1. 1. 1. 1. 1. 1. 1. 1. 1. 1. 1. 1. 1. Overview: marginalism, subjectivism, and revolution.
                                    2. Jevons.
                                    3. Menger and the Austrian School.
                                    4. Walras and the Lausanne School.
                                    5. Summary and comparison.

• Classical economics. Contrast between nonaugmentable land and augmentable labor, with capital subsumed as stored up labor. Function of economics to to reveal the effects of changes in the quantity and quality of the labor force on the rate of growth of aggregate output. Since rate of growth of output a function of rate of profit on K, secular trends in factor price and distributive shares came to the fore. Accent on K-accumulation and growth. Competition increases scope for D of L. Welfare conceived of largely in physical terms. (The science of wealth; the science of subsistence.) Complacency and a sense of stagnation.

• William Stanley Jevons (1835-82). Léon Walras (1834-1910). Carl Menger (1840-1921).

• Marginal Utility Revolution. (1) The adjective or the noun? (2) Revolution or gradual shift?

o   Hutchison: “What was important in marginal utility was the adjective rather than the noun.”

o   Schumpeter: “So soon as we realize that it is the general-equilibrium system which is the really important thing, we discover that, in itself, the principle of marginal utility is not so important after all as Jevons, the Austrians, and Walras himself believed.” (p. 918.)

o   Lachmann: “In the subjective revolution of the 1870s, the first step in the direction of subjectivism was taken when it was realized that value, so far from being inherent in goods, constitutes a relationship between an appraising mind and the object of its appraisal.” (Spadaro, p. 3.)

o   Hayek: “It is probably no exaggeration to say that every important advance in economic theory during the last 100 years was a further step in the consistent application of subjectivism.”

o   There was plenty of marginalism before 1870 — not just in the so-called forerunners (Dupuit, Gossen, etc.) — but in Ricardo and Mill. If marginalism is taken as defining characteristic of the “revolution,” then it was no revolution. Adding to the demand side the idea that what matters is Ricardo’s “least favorable circumstances” is a just a refinement — a logical next step.

o   More important changes: (1) shift of problem from growth and material welfare to optimum use of known resources. (2) shift to utility (subjectivism) as welfare criterion.

• Dehomogenizing the revolutionaries.  Nature and role of utility as well as nature of economic problem very different in each of the three “marginalist” schools.

• Forerunners. General problem of “rediscovery” in the history of science. Contributions ignored (are not, in a sense, contributions) until they fit in with a controversy or problem. Whitehead: “Everything new has been said before by someone who didn’t discover it.”

o   Daniel Bernoulli (1700-82). Blaug: an outlier. Utility in probability theory. (St. Petersburg paradox, 1738.) Subjective: utility “is dependent on the particular circumstances of the person making the estimate.” Develops concept of marginal utility and diminishing marginal utility. ”There is no doubt that a gain of one thousand ducats is more significant to a pauper than to a rich man though both gain the same amount.” Utility as continuous function. Postulates that du/dx proportional to 1/x, where x is wealth. (Integral obviously the log.) Draws first utility diagram. Article written in latin. Not translated into German until 1896 and English until 1954. (Spiegel, pp. 143-144.)

o   William Forster Lloyd and Samuel Mountifort Longfield develop distinction between total and marginal utility in 1834, followed closely by Nassau Senior. But none made much substantive use of the distinction.

o   Johann Heinrich von Thunen (1783-1850). Series of volumes called The Isolated State (1826-63). Influenced Marshall, who liked his idea of the relationship between theory and facts. Father of circular central-city location theory model. Consider outer ring: rent is zero, so product divided between K and L. p = annual product of family assisted by K; w = wages bill. Profits: y = p-w; rate of profit: z = (p-w)/w. All variables measured in terms of wheat. Rearranging, w + zw = p. Worker spends a on subsistence and invests the rest, y = a-w, at rate z. Von T assumes that goal is to pick w so as to maximize zy, the return on invested surplus. Let x = zy = [(p-w)/w](w-a) = p – w – (ap/w) + a. If p and a constants, then dx/dw = -1 + (ap/w²) = 0. Hence ap/w² = 1 or w = SQRT(ap). Geometric mean between subsistence and annual product. Von T thought this result so important, he had it inscribed on his tombstone. But why maximize yz? Von T elsewhere defines marginal productivity of labor correctly, but then doesn”t use it. Notice that, while techniques new and answers different, questions are Ricardian.

