Talk:Marginalism/Archive 2

I don't find the distinction (that some previous author drew) between "neoclassical economics" and the "Austrian economists" to be as strong as suggested. I don't know much about Austrian economics, but the neoclassicals put a big emphasis on the subjective side of the supply of the "factors of production." Jdevine 15:43, 15 Jul 2004 (UTC)

The difference was that Austrians rejected neoclassical economics use of cardinal utility, arguing that only ordinal utility was praxeologically valid. Neoclassical economics later reconstructed utility in terms of ordinal utility. Nevertheless, Austrians deny the validity of mathematical maniupulation (such as calculus) of utility curves based on ordinal utility. DrThompson 01:18, 11 Mar 2005 (UTC)

I find the whole discussion about diminishing marginal utility strange, esp. the claim '[diminishing marginal utility] corresponds to convexity of the indifference curves' must be false. The preferences, and hence the indifference curves, are invariant under arbitrary strictly increasing transformations. On the whole, the concept of diminishing marginal utility is vacuous, unless one is talking about von Neumann-Morgenstern utility functions or accepting cardinal utility, which I believe is quite rare in current mainstream economics.

Duplication

I consolidated Neoclassical_Revolution, Marginal utility, economic subjectivism, Marginal_theory_of_value and diamond-water paradox into marginalism, eliminating quite a bit of duplication and repetition.

The Marxist section could be more specific to marginalism, since endorsement of marginalism is not necessarily endorsement of capitalism. More informaiton in the Neoclassical section would be nice too. DrThompson 04:12, 11 Mar 2005 (UTC)

Marxist interpretation

I amended the statement that Marx distinguished between utility and use value (since these concepts are virtually identical) and said that Marx distinguished between exchange value and use value.

In general, there is a gulf between the labour theory of value and marginalism and there is no point muddying this as the article does.--Jack Upland 09:19, 1 December 2005 (UTC)

The charge of circularity

"Despite its mathematical framework, the theory is charged with being circular...." sounds odd. After all, arithmetic itself has been "charged with being" tautological. I say "arithmetic" because with other fields of mathematics the charge is more (or more obviously) specious. Anyway, why is it "despite" a mathematical framework -- rather than, perhaps, because of it -- that such chares are made against marginalism? --Christofurio 20:18, 23 December 2005 (UTC)

My point was that the supposedly rigourous logic underpinning marginalism is undermined by the circularity.--Jack Upland 05:01, 31 December 2005 (UTC)

And another thing! ... some of the statements passed off as factual in this story are simply, factually, false. "According to its critics, the theory concentrates on the exchange between individuals, ignoring the larger economy, and concentrates on the marketplace, ignoring production - even though businesses in practice calculate prices according to costs of production."

Although I suppose critics exist who say this, the part of that sentence that comes after the hyphen is presented as a simple statement of fact, what happens "in practice." But it doesn't. On Dec. 26, business "in practice" will be happy to get rid of their Christmas decorations for very low price, far below costs of production, because (a) the cost of holding on to them for 11 more months is high and (b) nobody will want them until then. Marxists focus on (a) whereas marginalists focus on (b), but any person even marginally intelligent and conscious will dissent from the statement that "businesses in practice calculate prices according to costs of production." --Christofurio 14:51, 24 December 2005 (UTC)

I agree, that sentence should be taken out as it is completely ignorant (general equilibrium is certainly marginal utility based and it incorporates all those things that it supposedly ignores). As to the circiularity charge, I think it's meant to refer to the price-taking assumption and the ultra-abstraction of a Walrasian auctioneer; so there's some validity there but it should be re-written to make the objection clearer. I'll leave it for a few more days in case anyone wants to comment and if not, I'll make the changes.radek 22:29, 25 December 2005 (UTC)

To pick the one-off end-of-year sales as the example of price-setting is rather convenient. You can find numerous examples of businesses (i.e. manufacturers) setting prices to cover their costs. If they didn't they would rapidly go broke. However, you ignored manufacturing, didn't you? Precisely the point made in the article - that marginalism fundamentally focusses on exchange between individuals (in this case the stock-taking retailer and the bargain-hunter).

In terms of editing/responding to the Criticism piece, that's OK but it's not valid to "correct" on the grounds that it violates marginalism. Every theory that's put forward on Wikipedia should give some indication of how the theory is criticised. A proponent of the theory saying critics are "ignorant" or "unintelligent" is no reason to delete criticism.--Jack Upland 05:01, 31 December 2005 (UTC)

Criticism of Utility

In the section on the Criticism of Marginalism the following has been added to the example of air being useful but free:

"The standard response to such objections is to note that something that is both very useful and very abundant may have a trivial marginal value. Where air is no longer abundant, as on the upper slopes of Mount Everest, it isn't free either. Mountaineers pay for their supply of it in bottled form."

