the question of relative 'values' you merely asserted a higher marginal utility for the automobile as if it was self-evident. Well, of course it is self-evident if we know the price. Put it this way: if you had no idea of prices, how would marginalism tell you what they were?--Jack Upland 00:39, 11 February 2006 (UTC)

Actually, the answer to why diamonds are more valuable than water will not be found in the "regression theorem." The Austrian school recognizes that value is subjective. As such, values change according to the needs of the individual. Therfore, an indivdual wandering the desert for days without food or water might indeed value water more highly than diamonds! Someone dying of thirst would readily exchange a pocketful of diamonds for a canteen of fresh water.

- Stephen C. Apolito, February 21, 2006

This is yet another example which is not drawn from the real economy. By the way I was castigated for saying that marginalism was individualistic, consumer-based, and circular - take a look at the arguments put forward at the labor theory of value discussion page by those indoctrinated in marginalism and say I'm wrong.--Jack Upland 07:16, 25 February 2006 (UTC)

With regard to the recent additions to the Criticism section:

Marginalism would counter that monetary units have proven themselves to be accurate measures of people's value of material goods, that is, the buck stops at utility.

What does that mean? 'Marginalism would say that marginalism is correct'? And as discussed ad nauseum there are plenty of examples where utility doesn't equate with price.

Secondly, the explanation of 'money regression' doesn't seem to fit the context nor is it very clear. (The cited article appears to be substituting circularity with an infinite regression.)--Jack Upland 05:01, 30 May 2006 (UTC)

Law of Diminishing Marginal Utility

I've been wondering, has there ever been an attempt to do a rigorous mathematical proof of the law of diminishing marginal utility. Or does there exist one already? It seems so natural and true for everything but at the same time, turning it into a purely mathematical proof would seem somewhat impossible given the way we define concepts like utility. --Jordan Ledvina 20:28, 28 May 2006 (UTC)

I don't know what you mean by 'proof' here, it's generally an assumption, whether in terms of a concave utility function or a convex preference relationship. You don't prove assumptions.radek 03:55, 30 May 2006 (UTC)

Diminishing Marginal Utility Graph

M&Ms:I believe the graph on this page to be incorrect in how it shows the total utility curve reaching a max and then sloping downwards. The MU curve is correct but while MU is decreeasing it still adds to TU meaning the curve should not slope downwards but only increase and evetually level off. Is there anyone who can fix it? (31/05/06)

---

Diamond-water paradox

This section should be removed unless someone can explain how it is not simply a case of cost driven by supply.

The explanation in this section could do with some improvement:

Water is essential, but after an easily acquired amount additional units have little to no value.

This doesn't seem to make sense. Living in Australia during a drought, I find this 'easily acquired' tag a bit hard to take. (Incidentally, water though relatively scarce is not expensive.) Depending on how you interpret it, the sentence as a whole seems to be either circular ('you don't want more than you want') or plain wrong (additional units of water are not cheaper).

Then:

Diamonds, however, as a very rare and sought after trade good, has value in as many additional units as one can find.

Describing diamonds as a 'sought after trade good' and using this to explain its economic value is circular. It amounts to saying diamonds as an expensive good are expensive.

Can someone who actually believes this perverse theory put Marginalism's answer in a logical fashion?--Jack Upland 01:17, 12 June 2006 (UTC)

M&Ms says; This paragraph might be more useful if you would like to edit it and sub it into the main article:

The marginalist explanation is as follows: The total utility or satisfaction of water exceeds that of diamonds. We would all rather do without diamonds than without water. But almost all of us would prefer to win a prize of a diamond rather than an additional bucket of water. To make this last choice, we ask ourselves not whether diamonds or water give more satisfaction in total, but whether more of one gives greater additional satisfaction than more of the other. For this marginal utility question, our answer will depend on how much of each we already have. Though the first units of water we consume every month are of enormous value to us, the last units are not. The utility of additional (or marginal) units continues to decrease as we consume more and more. Source "The Library of Economics and Liberty" [1]

