Chapter 8: Jevons,
Menger and
Foundations of
Marginal Analysis
Questions for Review, Discussion and
Research
1, 2, 5, 6, 7, 8, 9, 10
- Marginal analysis and the use of
mathematic helped forge a new set
of analytical techniques for the
emerging neoclassical approach
Forerunners of
Marginal Analysis
1. Cournot (1838)
 Economics of the firm,
duoploly
2. Longfield (1834)
 Developed marginal
productivity theory of
distribution
3. Dupuit (1844)
1. Gossen – Same as
Longfield plus first
articulation of the concept
of marginal utility
2. Von Thunen

Applied marginal analysis
through calculus and the
interdependence of
markets with
simultaneous equations
Marginal Revolution

Writings of Jevons, Menger
and Walras were original
inasmuch as their ideas
influenced the subsequent
development of economic
theory in a way that
predecessors did not
Critique of Classical
Theory of Value
1. Classical model implies
Factor Costs of Production
→ Determine value of
product outputs

Jevons and Menger
reversed the direction of
causation
2. Price determination is not
dependant on total or
average utility but marginal
utility
What is Utility?


A psychological phenomena
with unspecified units of
measurement
Utility only derived from
consumption
skip pp. 229-30
Utility Functions



Menger’s analysis was verbal
and he only used arithmetic
examples
Jevons and Walras employed
additive utility functions where
Total Utility = f1(Qa) + f2(Qb)
+ ….
We use a more general form
today that allows for
complementary and
substitution
Theories of Exchange

Used principle of diminishing
marginal utility to specify the
conditions where consumers
maximize utility in the
consumption of many
products
Overhead pp. 231-32
Valuation of the
Factors of Production


Classical

Relative prices of outputs
depends on costs of
production and implies
that value comes from
the past
2) Neoclassical

Value comes from the
future when expected
satisfaction is enjoyed in
the consumption goods
and services (especially
durables)



Value causation runs from the
final pricing of outputs to cost
of factor inputs “used up” in
the production process
Causal relationship defined
within the partial equilibrium
framework
Factors of production are not
price determining but price
determined
Evaluation of Jevons
and Menger


Always assumed that the
supply of outputs was
exogenous
Their illustrations indicate
that value does not depend
entirely upon utility or
demand but both supply and
demand
Overhead pp. 234-35
Lasting Contributions
of Menger, Jevons,
and Walras

Overhead pp. 239-40
Was Menger An Early
Neoclassical
Economist?

Overhead pp. 239
Carl Menger



Little influenced by Von
Thunen and unaware of
Gossen of Mangoldt
Founder of a school of
thought that concentrates on
the subjective, atomistic
nature of economics
Aggregate, collective ideas
could not have adequate
explanation ??? upon
individual decision making
and behaviour
Overhead pp. 293-94 of
other source
Overhead pp. 296-97 of
other source
Weiser and the Theory
of Imputation



Adopted highly theoretical,
deductive approach of
Menger
Used verbal models and did
not use mathematics
First to use the term
marginal utility

The price of a factor of
production is measured
by the marginal utility the
factor yields in marginal,
or last, final good
consumed
Overhead pp. 236-37
Capital Theory of
Eugen Bohm-Bawerk


Builds on Menger’s vision of
how a modern capitalist
economy is structured
Mengers approach sees
capital in terms of a time
structure of production


Production is organized as a
sequential process of
activities in which goods of
a higher order (capital
goods) become transformed
into goods of the lowest
order (consumption goods)
Capital goods are
heterogeneous and are
classified by their position
along a time continuum in
the production process

Bohm-Bawerk’s theory
of capital was a
conscious extension of
Menger
Capital Theory of
Eugen Bohm-Bawerk
Cont’d

For Menger, the rewards to
save only if time consuming
methods of production are
adopted and result in higher
levels of productivity and
higher levels of consumption
in the future

The introduction of time
considerations is his greatest
contribution to capital
theory and stands in sharp
contrast to the instantaneous
processes of production in
neoclassical theory

His central proposition was
that the production of final
goods (consumption
products) takes time and
that roundabout methods of
production are more
productive than direct
methods
Capital Theory of
Eugen Bohm-Bawerk
Cont’d


Primitive economics only
use land and labour (original
means of production) to
make goods for “immediate”
consumption
Capitalist economies emerge
when roundabout and more
capital intensive methods
are employed


Time itself becomes an input
and the length of the
production period for
consumer products is itself a
variable
In Figure 12-3 the
production period is
represented on the time axis
Capital Theory of
Eugen Bohm-Bawerk
Cont’d

Final output increases in
absolute terms with a
lengthening of the period of
production but at a
decreasing rate

More and more capital is
used in combination with the
original factors so the ratio
of capital to land and labour
rises and the final output at
consumption goods grows at
a decreasing rate
Overhead pp. 311-13
Austrian Economics in
18th Century

-Alfred Marshall Principles
(pp.60) states it’s “The most
important economic work
that has been done on the
continent in (the 19th
century) is that of Germans
Later Generation’s of
Austrian Economists

Examined in chapter 13