I added a note that the price of bottled air could also be explained by the labour involved. Other responses could include:

• Oxygen cylinders are a different "commodity" from atmospheric air and are sold at the same price at any altitude. (I doubt there's a shop on the top of Everest!).
• The sherpas don't use cylinders but they still breathe the rarefied air for free!
• Who on earth would they pay anyway???
• Many vitally useful items are cheap (water, staple foods etc). Many fairly useless items (ornaments etc) are expensive. Why refer to the concept of utility when it is so inapplicable?

I don't know if there is a Wikipedia policy on this, but responses and counter-responses could continue indefinitely. I think the criticism should stand alone to some degree.--Jack Upland 03:55, 3 January 2006 (UTC)

Cost of production

However, this does not explain ...why large, easily extracted and easily found diamonds are worth much more than small, hard to extract ones.

This is a silly argument as any LTV would suppose a standardised value for a commodity (such as Marx's notion of "socially necessary labour") and not claim that the price of each item varied according to its individual origin. The comparison of diamonds and emeralds ignores the higher level of work involved in cutting diamonds and the monopolistic nature of their supply (LTV being based on an equilibrium of supply and demand).--Jack Upland 23:44, 13 January 2006 (UTC)

External links

I removed the link to the marginalrevolution.com blog. The last 10 entries were:

• Hear Walt Whitman speak
• Why the War on Drugs is hard to win
• Bargaining in the Souk
• Scary sentence of the day
• Is American FDI more productive and am I dizzy?
• Bosnia and Herzegovina fact of the day
• Invisible hand podcasts
• Are neighborhood effects really family effects?
• Random thoughts from Marrakesh
• Why was British food so bad for so long?

Granted, they all touch on economics but none gives any insight into the meaning of marginalism. Therefore the link serves no purpose in this article.--Swift 20:41, 16 January 2006 (UTC)

Criticism section

Alright, I really think the criticism section as is has to go. It's mostly just plain wrong. Quickly, let me enumerate:

• All theory is to some extent divorced from reality. That's what makes it a theory - there's a need for simplifying assumptions and the like. This is no way particular to Marginalism. The same is true of LVT, or any economic theory. Hence, the criticism is vacuous.
• The theory does not ignore "the larger economy". General equilibrium is based on marginal utility theory and it is "large economy" as much as one can get.
• Marginalism does not deny the importance of costs of production. In its Austrian version it sees these costs as derived from subjective considerations but still important. In its "neoclassical" /Marshallian version these costs are the underlying technology of an economy. If anything it would be more precise to say that LVT ignores the importance of tastes in price determination.
• The fact that consumers maximize given prices and prices are determined by this maximization is not circular. It's just simultanous. Anyway, this is the price taking assumption, which is not implied by marginalism in any way - although in many applications it's added on.
• Marginalism does explain why a car is more expansive than a pencil. Marginal utility of a car is helluva higher than the marginal utility of a pencil. Having said that, marginalism says nothing about how equilibrium is reached. HOWEVEVER, that's a problem of equilibrium analysis not marginalism per se.
• The theory does not conflate use-value with exchange-value. True, it doesn't use this vocabulary very much. The second sentence in the paragraph makes it clear that the author does not know what he or she is talking about.

Having said all that, I do think the article should have a well written, robust, factually correct Criticism section. I'm not sure I'm up to it since my own knowledge is lacking in things like LVT. I dunno, one way to go would be to point out the many behavioral assumptions underlying marginalism. Jack, you seem to be much better versed in unorthodox theory than me so perhaps you could have a go. The New School website on History of Economic Thought would be a good place as a starting point: http://cepa.newschool.edu/het/ (though I don't know how the copyright works here).

Anyway, I plan on deleting this section whole unless some improvements are made.

More specifically, this http://cepa.newschool.edu/het/essays/margrev/phases.htm may be useful in clearing up some of the confusion radek 08:05, 3 February 2006 (UTC)

You are clearly a supporter of marginalism. As such, you naturally disagree with a criticism of it. This is not a valid reason to delete its criticism. But I am happy for the section to be improved. In response to your points:

I guess I am a supporter in so far I think it's a useful approach. That doesn't mean that I can't step back or that I can't accept valid criticism. Like I said, I do think the article needs a criticism section. But the criticism should be factually correct, relevant and precise, not pulled out of thin air. And I didn't delete it - this is why I brought it up here.