But once again, there seems to be a "smuggling in" of the concept that diamonds have more value: this is why we "would prefer to win a prize of a diamond". It avoids the question of why this is and what this "value" consists of. Hence it is still circular. (And it is basically a bizarre thought experiment, not a real-world explanation.)--Jack Upland 07:54, 17 June 2006 (UTC)

M&Ms says: I understand what you mean. In general the explanation of this theory would be based on a few assumptions. One being that there is a supply of water. This supply is enough to satisfy a persons needs and with plenty left over. Second assumption is that diamonds are rare. So when you have 2 goods that are assumed to be in demand (one good that is plentiful in supply and the other is not) people will have a preference for the one which is rare. Now this example must maintain the assumption where water is plentiful and diamonds are rare. Thats why you could not apply it to your own situation (that of scare water due to the climate of your area). Now because the explanation assumes that water is plentiful and easily obtained it is therefore not expensive. Diamonds however are rare and therefore expensive. Those are the assumptions anyway. So basically if you have plenty of water you have enough to satisfy your needs and it is not expensive. But this makes it useless for trading. If you also have plenty of water (more than what you need) I could not try buy a car off you with water. Why would you need it? You have all you need so you don't need more. However if I have diamonds (which we "assume" you want because they are rare) and you do not then we could possibly trade. Extra water adds little or no utility (satisfaction) for yourself but diamonds add a lot. Now what this "value" consits of is technically subjective. When the theory was created the classical economist did not recognise "subjetive" vaule only "inherent" value but this only serves to obscure the matter. Basically a diamond gets its' value from what people are willing to pay and what the seller is willing to take. Again we will have to assume something; that this is not the first diamond to be traded or sold. The seller then has an idea of what he can get for it. The buyer will have an idea of what he might want to pay (which might be zero) but he must recognise that the seller knows what diamonds are selling for at the moment. Subjectivity then intervenes when the seller offers a price that the buyer thinks is too high and the buyer offers a price that the seller thinks is too low. When then bargain and may or may not agree to buy/sell. If I buy then the diamond for £1000 then it follows that I valued the diamond at that price. If I do not buy at that price then I did not vaule it at the price offered. Again we "assume" of course that neither the buyer nor the seller face any circumstances where they "have" to buy/sell, i.e. a gun to the head. If we are free to ask for the good at a certain price we will then impose what we think the diamond is worth and try to get the best deal. At the end of it all there is really no explanation as to why diamonds fetch a high price. Here in Ireland we do not have malaria. Malaria is extremely rare but I'm certainly not going to pay to have it brought over in some form. Peolpe just do pay a higher price for diamonds, mostly to use it for decoration and symbolism, which economics won't touch and its' proponents are happy to say it is subjective.

So at the end of the explanation, there's an acknowledgement this is no explanation?! Yet the classical economists did have a explanation - the labour theory of value...--Jack Upland 00:23, 18 June 2006 (UTC)

M&Ms says: The labour theory of value was thought to be inherent but is not. Why can a builder charge £X amount per hour for his work? Again you could say others are charging the same but where do they get the exact figures from? Nowhere! they charge what they want bearing in mind that too high a price will mean the competition could undercut them and too low a price might undermine their reputation etc... You are missing the point. People decide how valuable something is. Ask anybody and they will tell you that a 9c diamond cost more than a litre of water. With that easily understanable and obtainable knowledge we then infer that a diamond will add greater marginal utility for each additional unit consumed. Why? because they have greater value in the short run.

• You are confusing the value of labour with labour itself.
• And you are missing the point: what is that 'easily understandable and obtainable knowledge' based on? If from the market, that is circular.--Jack Upland 05:12, 9 August 2006 (UTC)

Mr Upland, of course Marginalism is circular, we are the market, each individual commodity exchange is a market, we investigate other markets, to best determine what we might charge or pay for a commodity. Our exchanges affect other exchanges, which in turn affect our own exchanges in the future, there is no grand theory or paradigm to predict human behaviour, and thus model prices with 100% accuracy, on all occasions (Marginalism does not try to do this), not even the labour theory of value. For someone who believe prices must have a reference point, or an absolute from where they are based, marginalism must be, from your point of view, a very unsettling, and as you described "perverse theory". -- 83.244.149.133 13:59, 22 January 2007 (UTC)

