• Debate about how much of a “revolution” it was

  • Inspiration vs. simultaneous independent discovery
  • How much of a radical departure from other writers?

• Other important predecessors that made key contributions to economic theory, often overlooked

  • Cournot, Gossen, von Thünen, Dupuit

• Controversies about discovery, credit, attribution

  • Menger independent, did not know of von Thunen, Gossen
  • Walras know of von Thunen, Gossen; wrote to Jevons, and Jevons alerted Walras to his own writings
  • Marshall supposedly writing about it in 1860s, published his Principles 30 years later

• 1838 Researches on the Mathematical Principles of the Theory of Wealth

• First writer to:

  • ✅ use and advocate mathematics for study of political economy
  • ✅ relate demand and supply as functions of price and quantity
  • ✅ draw a demand and supply graph
  • ✅ use marginal analysis to find profit-maximizing output: where marginal revenue = marginal cost

• Sadly, no influence in his lifetime

• We still use his model of oligopoly today

• Taught Auguste Walras, father of Leon Walras (and may have inspired Leon to general equilibrium theory)

• Begins with monopoly up through limiting case of pure competition

• Famous theory of oligopoly, a model of duopoly:

  • Two firms produce an identical good (spring water), decide how much to produce (simultaneously), their joint output determines the market price
  • Game-theoretic equilibrium where firms are playing mutual best responses to one another

• Cournot competition model of oligopoly taught in microeconomics & industrial organization

  • compared with Bertrand competition & Stackelberg competition models of oligopoly

• Cournot Theorem: as the number of firms (N) in the market increases, market output Nq goes to the competitive level, and price converges to c.

  • Assuming no fixed costs, and an identical constant marginal cost for firms

• More (fewer) firms reduce (increase) market distortions from market power

• See some visualizations I made:

  1. Cournot: Symmetric Market Changes
  2. Cournot: Asymmetric Costs
  3. Cournot: With n Firms

• A German landowner, passionately interested in agricultural management

• Der isolirte Staat in Beziehung auf Landwirtschaft und Nationalökonomie (The Isolated State in Relation to Agriculture and Political Economy (vol. 1: 1826, vol. 2: 1850)

• A (remarkable) spatial theory of economic geography, industry and production, and determination of rent and prices

  • concentric rings emanating from a city (market)
  • determines land rent as a function of distance, productivity, and market prices
  • proponent of mathematics in political economy, first to introduce calculus into analysis

• Essentially a marginal productivity theory of wages and labor:

“The wage is equal to the extra product of the last laborer who is employed in a large enterprise”

• Came up with a rather simplistic formula (that he had engraved on his tombstone): Natural Wages =√AP

  • A: value of product of labor and capital
  • P: subsistence of laborer and family
  • Surplus will arise on initial units of labor and capital, but diminishing returns to later units,

• Coined the term “marginal cost” (Grenzkosten)

• Perhaps the first to articulate a theory of marginal utility

• Tragically, his work was ignored: too universal and mathematical

  • German Historicism was dominant

• 1854 Die Entwickelung der Gesetze des menschlichen Verkehrs, und der daraus fließenden Regeln für menschliches Handeln (The Development of the Laws of Human Intercourse and the Consequent Rules of Human Action)

• Gossen’s Second Law: in equilibrium, an agent will allocate resources so that the ratio of marginal utility to price equalizes across all goods and services
  • the equimarginal principle: equalize marginal utility per dollar spent across all goods

(∂U∂x)px=(∂U∂y)py∀(x,y)

• where U is the utility function, x and y are goods

• Gossen’s Third Law: scarcity is required for objects to have economic value (as goods)

• French civil engineer

• Focused specifically on applied questions

• 1844 De la mesure de l’utilité des travaux publics (On the measurement of the utility of public works)

  • what is the optimum toll for a bridge?

• Diminshing marginal utility curve: marginal utility decreases with quantity consumed

  • lower tolls ⟹ more use, higher tolls ⟹ less use
  • A downward sloping demand curve due to diminishing marginal utility

• 9th child to middle class family, studied engineering and chemisty

• Became assayer of gold mint in Sydney, Australia for 6 years

• A major British intellectual, known for his work on logic, scientific method, etc.

