In: Economics
A full page answer: How did the French Marginalists differ from their British counterparts? Be specific.
The crux of the Neoclassical thought of value is the thought of
subjective scarcity. The Neoclassical reply to the noted
"water-diamond" paradox is that diamonds are naturally extra
priceless than water no longer on the grounds that diamonds are
more expensive to supply (the Classical reply), but rather due to
the fact that diamonds are more scarce than water. Some may just
object to this big difference: if diamonds are very highly-priced
to produce, then one should count on to look somewhat less of them
around, as a result the fee-of-production and rarity arguments seem
to boil right down to the equal factor. Adam Smith appears to
suggest this when he writes:
"[T]he value of [precious] metals has, in all ages and countries,
arisen chiefly from their shortage, and that their scarcity has
arisen from the very small portions of them which nature has any
the place deposited in a single position, from the rough and
intractable substance with which she has virtually every where
surrounded those small quantities, and thus from the labour and
expence which are every the place integral with a purpose to
penetrate and get at them." but this is not quite genuine for
Neoclassicals. The Neoclassical idea of shortage is not in basic
terms that whatever is "infrequent", but alternatively that it is
perceived as rare by way of consumers. To take Lionel Robbins's
(1932: p.46) noted instance, bad eggs is also "infrequent", but if
individuals do not want unhealthy eggs, then even one dangerous egg
is already "too many" of their eyes and for that reason do not have
much price. In contrast, if people's want for diamonds is very
great certainly, then of their notion, even a massive number of
diamonds could also be "too few" of their eyes, accordingly they
are going to have a excessive fee. Hence, the Neoclassical concept
of scarcity is really special from the Classical inspiration: the
subjective detail of wish is an critical a part of the story.
There are as a consequence two important ingredients of
Neoclassical value conception: (1) that the relative values of
matters come up from their relative shortage and (2) that
subjective wants are an indispensable part in picking the relative
shortage. Each of those notions have an historical historical past
predating 1871-4, however they weren't always wedded collectively.
Some economists believed that rarity gave upward thrust to value
with out thinking too difficult about whether rarity was a
subjective or objective factor; in distinction, others have concept
that subjective notions such as utility and demand were predominant
in deciding on rate, however did not fairly connect it to
scarcity.
(A) scarcity and Utility in the Classical Schema
The Classicals -- Adam Smith, David Ricardo, John Stuart Mill,
Karl Marx, etc. -- believed in neither of these strategies.
Following the sample set through Richard Cantillon (1755), they
argued that subjective desires and shortage may be primary
explanations in picking market (or temporary or quick-run) prices,
but they insisted that the typical (or equilibrium or long-run)
costs have been decided completely by way of relative expenditures
of creation (usually, relative labor fees).
The Classicals perceived rarity to be an aberration: if goods may
also be produced -- i.E. Created -- then there is not any inherent
shortage of them. For that reason, scarcity costs have been what
Ricardo known as "monopoly costs" -- i.E. The costs which arose
handiest "when via no viable device their variety can also be
augmented; and where, as a consequence, the competition is
absolutely on one side -- amongst the purchasers." (Ricardo, 1817:
p.A hundred sixty five) and accordingly "their fee is restricted
handiest via the extent of the energy and will of purchasers"
(ibid.) however this isn't the normal, long-run rate. "The
exchangeable price...Of a commodity which is at a monopoly cost is
nowhere regulated with the aid of the cost of production."
(Ricardo, ibid.) consequently, shortage could play a position in
the short-run (when portions are fixed), but now not in the
long-run.
They had granted that rarity might be a determinant of value in
a few cases, "rare statues and pictures, scarce book and coins,
wines of a peculiar quality" (Ricardo, 1817: p.6) -- goods which
cannot be produced and thus whose value is regulated by "monopoly
prices". But these cases were so exceptional that they could be
safely ignored. At best, as our earlier quotation from Smith
indicates, they were willing to discuss scarcity as a foundation of
value only insofar as it arose from high costs of production.
Certainly, whatever lip service they paid to scarcity, they did not
incorporate it into their central theoretical schema.
Utility was a slightly different story. The Classicals confused
utility of a good with its usefulness. They agreed that a good must
have usefulness if it is to be produced. The mercantilist Nicholas
Barbon was perhaps the first to explicitly claim that price was
influenced by utility: "the Value of all Wares arise from their
Use; Things of no Use, have no Value, as the English phrase is,
They are good for nothing." (Barbon, 1690: p.13). In this, he was
followed up by John Locke (1692) and John Law
(1705).
Richard Cantillon (1755) -- like all the Classicals thereafter --
acknowledged that a good must have utility in order to be produced.
But utility itself did not determine the relative prices of the
goods. It is relative costs of production that will determine the
natural prices of goods. Utility merely determines that a good will
be produced, period. That's where its role both begins and ends.
Utility is of no further use beyond that.
Why did the Classicals cut utility's role so short? The reason is
that utility seemed to run into trouble when confronted with the
old water-diamond paradox set forth by John Law (1704: p.4) and
made famous by Adam Smith (1776: p.44-5). As Smith noted, water is
useful to humans, diamonds are useless to humans, thus water should
have a higher "use-value" or "utility" than diamonds. But clearly,
water commands a lower "exchange-value" than diamonds. Thus, like
Aristotle before them, the Classicals gave up on the utility-value
connection: it seems as if utility simply could not be incorporated
successfully into a theory of natural price.
Of course, Smith's error was to confuse "utility" with
"use-value". The concept of "utility" handed down by the
Scholastics to the modern 18th Century economics by writers such as
Samuel von Pufendorf (1675) was to connect utility to desiredness
and not to usefulness. Diamonds may be "useless", as Smith
asserted, but they could still have utility in the sense that they
are desired. With the notable exceptions of Jean-Baptiste Say and
Nassau Senior, the misleading argument by Adam Smith was accepted
by the rest of the Classical School.