2 problems:

• Marginalism is presented as providing a reference point for price determination, which you acknowledge it does not.
• Your argument suggests that all prices vary wildly in different times and places. This simply isn't true.--Jack Upland 01:28, 28 January 2007 (UTC)

2 Problems with your 2 Problems:

- Your first point, see start of the article on Marginalism "However, what marginalism seeks to explain is relative differences in prices. It is not necessarily an explanation of prices in monetary terms......"
- Your second point, I was not stating anything specifically about price fluctuations, however, since you've mentioned it, prices do vary, and the rate at which prices vary, can also vary. You can deny it if you like, but there's evidence of it everywhere. One random example, history of property prices in the UK (You'll find regional variation, periods of rapid change, and periods of slower change). --83.244.149.133 17:33, 4 May 2007 (UTC)

How about this, people: Instead of arguing the validity of the paradox here in neoclassical terms, why not simply accept that it's attributed to Smith and is nothing more than a useful illustration? I'm sure you can annotate the section with a couple of short sentences on actual, citable research (not original) that's been produced in the ensuing centuries which reveals the shortcomings of taking the example too seriously in understanding modern concepts of utility and marginalism? Smith's aphorism IS useful and this argument is not, not on this page. 68.124.67.244 00:18, 14 May 2007 (UTC)

Rewrite

I rewrote the intro, as it was really wrong. The rest of the article needs a lot of work too. Economizer 02:16, 24 August 2006 (UTC)

: The whole article is a complete mess. I will try to explain some of the ways it misrepresents neoclassical thinking. 

The explanation giving in the introduction that differences in prices reflect differences in marginal utility is seriously misleading at best, if not downright wrong. The introduction also has got several other flaws. The claimed definition of marginal utility is not enlightening. It does not mention that price will equal marginal cost for produced goods. Also the relationship with the article on supply and demand should be mentioned.

The explanation of the diamond-water paradox is wrong. For one thing it ignores the production-side which is absurd. Also the statement that "it is not the usefulness of water as a whole that affects price, but the usefulness of one unit of water, not total utility but marginal utility" is seriously confusing. Prices are not magically set to reflect marginal utilities( or more correctly marginal rates of substitution). Prices reflect marginal rates of substitution because people, taking prices as given, will change their consumption until prices do reflect these rates since this is a neccessary condition for them to be optimising. (This of course depends on people being utilitymaximisers and price-takers, something that should also be made clear in the article.)

The section abour "cost of prodction" appears to be implying that in the long-run prices will not equal the average cost of production according to marginalism. This is pretty amazing since in in the standard marginalist model of perfect competion taught in every introductory course in microeconomics prices will indeed equal the average cost of production in the long run.

I do not see the point of the reference to behavirioal economists in the section about subjective value.

The explanation of what marginal utility is is wrong. To explain what marginal utility means you need to start by explaining utility functions and that people are assumed to maximize them. The you define marginal utility as the partial derivative of them. It should also be mentionedd here that utility functions are just ordinal and not cardinal in modern non-financial economics. The curve is correct but it should perhaps be mentioned that marginal utility often is assumed never to become negative.

The mention of marxism should probaly be deleted. The description of it is to brief tom be valuable. Better to simply mention that it is an example of a non-marginalist economic theory and then link to its article. The criticisms marxists have had against marginalism can be mentioned in the criticism section.

The criticism section could do with a workover too. I do not understand at all what the second sentence is supposed to be saying. It seems that it is criticising a subjective theory of value for not reconognising that value is subjective which is pretty bizarre. The last paragraph contains a valid point but is wrongly phrased. Standard marginalist theory does indeed assume that the utility of a good does not depend on its price. But this does not make the theory circular even if it turned out to be an important omission.

I see even more flaws with this article than those I have already mentioned but I think I have made my point that the article needs a complete rewrite. Let me summarise: the article is WRONG, WRONG, WRONG!!!!!.