o   Antoine-Augustine Cournot (1801-1877). Mathematician (impressed Poisson) and educational administrator (replaced Ampere). Succumbed to progressive blindness. Recherches dans les principes mathématiques de la théorie des richesses (1838). Pioneered use of mathematics. Mathematics a way of summarizing more simply what would require greater complexity with verbal and arithmetic exposition. “Anyone who understands algebraic notation reads at a glance in an equation results reached arithmetically only with great labor and pains.” (E&H, p. 209.) Law of demand (loi du debit). Specified demand function that was continuous and negatively sloped. Understood distinction between shift in curve and change in quantity demanded. Had clear idea of ceteris paribus. But refused to associate demand with utility. ”Sales or demand (for to us these two words are synonymous and we do not see for what account theory need take into consideration a demand which is not followed by a sale) … increase when price decreases.” (E&H, p. 211.) Demand theory grounded in empirical observation. Related annual average price with annual quantity. Hence, D = f(P) is a curve connecting time-series data on sales with prices at which sales realized.

• • • Monopoly models. Progenitor of standard modern neo-C treatment. Mineral-water monopolist (note assumptions) seeks to maximize net receipts. When costs zero, max pF(p). F(p) + pF′(p) = 0. “Whatever may be the abundance of the source of production, the producer will always stop when the increase in expense exceeds the increase in receipts.” (E&H, p. 213.) Cournot duopoly: another entrant to mineral-water market. Conjectural variation of zero: the “Cournot” assumption in game theory. Each player assumes the other will not alter his output. Reaction functions. Output in duopoly two-thirds the competitive output. In general, quantity = n/(n+1) times the competitive output. Progenitor of “structural” antitrust paradigm: numbers alone, and not behavior, matter. C’s game theory criticized and improved by Bertrand and Edgeworth. C also cited by Marshall as an influence.

o   The engineers: Dupuit and Ellet. Arsine-Jules-Emile-Juvenal (Jules) Dupuit (1804-1866). Engineer who, like Cournot, dabbles in economics as a side-line. Graduate of the Ecole des Ponts et Chausées. Concerned with welfare effects of public projects. Uses example of water to argue that marginal utility diminishes (the least-pressing need determines exchange value of entire stock). ”On the Measurement of the Utility of Public Works,” 1844. Draws demand curve: y = f(x); like Walras, price on x-axis. Unlike Cournot, explicitly linked demand to utility. Consumers’ surplus, natural monopoly, and price-discrimination (multi-part tariffs). ”On Tolls and Transport Charges,” 1849. Dupuit best of a noticeable tradition at the Ecole des Ponts et Chausées. Charles Minard and Henri Navier. Charles Ellet, Jr. (1810-1862). An American who studies at the Ecole. Introduced principle of suspension bridge to U.S. and built first such bridge, across the Schuylkill. Analysis of monopoly price, profit-max, location theory (furthers Thunen, whom he likely never read), and price discrimination. Viner ranks Ellet w/ Dupuit and Cournot as pioneer of pure theory of monopoly price.

o   Hermann Heinrich Gossen (1810-1858). A life of frustration and failure, not the least of which was the lack of attention his book — Development of the Laws of Human Relationships and of the Rules to be Derived Therefrom for Human Action — received after its publication in 1854. Not just scientific economics, but a religious-utilitarian philosophy of life. Hype: comparison to Copernicus, and the world as paradise once his ideas accepted. Analysis and curves similar to Jevons. But x-axis usually measured time not quantity; and relationships all linear. Believed utility not directly measurable, but that this doesn”t preclude graphic depiction. Gossen’s first and second laws: (1) the marginal utility — “the value of the last atom” — of a perfectly divisible good diminishes as the quantity of the good increases; (2) the total utility of a given quantity of a good that serves several uses is at its maximum when the marginal utility equal in all uses. Gossen discovered and publicized by Jevons in 1878, 20 years after his death.