• All theories are generalised, but to be 'divorced from reality' is stronger than this, surely.

It is stronger. It is also an empty assertion. If you want to point out a SPECIFIC aspect of the theory that is unrealistic then go ahead however.

• On a theoretical level, marginalism is centred round an individual exchange. This is not negated by orthodox economists acknowledging the 'real economy' occasionally.

I don't understand what you mean here. Marginalism is about individual's preferences and subjective valuation as opposed to objective valuation like in LTV. The thing about orthodox economists seems to be a total non-sequiter. And anyway orthodox economists acknowledge the 'real economy' all the time - I mean, how could they not? So sorry, I have no idea of what you're talking about here.

• Similarly, orthodox economists may occasionally (grudgingly) acknowledge costs of production, but these aren't central to their theories - and this is a weakness.

Marshallian/Neoclassical economists typically spend a good bit of time talking about costs of production. Look at the Theory of the Firm for example. Some UNorthodox economists, such as the Austrians do think that it's all subjective utility and costs of production are just a manifestation of preferences (over work/leisure and saving). Alright how about something like this:

"One criticism of marginal theory of value is that it down plays the role of cost of production in price determination in favor of a focus on individual's tastes and preferences. In its most extreme, Austrian, version marginalism denies that an objective, cost-based, component exists at all. Rather the Austrians argue that costs of production are merely just the manifestations of individual's tastes over labor vs. leisure, and saving vs. consumption"

• The circularity exists in the fact that customers can't avoid the price issue. For instance, no one denies air is important, but no on pays for it. On the other hand if someone wants a car, they are aware that the market price is considerably more than a pencil. Demand is not independent of price.

Again, I'm not sure what you're talking about. Marginal utility is marginal utility. It has nothing to do with prices per se. Combined with a budget constraint marginal utility generates a demand function. Of course demand is not independent of price - this doesn't make anything circular.

• An artist might 'value' a pencil more than a (polluting) car/automobile, but is not by that fact either obliged or willing to part with more money.

And what does this have to do with anything?

• The use of the concept of 'marginal utility' to explain price does, in fact, indicate that the 'marginalists' conflate 'exchange value' and 'use value' - and whether or not they use these terms is completely irrelevant.--Jack Upland 09:06, 3 February 2006 (UTC)

Ok, this one I think I understand. I think it would be more proper to say that marginalists do not distinguish between exchange value and use value in a systematic manner. So something along this line would definetly be acceptable criticism.

Let me also just say that I'm not interested in pushing any ideological points - I just want to make the article better. This means two things. One, it should have a criticism section. Two, the criticisms should be fairly sound. I'm totally willing to compromise on this.radek 02:32, 4 February 2006 (UTC)

In specific reference to the essay you directed me to, it is premised (as is your argument) on the notion that marginalism is correct: those who developed the theory have sparks of insight and those who disagreed are ignorant and confused. We also learn that 'utility' doesn't mean 'usefulness'. Apparently it means desire (and apparently no one desires water). But how this relates to price is unclear. This is perhaps best summed up by the essay itself:

Marginal utility, let us be frank, is hardly a scientific concept: unobservable, unmeasurable and untestable, marginal utility is a notion with very dubious scientific standing.

In other words, everything you object to in the 'Criticism' is correct.--Jack Upland 00:42, 4 February 2006 (UTC)

It would seem that the quote you cite speaks against the essay being pro-marginalist. Anyway, the essay is not based on the premise that marginalism is correct, rather it just takes it seriously rather then dismissing it out of hand. And the New School is pretty unorthodox with a mixture of Marxian and Post-Keynsian economists. While it does think folks like Jevons and Walras insightful I don't think it considers folks like Ricardo or Marx ignorant at all. And if you read down to Paretian Revival some of the issues in the quote are addressed. However. We can put something like the quote in the criticism section: that utility is unobservable. that utility is not measurable (this is actually realistic in my opinion - the difference between cardinal and ordinal utility). that utility is generally untestable (though predictions derived from marginal theory certainly are). And I really don't understand all this stuff about air and water. The marginal utility of a bit of air is essentially zero. Hence its price is essentially zero. And I happen to both desire and pay for water.radek 02:57, 4 February 2006 (UTC)