I have edited the 2nd sentence to make it clearer. It wasn't arguing that marginalism didn't recognise subjectivity (in fact the opposite). It was expanding on the intangibility of the concept as mentioned in the 1st sentence and contrasting this with obvious usefulness of resources which are free and inexpensive. As to the circularity, every discussion of marginalism that I have come across purports to explain price, but carries embedded within it the foreknowledge of the price level. That is what the last para is attempting to convey.--Jack Upland 11:18, 8 September 2006 (UTC)

I still do not quite understand the third sentence. The value or marginal utility of an extra unit of a good does indeed depend on the individuals circumstances in the neoclassical theory.

Marxism

Does it really make sense to have such a large marxism section? After all marxism is not a marginalist theory and its criticsim could be dealt with in the criticism section.

But if one wants to have the section one should include replies to its criticisms. Eg, the second paragraph does not seam like a reasonable criticism. After all marginalists would agree that the process described in the paragraph takes place and that it wil drive prices down to average cost in the long run. This does not however mean that supply and demand does not operate. It just means that the longrun supply curve looks different from the shortrun supply curve.

The third paragraph is really meaningless. A physics analogy might clarify why. Imagine a ball hanging hanging in rope. It is affected by gravity and the force from the rope. In equilibrium these two forces will balance each other. One could claim just as well that they disappear and stop to act. Yet it is these forces that determine where the ball is since if it were higher or lower the forces would no longer balance and it would be pulled back towards equilibrium. Its the same in the market. The price is determined by the forces of supply and demand. The price will be set so that they are equal. If the price was at any other level than at equilibrium the excessive demand or supply would act to drive the price back to its initial level.

The circuliary charge should also be responded to. One might want to point to for example Scarfs algorithm where one can compute the price level in general equilibrium without entering any price level.

On the physics analogy, the ball's equilibrium position would be determined by the rope's lenghth (or if it broke, by the position of the ground!) Though this analogy is imperfect, it does illustrate the fallacy being put forward. In practice, the fundamental things apply to the final analysis, and the transient impulses of supply and demand determine the temporary fluctuations. If there is an algorithm that applies, then tell us what is it. Say the supply is X and demand is Y - for a pencil or a palace! - what's the price???--Jack Upland 05:34, 6 April 2007 (UTC)

schools

I think it is best if each marginal concept is explained as it is found by different schools. For example, the concept of marginal utility can be both based on ordinal and cardinal utility. It needs to be said which schools accept what. etc. Intangible 04:28, 15 October 2006 (UTC)

We'de done this before but maybe this time... =

The article states:

"But prices as expressed in the marginal utility, assume that consumers have a given money income. Hence the initial distribution of income is implicit in the general pricing process. Thus while marginal utility theory makes prices appear as something independent of income-distribution, in fact it is dependent upon it. A different income distribution will produce a different price structure. As marginal utility theory cannot explain income distribution, neither can it explain prices."

Ok, first marginal utility does NOT assume that consumers have a given MONEY income. At most it assumes that consumers have some initial endowments of goods which they can trade. On the other hand, it is true that the resulting prices will generally be a function of the distribution of these endowments (unless you get crazy Austrian on this). And yes, a different distribution of endowments will lead to different price structures. However the last sentence does not follow logically from these (almost true) premises. First, the phrase "marginal utility theory cannot explain income distribution" doesn't really make sense (is someone thinking of marginal productivity theory here?). Second, and more substantially, even if marginal utility theory takes income/endowment distribution as given (i.e. does not explain it) that does not mean that it does not explain prices. In the end prices are functions of the underlying fundemental data of the economy; distributions of preferences and initial endowments. True, marginal utility doesn't have much to say as to where these initial endowments came from, but hey, you gotta start a model somewhere. So I'm removing the last sentence and changing 'money income' to 'endowments'.radek 21:24, 19 October 2006 (UTC)

I removed that whole thing. It doesn't require any possessions whatsoever to trade. All one has to have is his own body or labor to trade. Marginal utility also applies to valuations of units of labor. I won't trade one hour of my labor for something unless that something has a higher marginal utility to me than one hour of labor washing my car. Anarcho-capitalism 02:20, 20 October 2006 (UTC)