• William Stanley Jevons (1835-1882). Technical training and five years in Australia — where, according to Keynes, he developed all his important ideas. Graduated from London in 1865, having already published an outline of utility theory as well as a piece on business fluctuations. Achieved prominence with The Coal Question (1865), a forecast, based on a Malthusian analogy, that England would run out of coal before the beginning of the twentieth century. A sunspot theory of the business cycle. Nervous and physical exhaustion set in early. A Principles left unfinished by his drowning in 1882. A sense of personal genius but strong introversion. Few students and little impact.

 o   Independent discovery of marginal utility, but generous to such writers as Dionysius Lardner (Railway Economics, 1850) and Fleeming Jenkins.

o   Theory of Political Economy, 1871.

o   Utility as a subjective magnitude, but with a physiological basis. Fechner, Elemente der Psychophysik (1860): the Weber-Fechner law — response to stimulus diminishes with each repetition. (Jevons alone in pushing the physiological connection.) Subjective: value not an intrinsic quality of things but “a circumstance of things arising out of their relation to man’s requirements. Benthamite influence: utility as pleasure and pain, which can be measured by its effects. U = f(X). Marginal utility: “degree of utility.” Wrote du/dx: “the ratio of a small change in utility to a small change in X (food).”

o   Separated utility in economics from moral utilitarianism, “the higher calculus of moral right and wrong,” to which economics should be subordinated. A cautious cardinalist. Refused to make interpersonal comparisons of utility: “The susceptibility of one mind may, for what we know, be a thousand times greater than that of another.” (Cf. Bentham and Mill/Edgeworth.)

o   Equimarginal principle (Gossen’s second law). Two goods and two consumers. Let a and b be initial endowments of two individuals; x and y be actual amounts exchanged; and phi and psi be “final degrees of utility” to respective parties. Then, phi1(a-x)/psi1(y) = y/x = phi2(x)/psi2(b-y). Marginal utility of x given up over marginal utility of y acquired inversely proportional to ratio at which goods exchanged. Higher the importance of good, less of it one willing to offer in exchange for another good. In modern terms, (du/dx)/(du/dy) = y/x = Px/Py or (du/dx)/Px = (du/dy)/Py = y/x. [Note that du/dx — “final degree of utility” — is same as rareté but is not “marginal utility.” The latter is the (total) utility of the marginal unit, which Marshall approximated linearly as (du/dx)Δx.]

o   Law of indifference: only one price in a given market.

o   Theory of exchange. “Trading bodies,” one with corn the other with beef. Two marginal utility curves cross. An exchange lowers A’s holding of corn and B”s holding of beef, but trade beneficial because each gains more utility than he loses. Equilibrium when MU of each’s gain equal to MU of his loss.

 o   The “catena.”Theory of exchange presupposes given initial stock. When output given, MU determines value. But what determines output?

Cost of production determines supply;
Supply determines final degree of utility;
Final degree of utility determines value.

o   Naive, and conflicts w/ claim that utility determines value. First two lines just suggestions, since Jevons had no theory of production (abandoned references to Lardner). Marshall would later get it right: simultaneous determination. Note that Jevons reasoned directly from individual utility to market demand in pecuniary terms. No concept of marginal utility of money.

 o   Labor.Blaug: “J’s most important contribution to the main stream of neoclassical economics.” Disutility of labor first increases then decreases, while product decreases monotonically. Whenab=bc, marginal utility of product equal to disutility of producing it: hence this will give equilibrium amount supplied. Problems with constancy of effort over entire day and with symmetry of factors that affect supply of and demand for labor. But these can be overcome. But is the theory in accord with institutional practice?