  • invented a logic piano, contributed to cryptography
  • 1874, Principles of Science: A Treatise on Logic and the Scientific Method

• Theory of sunspots and economic depressions

  • 1875, The Solar Period and the Price of Corn

• Drowned in a bathing accident in 1882 (46 years old)

• 1871 The Theory of Political Economy

• Jevons excitedly believes he’s found the answer to all problems of political economy

“[I] have fortunately struck out what I have no doubt is the true theory of Economy, so thorough-going and consistent, that I cannot now read other books on the subject without indignation”

• Not a complete textbook on economics (like Ricardo or Mill), but elaborates two fundamental ideas (and innvations):

  1. theory of value & distribution in relation to utility
  2. a theory of wages and of capital (lesser known)

• Easiest to read of the marginalist revolutionaries

• Critical of classical economists (Ricardo & Mill)
  • labor theory of value, population principle, and wages fund doctrine all disproven

“The fact is, that labor once spent has no influence on the future value of any article: it is gone and lost forever. In commerce bygones are for ever bygones,” (p. 164).

• Argues for mathematics (primarily calculus & geometry) in political economy
  • intuition provides basic premises, then we can deduce theory
  • interested in empirical work, measurement, index numbers

“[O]ur science must be mathematical, simply because it deals with quantities.”

• Directly influenced by Benthamite utilitarianism & hedonoic calculus

• 1862, “Brief account of a general mathematical theory of value”

“[A] true theory of economy can only be attained by going back to the great springs of human action, the feelings of pleasure and pain”

• Individuals seek to maximize pleasure (utility), minimize pain (disutility)

• But, utility is not intrinsic to goods, it comes from individual valuation!

“If a thing is to become a good, or in other words, if it is to acquire goods-character (Gu ̈terqualit ̈), all four of the following prerequisites must be simultaneously present:

1. A human need.
2. Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need.
3. Human knowledge of this causal connection.
4. Command of the thing sufficient to direct it to the satisfaction of the need, (p.55)”

“Hence a thing loses its goods-character: (1) if, owing to a change in human needs, the particular needs disappear that the thing is capable of satisfying, (2) whenever the capacity of the thing to be placed in a causal connection with the satisfaction of human needs is lost as the result of a change in its own properties, (3) if knowledge of the causal connection between the thing and the satisfaction of human needs disappears, or (4) if men lose command of it so completely that they can no longer apply it directly to the satisfaction of their needs and have no means of reestablishing their power to do so,” (p.56)

• Menger consistently applies notion of subjectivism and a causal-genetic approach to economics

• Free goods (like air): have want-satisfying power but are not scarce

  • Goods only become economic goods due to scarcity, require economizing choices
  • Must allocate goods to most important want first, then will allocate goods to lesser wants
  • Diminishing marginal utility (but not stated in those terms)

• Possibility of “imaginary goods”: things that people falsely believe will satisfy a need

  • e.g. quack medicine, fortune tellers, astrology, etc.

• Arabic numerals (in cells) indicate want-satisfying power of a unit of the good, i.e. marginal utility

  • declining with each additional unit (row) of the good
  • possibly an ordinal ranking

• Roman numerals (columns) indicate goods of different importance

  • lower numbers (e.g. class I) indicate more important goods

• Always allocate goods to satisfy highest needs (lowest classes) first, based on marginal utility

• Value of a good is defined in terms of want satisfaction lost if the last unit of the good was no longer available

“[T]he goods-character of goods of higher order is directly dependent upon complementary goods of the same order being available with respect to the production of at least one good of [all lower orders, down to the first order].”

“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 [subject] to the law of causality [and] is inseparable from the idea of time...[but with this comes] economic uncertainty of men, and, as we shall see in what follows, is of the greatest practical significance in human economy.”

• Does not directly talk about cost or production (anticipated in his unpublished Volume 2), but he does talk about the supply side:

• Higher order goods must have complements in production in order to be useful

• Imputation theory: higher-order goods derive their value from the value of final consumption (1st order goods)

• Value of a factor of production (higher order good) is the value that would be lost if the last unit was withdrawn from production

• Marx recognized value requires utility, but use-value of goods is determined outside his analysis

• Marginalist revolutionaries did not know of Marx, relatively unknown then

  • Das Kapital vol 1 published in 1867
  • Jevons, Menger, Walras already writing or written

• Initial writings did not discuss Marxist economics, but did challenge Classical economics

  • Marx probably read Jevons, Menger, Walras, and struggled to respond in later volumes of Kapital