It does require any possessions to trade?! Try trading with no possessions and see how far you get. Your example contains its on refutation. You have your labour to trade. That means you own your labour power. In other words you are not a slave, or a bonded serf, but are a free labourer. Of course marginal utility theory assumes a pre-existing distribution of income whare are existing endowments of goods? Goods are worth money. Money is the measure of the value of those endowments. That is what a pre-existing distribution of income is. If as in the case of our anarcho-capitalist above you have no goods, then you have no money, then you have nothing to trade except your labour power. Far from being a capitalist your are a worker. (Irrespective or your desire or intent). As marginal utility theory cannot explain the distribution of income, i.e. the existing relations of distribution based on an existing set of relations of production, which determine the ability of consumers to express their preferences for different goods and therefore determine the prices of those goods, neither can it explain prices. Simple as.

Again, you don't have to have any possession to trade. If you have nothing material you trade your labor in order to get possessions. The theory of marginal utility still explains prices. By "prices" we're not necessarily talking dollar amounts. It applies to trade of anything. For example, the price of a drink of water may be one hour of labor.Anarcho-capitalism 00:58, 22 October 2006 (UTC)

You miss the point. You have to at least own your labour in order to trade it. But ironically, as you say if labour is the common factor in the prodution of all commodities it is the price of an average unit of labour which will determine the value not marginal utility. And indeed the price of a drink of water may be an hour of labour, but what determines the value of an hour of labour? It's cost of production, which is why the labour theory of value rather than marginalism is a better explanation of the origin of prices.

The cost of an hour of labour is simply that alternative forgone inspite of it. The individual could have spent an hour working for an alcoholic drink. This is the cost of labouring an hour towards getting a water drink. Intangible 19:58, 22 October 2006 (UTC)

You're confusing cost with value. What determines the minimum value (the minimum price) of an hour of your labor is the marginal utility of whatever will be traded for it. I may offer you 2 glass of water for an hour of your labor and someone else may offer you 1 glass for an hour of your labor. The theory of marginal utility explains why we offer different prices (different amounts of water). Because I have more water than the other guy I am willing to offer you more for your labor than the other guy. Marginal utility determines why the price of your labor is two gallons of water when you trade with me and one gallon when you trade with someone else. If you have labor to sell and you want to buy water, do you care how much labor it took for us to acquire it and adjust the price of your labor accordingly? Of course not. Maybe it took none. Maybe I have a natural spring on my property and I'm selling water with virtually no labor on my part.Anarcho-capitalism 21:55, 22 October 2006 (UTC)

The idea that an hour of labour has a cost simply confirms my point. What determines the cost of an hour of labour? It's cost of production. The theory of marginal utility does not explain the cost of labour. People may off me 1 cent for my labour, they may offer me 2 cents and a jug of water, but I will not accept it, because it is not the cost of my labour i.e. its value. I will only accept their offer, when they offer me the cost of my labour i.e. its value. But there is a further important point, before you can off me a glass of water, or two glasses of water, you must own the water you offer me. The amount of water you offer me will depend on how much you own. So the price of my labour and the offers you make are pre-determined, by a pre-existing set of relations of distribution. As marginal utility theory cannot explain the effect of these relations of distribution neither can it explain price. Even Wieser, one of the key originators of marginal utility theory accepted this point "In natural value goods are estimated simply according to their marginal utility; in exchange value according to a combination of marginal utility and purchasing power..." Weiser "Natural Value". In other words Wieser's theory of marginal utility did not operate in a capitalist economy, because it could not account for the effect of purchasing power, it only worked in a fantastic "natural economy" that had no existence in the real world. And especially not the capitalist one.