 o   Capital theory. Following Bentham, Jevons saw time and uncertainty as important aspects of utility. Anticipates much of Austrian K-theory. Productivity of Kfunctionof time alone. An increase in K tantamount to increase in period of production. Rate ofidepends on ratio of product increment to the increment of K. F(t) is production function. Increment of product isF(t+Δt) – F(t); increment of investment isΔtF(t). In limit, r = (dF(t)/dt)/F(t) = F′(t)/F(t). Thus r = rate of increase of product over product. A marginal productivity theory of interest; J does not generalize to other factors.

 

• Carl Menger. Born in what is now Poland; educated at Vienna, Prague, and Cracow. Austria: not a small country but a far-flung empire; cultural rival of Germany. (Immense intellectual activity of late nineteenth/early twentieth century Vienna.) Catholic rather than Protestant. Cf. Austrian problem of multi-ethnic diversity with German drive for national identity. Utilitarianism unknown in Austria; but tradition of Kantian idealism and natural law philosophy. Influence of enlightenment stronger than in Germany. Older and younger Historical Schools (Knies,Roscher, Hildebrand versusSchmoller.) Few native Austrian economists before Menger. Menger as teacher (contrast Jevons and Walras) and founder of a true “school.” TheMethodenstreitwithSchmoller. UntersuchungenuberdieMethodederSozialwissenshaftenundderpolitischenOekonomieinsbesondere(1883). [Problems of Economics and Sociology.] Discussions of origin and character of social institutions.
•  Grundsatze der Volkswirtschaftslehre (Principles of Economics), 1871. Evaluation of needs and their satisfaction rather than utility. Emphasis on “causal” processes and a kind of “methodological essentialism” without the heavy metaphysical baggage.

 o   Economic goods. Begins with definitions and theory of “goods.” (Cf. Marx?) ”Things that can be placed in causal connection with the satisfaction of human needs we term useful things. If, however, we both recognize this causal connection, and have the power actually to direct the useful things to the satisfaction of our needs, we call them goods.” (p. 52.) Requirements for goods-character: (1) a human need; (2) “Such properties as render the thing capable of being brought into causal connection with the satisfaction of this need; (3) human knowledge of causal connection; (4) command of the thing sufficient to direct it to needs. Imaginary goods: mistakenly thought to be goods. Goods can be intangible “relationships”: monopolies, goodwill, love; modern distinction between goods (“material goods”) and services (“useful human actions [and inactions]”).

 o   Orders of goods. Causal connection between value of goods of higher (second, third, fourth, etc.) order and goods of lower (1st) order. First order: goods in direct causal connection with satisfaction of needs (consumer goods). Higher-order goods: means of production. Goods-character of higher-order goods depends on having the necessary complements: bread example. (Rudiments of Austrian business-cycle theory.) Goods-character of higher-order goods depends on goods character of corresponding lower-order goods. ”To indicate the order of a particular good is to indicate only that this good, in some particular employment, has a closer or more distant causal relationship with the satisfaction of a human need. Hence the order of a good is nothing inherent in the good itself and still less a property of it.” (p. 58.)

 o   Time and error. “The process by which goods of higher order are progressively transformed into goods of lower order and by which these are directed finally to the satisfaction of human needs is … not irregular but subject, like all other processes of change, to the law of causality. The idea of causality, however, is inseparable from the idea of time. A process of change involves a beginning and a becoming, and these are only conceivable as processes in time. Hence it is certain that we can never fully understand the causal interconnections of the various occurrences in a process, or the process itself, unless we view it in time and apply the measure of time to it.” (p. 67.) Period of waiting between command of higher order goods and possession of lower-order goods. Planning and foresight. Uncertainty increase with the number of elements involved.

 o   Progress in human welfare. Division of labor only one cause (recall that Menger saw himself as following in Smith’s tradition). Capital accumulation (transformation of lower-order into higher-order goods) also important. (But Smith knew this, of course.)