I will look at changing the section in line with what you say. Your statement about costs of production is particularly useful (though I wonder how a backhanded acknowledgement of the LTV - i.e. the importance of costs of production - really supports marginalism as a valid theory). That being said, I didn't pull the criticism out of 'thin air': these are in summary some of the points I have seen raised against marginalism. Your constant rejoinder that you 'don't understand' is no reason for deletion! While both you and the New School might qualify your support for marginalism, you essentially dismiss any fundamental criticism as confused and ignorant (or in the case of Classical Economics just outdated). I don't understand how you can assert that marginal utility has nothing to do with price. It seems that marginal utility means whatever its proponents say it means at any point in the argument.--Jack Upland 22:11, 4 February 2006 (UTC)

Ok, the criticism part is looking much better. Thanks for making the changes. I'm still a bit confused about this charge of circularity and the statement that knowing prices is necessary to evaluate utility. Perhaps you are thinking of Veblen goods? I haven't thought through whether or not the charge of circularity would apply in this case or if it is just another instance of 'simultaneity'. At any rate in general only a relatively small number of goods would be considered as such hence the theory would still have broad applicability outside a few special cases. When I contemplate consuming an apple - which has no luxury/anti-luxury characteristics - I don't consider its price (or more precisely I only consider its price because of my budget constraint, not because of my preferences). So perhaps the criticism should be qualified with something like "Marginalist theory becomes circular and hence is generally not applicable in cases where the relevant goods have utility aspects which directly depend on their price or status, for example Veblen goods. The relevance of the theory depends then on how many of these types of goods are present in the real world."radek 02:56, 10 February 2006 (UTC)

I've been through this argument several times in these pages. Your apple example conflates 'use value' and 'exchange value'. Your comment on budget constraints presupposes you know the price of the apple. Hence your argument is itself circular. Similarly with your earlier discussion of the automobile versus the pencil - faced with the question of relative 'values' you merely asserted a higher marginal utility for the automobile as if it was self-evident. Well, of course it is self-evident if we know the price. Put it this way: if you had no idea of prices, how would marginalism tell you what they were?--Jack Upland 00:39, 11 February 2006 (UTC)

Actually, the answer to why diamonds are more valuable than water will not be found in the "regression theorem." The Austrian school recognizes that value is subjective. As such, values change according to the needs of the individual. Therfore, an indivdual wandering the desert for days without food or water might indeed value water more highly than diamonds! Someone dying of thirst would readily exchange a pocketful of diamonds for a canteen of fresh water.

- Stephen C. Apolito, February 21, 2006

This is yet another example which is not drawn from the real economy. By the way I was castigated for saying that marginalism was individualistic, consumer-based, and circular - take a look at the arguments put forward at the labor theory of value discussion page by those indoctrinated in marginalism and say I'm wrong.--Jack Upland 07:16, 25 February 2006 (UTC)

With regard to the recent additions to the Criticism section:

Marginalism would counter that monetary units have proven themselves to be accurate measures of people's value of material goods, that is, the buck stops at utility.

What does that mean? 'Marginalism would say that marginalism is correct'? And as discussed ad nauseum there are plenty of examples where utility doesn't equate with price.

Secondly, the explanation of 'money regression' doesn't seem to fit the context nor is it very clear. (The cited article appears to be substituting circularity with an infinite regression.)--Jack Upland 05:01, 30 May 2006 (UTC)

Law of Diminishing Marginal Utility

I've been wondering, has there ever been an attempt to do a rigorous mathematical proof of the law of diminishing marginal utility. Or does there exist one already? It seems so natural and true for everything but at the same time, turning it into a purely mathematical proof would seem somewhat impossible given the way we define concepts like utility. --Jordan Ledvina 20:28, 28 May 2006 (UTC)

I don't know what you mean by 'proof' here, it's generally an assumption, whether in terms of a concave utility function or a convex preference relationship. You don't prove assumptions.radek 03:55, 30 May 2006 (UTC)

Diminishing Marginal Utility Graph

M&Ms:I believe the graph on this page to be incorrect in how it shows the total utility curve reaching a max and then sloping downwards. The MU curve is correct but while MU is decreeasing it still adds to TU meaning the curve should not slope downwards but only increase and evetually level off. Is there anyone who can fix it? (31/05/06)

---

Diamond-water paradox

The explanation in this section could do with some improvement:

Water is essential, but after an easily acquired amount additional units have little to no value.

This doesn't seem to make sense. Living in Australia during a drought, I find this 'easily acquired' tag a bit hard to take. (Incidentally, water though relatively scarce is not expensive.) Depending on how you interpret it, the sentence as a whole seems to be either circular ('you don't want more than you want') or plain wrong (additional units of water are not cheaper).