At best, utility (like scarcity) will have a prominent role to play
in Classical theory only for the temporary case of short-run market
prices. Indeed, Cantillon (1755) was the first to suggest a clear
supply and demand mechanism for the determination of market prices
which includes both utility and scarcity (inexplicably, a lot of
Anglo-Saxon literature tends to credit Sir James Steuart (1767) for
this). But for long-run natural prices, neither utility nor rarity
have a role in the Classical schema.
(B) The Franco-Italian Tradition: Subjective Scarcity
Some writers during the Classical period refused to relegate the
utility explanation to a temporary or minor phenomenon and disputed
the cost-of-production solution to the water-diamond paradox. The
most notable of the disputants was Jean-Baptiste Say (1803, 1815,
1828). Although a follower of Smith in many other respects, he
rejected Smith's labor theory of value. Or rather, he argued that
utility and thus demand must play a part in the determination of
natural price. At times, he went quite far in this pursuit. James
Maitland Earl Lauderdale (1804) also rejected Smith's theory and
proposed a long-run demand-and-supply mechanism.
The Classicals were not amused: David Ricardo (1817: Ch. 20) and
John Stuart Mill (1845, 1945) took both Say and Lauderdale to task
for their heresy. For instance, Ricardo writes:
"M. Say acknowledges that the cost of production is the foundation
of price, and yet in various parts of his book he maintains that
price is regulated by the proportion which demand bears to supply.
The real and ultimate regulator of the relative value of any two
commodities is the cost of their production, and not the respective
quantities which may be produced, nor the competition amongst the
purchasers." (Ricardo, 1817: p.231)
However, we should note that the resistance of the Classicals was
not mere pig-headedness or simply a reiteration of Smith's
"use-value" confusion. As particularly expressed by J.S. Mill
(1845), if one was to acknowledge the role of both demand and
supply in long-run price-determination, one is effectively mixing
together mathematically heterogeneous things which cannot be
juxtaposed upon each other.
"It seems to me necessary, when we mean to speak of the ratio
between the demand for a commodity & the supply of it, that the
two quantities should be, in the mathematical sense, homogeneous --
that both of them should be estimated in numbers of the same unit."
(J.S. Mill, 1945: p.143)
Although insisting on the importance of subjective utility in price
determination, Law, Say and Lauderdale were less clear about the
role of rarity in all of this. This is understandable given the
traditional difficulty of distinguishing a costly item from a rare
item. Objectively-determined rarity had been of central importance
in the work of Bernardo Davanzati (1588), Juan de Lugo (1642) and
Pierre de Boisguilbert (1695), but the connection with utility was
not immediately and clearly made.
The first explicit recognition of scarcity, i.e.
subjectively-determined rarity, as the source of value is contained
in the remarkable work of Ferdinando Galiani (1751). Galiani's
brilliant performance was followed up by the anti-Physiocrat
philosopher, Abbé Condillac (1776). Condillac explicitly employed
both utility and rarity in determining scarcity and value and was
willing to confront the Classical solution directly. As he wrote,
"a thing does not have value because of its cost, as some suppose;
but it costs because it has value." Condillac's argument was
reiterated in a relatively obscure note by the ambiguous
Physiocrat, Jacques Turgot (1769).
It is evident, then, that Say's groping for a subjectivist theory
of price was not isolated. There was already a somewhat long
history in France
and Italy. Under Say's own influence, this Franco-Italian tradition
sustained itself in these countries throughout the 19th Century.
The ground-breaking work of French proto-marginalist economists
such as Louis Auguste Say (1822) (J.B. Say's brother), Auguste
Walras (1831) (L. Walras's father), Augustin Cournot (1838) and
Jules Dupuit (1844) can thus be seen as natural outgrowths of a
long tradition and not merely a series of brilliant isolated sparks
of insight. It was upon this tradition that Léon Walras was to draw
in composing his 1874 masterpiece..
In Germany, another ambivalent follower of Smith and popular
textbook writer, Johann Friedrich Rau (1827) did not discard the
role of demand entirely -- indeed he showed how demand-and-supply
diagrams can be used to determine price explicitly! In addition,
the weight of the German Historical School ensured that the
Classical Ricardian theory never penetrated very deeply in Germany
either. Together, this can perhaps explain the German-language
contributions to the utility-cum-scarcity tradition, such as F.B.W.
Hermann (1832), Hans von Mangoldt (1863) and, above everything,
Hermann Heinrich Gossen (1854). Carl Menger was thoroughly soaked
in Rau and Hermann before trying his hand in 1871.
In Great Britain, where the Ricardians reigned supreme, the
subjective scarcity notion had more trouble catching .
(C) The Holy Grail: Marginal Utility
Discussions of utility, scarcity and the mechanism of demand and
supply, however suggestive, were not well-integrated in the efforts
of the early proto-Neoclassical economists. The great missing
ingredient was the connection between utility and demand. Auguste
Walras (1831) and Mountiford Longfield (1834) attempted an explicit
connection, but their theories ended tied up in knots. As was to be
discerned later, the key to successful integration was marginal
utility -- specifically, diminishing marginal utility.
The concept of diminishing marginal utility -- i.e. that equal
increments of a good yield diminishing increments of utility -- was
already widely known. Daniel Bernoulli (1738) had employed this
concept to solve the St. Petersburg Paradox. The utilitarian Jeremy
Bentham (1789, 1802) had certainly stated the idea. Lloyd (1833),
Senior (1836), Jennings (1855) and Hearn (1864) were well aware of
diminishing marginal utility as well. The question was one of
connecting it to demand, which these writers failed to do
clearly.