o   Economic character of goods. Requirements: the amount of consumption necessary to satisfy needs. Three possibilities: (1) requirements > available quantity; (2) requirements < available quantity; (3) requirements = available quantity. Condition (1) leads to process of economizing; such goods are economic goods. (p. 96.) When condition (2) holds, goods needn’t be economized; hence, become non-economic goods. What is economic and what non-economic subjective and susceptible to change. Economic character of higher-order goods depends on economic character of corresponding lower-order goods.

 o   Value. If R > Q — and economizing men aware of this fact — “goods attain for them a significance we call value. Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.” (p. 115.)

 o   Subjectivism. “Just as a penetrating investigation of mental processes makes the cognition of external things appear to be merely our consciousness of the impressions made by the external things upon our persons, and thus, in the final analysis, merely the cognition of states of our own persons, so too, in the final analysis, is the importance that we attribute to things of the external world only an outflow of the importance to us of our continued existence and development (life and well-being). Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs.” (p. 116.) Notice connection to empiricist psychology. Repudiates classical distinction between value (oruse value) and exchange value: not only do non-economic goods lack exchange value, they lack any value at all. Distinguishes “utility” (capacity to satisfy needs) from value. Strong subjective passage, p. 121.

 o   Subjective factor: differences in the magnitude of different satisfactions.

         I     II     III    IV     V      VI     VII    VIII     IX     X

         ———————————————————————

         10    9       8      7     6      5       4       3       2     1

         9     8       7      6     5      4       3       2       1     0

         8     7       6      5     4      3       2       1       0

         7     6       5      4     3      2       1       0

         6     5       4      3     2      1       0

         5     4       3      2     1      0

         4     3       2      1     0

         3     2       1      0

         2     1       0

         1     0

Menger: suppose I is food and V is tobacco. The first unit of tobacco has the same importance to agent as fifth unit of food. Requires unrelatedness of wants and that a “unit” of each good measured in terms of the sacrifice of some numéraire commodity like money. Also, this example apparently cardinal; but Austrian conception of utility elsewhere ordinal (McCulloch: “intrinsically” ordinal; “set differences”; marginal utility does diminish in this sense contra Hicks). Numbers in table chosen “merely to facilitate demonstration of a difficult and previously unexplored field of psychology.” (p. 128.)

o   Objective factor: the dependence of separate satisfactions on particular goods. Farmer example. ”If a good can be used for the satisfaction of several different kinds of needs, and if, with respect to each kind of need, successive single acts of satisfaction each have diminishing importance according to the degree of completeness with which the need in question has already been satisfied, economizing men will first employ the quantities of the good that are available to them to secure those acts of satisfaction, without regard to the kind of need, which have the highest importance for them. They will employ any remaining quantities to secure satisfactions of concrete needs that are next in importance, and any further remainder to secure successively less important satisfactions. The end result of this procedure is that the most important of the satisfactions that cannot be achieved have the same importance for every kind of need, and hence that all needs are being satisfied up to an equal degree of importance of the separate acts of satisfaction.” (p. 131.) Theequimarginalprinciple:Gossen’ssecond law.

 o   Menger: not utility in Jevons’s sense. Considered utility an abstract relation between a species of gods and a human need. Not equivalent to value. Value is subjective but utility — “usefulness” — is objective. No term for marginal utility (this introduced byWieser). Concerned w/ utility of marginal use not with “marginal utility.”

o   Summary, p. 139. Only satisfactions have value; value of goods imputed to them by virtue of their ability to provide satisfactions.

 o   Repudiates labor theory of value. Both nature and measure of value subjective. ”Equally untenable is the opinion that the determining factor in the value of goods is the quantity of labor or other means of production that are necessary for their reproduction. A large number of goods cannot be reproduced (antiques, and paintings by old masters, for instance) and thus, in a number of cases, we can observe value but no possibility of reproduction. For this reason, any factor connected with reproduction cannot be the determining principle of value in general. Experience, moreover, shows that the value of the means of production necessary for the reproduction of many goods (old-fashioned clothes and obsolete machines, for instance) is sometimes considerably higher and sometimes lower than the value of the products themselves.” (p. 147.) Emphasis on knowledge (p. 148).