Then:

Diamonds, however, as a very rare and sought after trade good, has value in as many additional units as one can find.

Describing diamonds as a 'sought after trade good' and using this to explain its economic value is circular. It amounts to saying diamonds as an expensive good are expensive.

Can someone who actually believes this perverse theory put Marginalism's answer in a logical fashion?--Jack Upland 01:17, 12 June 2006 (UTC)

M&Ms says; This paragraph might be more useful if you would like to edit it and sub it into the main article:

The marginalist explanation is as follows: The total utility or satisfaction of water exceeds that of diamonds. We would all rather do without diamonds than without water. But almost all of us would prefer to win a prize of a diamond rather than an additional bucket of water. To make this last choice, we ask ourselves not whether diamonds or water give more satisfaction in total, but whether more of one gives greater additional satisfaction than more of the other. For this marginal utility question, our answer will depend on how much of each we already have. Though the first units of water we consume every month are of enormous value to us, the last units are not. The utility of additional (or marginal) units continues to decrease as we consume more and more. Source "The Library of Economics and Liberty" [1]

But once again, there seems to be a "smuggling in" of the concept that diamonds have more value: this is why we "would prefer to win a prize of a diamond". It avoids the question of why this is and what this "value" consists of. Hence it is still circular. (And it is basically a bizarre thought experiment, not a real-world explanation.)--Jack Upland 07:54, 17 June 2006 (UTC)

M&Ms says: I understand what you mean. In general the explanation of this theory would be based on a few assumptions. One being that there is a supply of water. This supply is enough to satisfy a persons needs and with plenty left over. Second assumption is that diamonds are rare. So when you have 2 goods that are assumed to be in demand (one good that is plentiful in supply and the other is not) people will have a preference for the one which is rare. Now this example must maintain the assumption where water is plentiful and diamonds are rare. Thats why you could not apply it to your own situation (that of scare water due to the climate of your area). Now because the explanation assumes that water is plentiful and easily obtained it is therefore not expensive. Diamonds however are rare and therefore expensive. Those are the assumptions anyway. So basically if you have plenty of water you have enough to satisfy your needs and it is not expensive. But this makes it useless for trading. If you also have plenty of water (more than what you need) I could not try buy a car off you with water. Why would you need it? You have all you need so you don't need more. However if I have diamonds (which we "assume" you want because they are rare) and you do not then we could possibly trade. Extra water adds little or no utility (satisfaction) for yourself but diamonds add a lot. Now what this "value" consits of is technically subjective. When the theory was created the classical economist did not recognise "subjetive" vaule only "inherent" value but this only serves to obscure the matter. Basically a diamond gets its' value from what people are willing to pay and what the seller is willing to take. Again we will have to assume something; that this is not the first diamond to be traded or sold. The seller then has an idea of what he can get for it. The buyer will have an idea of what he might want to pay (which might be zero) but he must recognise that the seller knows what diamonds are selling for at the moment. Subjectivity then intervenes when the seller offers a price that the buyer thinks is too high and the buyer offers a price that the seller thinks is too low. When then bargain and may or may not agree to buy/sell. If I buy then the diamond for £1000 then it follows that I valued the diamond at that price. If I do not buy at that price then I did not vaule it at the price offered. Again we "assume" of course that neither the buyer nor the seller face any circumstances where they "have" to buy/sell, i.e. a gun to the head. If we are free to ask for the good at a certain price we will then impose what we think the diamond is worth and try to get the best deal. At the end of it all there is really no explanation as to why diamonds fetch a high price. Here in Ireland we do not have malaria. Malaria is extremely rare but I'm certainly not going to pay to have it brought over in some form. Peolpe just do pay a higher price for diamonds, mostly to use it for decoration and symbolism, which economics won't touch and its' proponents are happy to say it is subjective.

So at the end of the explanation, there's an acknowledgement this is no explanation?! Yet the classical economists did have a explanation - the labour theory of value...--Jack Upland 00:23, 18 June 2006 (UTC)

M&Ms says: The labour theory of value was thought to be inherent but is not. Why can a builder charge £X amount per hour for his work? Again you could say others are charging the same but where do they get the exact figures from? Nowhere! they charge what they want bearing in mind that too high a price will mean the competition could undercut them and too low a price might undermine their reputation etc... You are missing the point. People decide how valuable something is. Ask anybody and they will tell you that a 9c diamond cost more than a litre of water. With that easily understanable and obtainable knowledge we then infer that a diamond will add greater marginal utility for each additional unit consumed. Why? because they have greater value in the short run.