If you're thirsty and I am the only one with water because I have a natural fountain on my property, you will pay whatever price I ask for that water. You will work all day long just to get water from me. The price of your labor is determined not by my labor costs at all. I didn't manufacture the water, so there are no labor costs at all on my part. The minimum price of your labor is determined by the marginal utility of water. Since I have an unlimited supply I will accept any labor at all from you, but since there is no competition I will charge as much as I want. If there is competition, then for each provider of water, the prices will vary depending on each provider's marginal utility of water. Again, these providers do not manufacture water so the labor theory of value is totally inapplicable.Anarcho-capitalism 18:44, 23 October 2006 (UTC)

Well, your assertion that the water takes no labor on your part is not entirely accurate, as you would have expended labor to obtain the property in the first place, and maybe had to dig the well, but once that is done, yes, there is no labor expended on your part. Dullfig 23:32, 23 October 2006 (UTC)

I could have stolen the property or the state could have stolen it and given it to me.Anarcho-capitalism 02:29, 24 October 2006 (UTC)

Whether you say that you only need labor to trade or that there is an initial endowment of goods is just a matter of semantics. Initial endowment of goods could in principle include available time which can be split between labor and leisure. I guess one could argue that everyone is endowed with the same amount of labor but that'd be a stretch (since even physical labor will differ by quality). In addition the vector of initial endowments might include land and natural resources. So in the general case the distribution of initial endowments can vary and as a result the price ratios will vary as well. But so what, this is no way a shortcoming of the theory, rather part of its robustness. Bottom line, I'm fine with that paragraph being out, since it was so confused, but if someone wants to write something decent (and accurate) along those lines I'm fine with that too.radek 18:51, 24 October 2006 (UTC)

But is this situation of complete monopoly supply typical of capitalist production, which is after all what we're talking about? Of course it isn't. Monoplies exist but are continually being undermined by the very process of capitalist production. But nonetheless let's work through the example. You have a monopoly on water supply. As the sole supplier of water you are able to charge a massively high price, which earns you super profits well above the average. Capitalists are attracted to the market by these profits. They develop alternative supplies of water, which they will charge less than your water, in order to sell, but still above the market price. As long as the price of water and hence the profits remain above the market price, new capitalists will develop new supplies of water. They in turn will reduce prices until the average rate of profit and average market price are established. If prices fall below the average and water production becomes unprofitable, similarly capitalists will go bust and the price will rise. The price does not vary according to marginal utility but according to the price of production and the tendency for capitalist production to establish average profit rates through movements of capital.

Is marginal utility theory strengthened by recognising that purchasing power, or initial endowments of value or relations of distribution already exist, prior to consumers entering the market? I'm afraid not. As Weiser himself recognised marginal utility theory could only apply, in a situation where all consumers had the same amount of money, the same purchasing power and therefore the same ability to express their needs through their purchases. Palpably not the case with the capitalist mode of production. Which is characterised by extremely unequal distributions of income.

Another small point, capitalists do not produce commodities in order to "use" them, except by selling them i.e. by realising their value. A capitalist producing water is not interested in how much water he can drink but in how much he can sell. They invest money M - to produce commodities C - which they sell for more money M'. The classic path M-C-M'. The form of the commodity i.e. its use is immaterial to them, all that matters is how much money the make on its realisation.

Again, if I control a natural spring, I can still charge people to take water from it. I did not exert any labor, so obviously the price of water is not contingent on the amount of my labor. An important benefit of the marginal theory of value is that it works for manufactured as well as natural goods.Anarcho-capitalism 23:22, 24 October 2006 (UTC)

You're wrong that marginal utility theory doesn't recognize purcashing power. It totally acknowledges it. The less things I have to trade, the higher the marginal utiltity of these things. Therefore the more it's going to take to convince me to part with these things. I will only buy things that give me more utility than that which I'm trading away.Anarcho-capitalism 01:31, 25 October 2006 (UTC)

But the price of water is not simply determined by the labour you take to manufacture it, but is the average price for the production of water under "normal conditions" of capitalist production. If everyone had a spring in their yard, then no labour would be expended on the production of water and therefore it would have no price. Marx discusses the effect of deviations from the normal cost of production, through the example of water falls providing a free source of power, compared with steam which capitalists have to pay for so producing a differential rent, for those capitalists with water falls. Or in your case a spring. [2]