 o   Imputation. Reverses Marx: value of goods not determined by value of what went into producing them; value of what went into producing a good is determined by the (expected) value of the good (in satisfying needs). ”We therefore have the principle that the value of goods of higher order is dependent upon the expected value of the goods of lower order they serve to produce.” (p. 150.) Importance of time and expectations: “… there is no necessary connection between the value of goods of lower or first order in the present and the value of currently available goods of higher order serving for the production of such goods. On the contrary, it is evident that the former derive their value from the relationship between requirements and available quantities in the present, while the latter derive their value from the prospective relationship between the requirements and the quantities that will be available at the future points in times when the products created by means of the goods of higher order become available.” (p. 151.)

 o   Marginal productivity theory of interest: not payment for abstinence, but exchange of one economic good (K-services) for another (money).

o   Entrepreneurship: (a) obtaining information; (b) economic calculation; (c) act of will; (d) supervision. Entrepreneurship as a kind of labor service; but not essentially risk-bearing. (Cf. Schumpeter.)

o   Land. Contra Ricardo, there is nothing special about land. It gets its value in the same way as all other goods or productive services.

 o   Labor. Ditto. If wages of laborer exchange for exactly price of subsistence, it’s just an accident. (p. 170.)

 o   Exchange. Gains from trade. Same marginal logic as individual allocation problem.

 o   Theory of price: indeterminacy and bargaining.

 o   Commodity. German usage: anything for sale. (Cf. Marx.) Menger: this too is subjective.

 o   Money. Evolutionary story. The marketability of commodities. Time and risk. From direct barter to the use of more-marketable commodities as intermediaries. ”As each economizing individual becomes increasingly more aware of his economic interest, he is led by this interest, without any agreement, without legislative compulsion, and even without regard to the public interest, to give his commodities in exchange for other, more salable, commodities, even if he does not need them for any immediate consumption purpose. With economic progress, therefore, we can everywhere observe the phenomenon of a certain number of goods, especially those that are most easily salable at a given time and place becoming, under the powerful influence of custom, acceptable to everyone in trade, and thus capable of being given in exchange for any other commodity.” (p. 260.) These goods become money. Smithian “invisible hand” explanation.

 

• Friedrich von Wieser (1851-1926). Refined Menger’s value theory. A more Jevons-like interpretation. Simultaneous-determination approach to imputation. Eugen von Bohm-Bawerk (1851-1914). Boyhood friend and later brother-in-law of Wieser. Time in capital theory: the average period of production. Attack on Marx: the contradiction between volumes I and III of Capital.

• Léon Walras(1834-1910). Born in Normandy. Son ofAugusteWalras, a classmate (and possibly admirer) of Cournot. Taught son economics, and passed to him views on the desirability of mathematical economics, subjective value theory,thenationalization of land. Could find no position in France; eventually (in 1870) found a position in the faculty of law at Lausanne. Elementsd’économiepure(1874 and 1877). Isolation and correspondence.

 o   General equilibrium. Schumpeter: this is what the revolution was all about. “…sofar as pure theory is concerned, Walras is in my opinion the greatest of all economists.” (p. 827.)

 o   Cournot: gave up on general equilibrium. “So far we have studies how, for each commodity by itself, the law of demand in connection with the conditions of production of that commodity, determines the price of it and regulates the incomes of its producers. We considered as given and invariable the prices of other commodities and the incomes of other producers; but in reality the economic system is a whole of which all the parts are connected and react on each other. An increase in the income of the producers of commodity A will affect the demand for commodities B, C, etc., and the incomes of their producers, and, by its reaction, will involve a change in the demand for commodity A. It seems, therefore, as if, for a complete and rigorous solution of the problems relative to some parts of the economic system, it were indispensable to take the entire system into consideration. But this would surpass the powers of mathematical analysis and of our practical methods of calculation, even if the values of all the constants could be assigned to them numerically.” (Cournot, quoted in Spiegel, p. 549.)

