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A full page answer: How did the French Marginalists differ from their British counterparts? Be specific.

A full page answer: How did the French Marginalists differ from their British counterparts? Be specific.

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Expert Solution

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.


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