Marginal utility theory assumes that the producers of goods also consume the goods they produce, or at least have the option of doing so. But where does this happen in the normal course of capitalist production? Really only amongst subsistence peasant farmers, who are barely integrated into the capitalist market anyway. It is dependent on the idea that consumers can make a choice between consuming or trading the things they produce, but in fact of course, hardly anyone consumes the things they produce. The capitalist sells them. The worker doesn't own them in the first place and so doesn't have the choice. It is a theory based on simple commodity production i.e. a "natural" peasant society.[[[User:Bill j|Bill j]] 18:08, 26 October 2006 (UTC)]

Just a foot note to the previous debate, particularly the Marxist arguments, firstly the Marxist understanding of the word "Market" seems to be a very absolute definition, it is worth remembering that every exchange is an individual market. To the person who argues about "Normal conditions of capitalist production", and "deviation from the normal", please define "normal". To the person who argues that "Marginal utility theory assumes that the producers of goods also consume the goods they produce", where on Earth did you come to this conclusion!? Are you suggesting that someone who wishes to produce say, cabbages, should enjoy eating them too? Do not underestmate the leverage of buyers, Marxists are so focused on labour and production, but consider the effecs of a cartel of buyers i.e. a monopsony. Finally, labour does not necessarily have value, it is a commodity like anything else, I could spend a week piling sand on a beech, unless someone decides that what I've created is of value, there is no market for the labour I've just expended, and is thus worthless. -- 83.244.149.133 13:35, 22 January 2007 (UTC)

structure

The structure of this article seems to be illogical. The difference between schools should be made clear by each concept, instead of just at the end of the article. It makes a big (at least it did) difference if marginal utility is based on ordinal or cardinal utility for example. Intangible 16:29, 22 October 2006 (UTC)

Marxist critique

I take exception to the marxist section: It is an extrapolation of what other people think marx would have said, had he been alive. I'm sorry, but that kind of writing does not belong in an encyclopedia. Under the critique section, one can list the critique of people that have actually analyzed the Marginal utility theory, and formulated a critique. But having an entire section go on and on about what marx might have said, based on his LTV, is baloney. -- Dullfig 02:49, 31 December 2006 (UTC)

I think parts of this section belong in the Criticism section.--Jack Upland 05:24, 1 January 2007 (UTC)

You might be right. Care to take a shot at it? Dullfig 20:22, 1 January 2007 (UTC)

I've removed the paragraph:

"Marginal utility theory is effectively a theory of supply and demand, as it asserts that the price of a commodity is the point at which supply and demand coincide in the market. But if a commodity were sold at its marginal price and this price were above its market price i.e. the average price for commodities in that sphere of production, there would be two effects, the higher than average profits accruing to the capitalists in that sphere would lead both to an increase in production by those capitalists and would attract new capitalists to it. The supply of the commodity would increase. Further the demand would decrease, as consumers who wanted the commodity were priced out of the market and therefore the price would fall. If the commodity were sold below its market price then the opposite process would occur. Consequently supply and demand, or marginal utility cannot determine the market price:"

It's nonsense, as Marginal utlility is not "effectively a theory of supply and demand", further more all commodity exchanges are conducted at market price.

A market and a price exists, purely because there are parties (or a single party) who wish to exchange a quantity of one commodity for a quantity of another commodity, because for each party, the quantity of the commodity being received, exceeds the benefit or subjective value of the quantity of the commodity being released (Each individual exchange is a market). I therefore cannot fully understand, in the context of previous paragraph, what is meant by the difference between "marginal price" and "market price", unless it is from the perspective of a third party, witnessing a market in which they are not participating, because they value the quantity of the commodity required to participate in the market, more highly than the quantity of the commodity being offered in the market. In other words, from the perspective of the aforementioned third party, the label of "marginal price" would apply to the quantity of commodity, that is required to participate, but which they would not be prepared to commit, and the label of "market price" would apply to the quantity of commodity that they feel they could commit? -- 83.244.149.133 11:09, 22 January 2007 (UTC)