 o   Walras’s system. Perfect competition (i.e., atomistic price-taking behavior), freedom of entry, mobility, and price flexibility. Budget identities: businessmen’s cost matched by revenues and consumers incomes matched by outlays. In first approx., no K-formation, savings, uncertainty, or demand to hold money (whether transactional or otherwise). Closed system: no foreign transactions or government. Number of unknowns: m products, n productive services, m product prices, n service prices, andmntechnical coefficients. This means 2m + 2n +mnunknowns, which Walras reduces by one because one of the products (e.g., “gold”) serves as numéraire. Number of equations: m-1 demand equations, m cost equations, n quantity equations for services, andmntechnical equations: 2m + 2n +mn-1equations. Demand equations derived from utility functions u =u(q1, q2, …), which are maximizeds.t. budget constraint. Demand equations reduced from m to m-1 by theorem that, if demand for n-1 commodities and budget constraint known, demand for nth commodity automatically follows; this identical to saying that absence of excess demand in m-1 markets implies absence of excess demand inm^thmarket:Walras’slaw. [SUM(i=1, n-1) {pi(q_i-q_i)} = -p_n(q_n-q_n).] Tâtonnementand theWalrasianauctioneer. Price adjustment versusMarshallianquantity adjustment. Patinkinand the real-balance effect: money supply indeterminate.

o   Rareté. An individual’s change in total utility from consuming one more (or less) unit of a good. Wanted to “express therareté, i.e., the intensity of the last want satisfied, as a decreasing function of the quantity consumed.” (E&H, p. 324.) But notice that he definedraretéas “l’intensitédu dernierbesoinsatisfaitparunequantitépossedée”. (Jaffé, p. 515, emphasis original.) ”Consumed” seems essentially synonym for possessed. Not concerned with psychological determinants of utility.Jaffé(contra Schumpeter): Instead of climbing up from marginal utility to the level of his general equilibrium system, Walras actually climbed down from that level to marginal utility. … Walras did not come into possession of his concept of marginal utility and his method of using it to derive a theoretical demand curve until after he had clearly outlined his mathematical theory of a network of interrelated markets.” (p. 513.)

 

• Wilfredo Pareto(1848-1923). An Italian nobleman and engineer, successor to Walras in the chair at Lausanne. Came to economicslate,and probably unfamiliar w/ Walras before 1891. Coursd’économiepolitique(1896-97);Manualedieconomiapolitica(1906;Manueld’économiepolitique, 1909). Turned to sociology late in life (theory of “circulation of elites”; fascism?).

 o   Ophélimité. Pareto wanted to remove any implication of utilitarianism from Walras: ophélimité as the power to satisfy wants. (Cf. Menger.) Precursor of replacement of utility analysis w/ indifference curve analysis (e.g., Hicks). [Hayek brings Pareto to attention of Hicks at LSE.] Pareto a kind of aristocratic liberal: saw perfect competition as bringing about maximum of ophélimité. Ironically, laid groundwork (along withBarone) for market socialism (Lange, Lerner). Pareto optimality: a change may make some better off but others worse off; absent interpersonal comparisons, welfare result ambiguous. Kaldor: compensation principle.

• Dehomogenizing the “revolutionaries.” 

 o   Jevons: utilitarianism; economics as an allocation problem. “The problem of economics may, as it seems to me, be stated thus: — Given, a certain population, with various needs and powers of production, in possession of certain lands and other sources of material: required, the modeof[employing theirlabourwhich will maximize the utility of the produce.” (4th ed., p. 267.)

 o   Menger:subjectivism; process and institutional economics; uncertainty and error.

 o   Walras:general equilibrium.