Evolution and Refinement of the Concept of Supply and Demand

from Cournot to Marshall

Ray McDermott Table of Contents

Page

Introduction 1

John Stuart Mill 2

Augustin Cournot 5

J. H. von Thunen 7

Hermann Heinrich Gossen 8

Fleeming Jenkin 10

William Stanley Jevons 13

Carl Menger 19

Leon Walras 21

Aspects of Marginal Theory as set by Jevons, Menger

and Walras 28

Rudolf Auspitz and Richard Lieben 47

Alfred Marshall 52

Conclusion 66

Bibliography 67

ALUMNI MEMORIAL LIBRARY Creighton University Omaha; Nebraika 65178 fc v 385843 “ *** '••v.i-fii. Evolution and Refinement of the Concept of Supply and Demand from Cournot to Marshall

The law of supply and demand can be restated in mathematical language.

Fleeming Jenkin did this. As one looks at the correspondence between the economists of an eighty year period (Cournot to Marshall), thinking can be clarified on the discussion of supply and demand.

Relationships are shown between these economists. There are similar­ ities as well as differences in their thinking.

Disagreements on terminology pertaining to utility theory is evident between Jevons, Walras, and Menger. Priority on thoughts about utility was claimed and disputed between Jevons and Walras. Marshall was annoyed by Jevons* theory.

Marshall, Walras, and Mill were all directed by their fathers in the classics. Lecturing at various universities was common for Jevons,

Marshall, Walras, and Menger. Some however were not trained economists.

Examples of these were Jenkin, Cournot, and von Thunen. Jevons, Menger, and Walras were the founders of the Marginal Utility School.

The economists are not discussed according to the chronological time in which they lived. Instead, they are discussed according to anticipated parts of marginal doctrine. Within a period of four years, Walras, Menger, and Jevons reached similar conclusions while working independently. Marshall refined previous definitions and laws of elasticity, supply and demand.

1 John Stuart Mill

Mill's contribution to the theory of international trade was a major

extension of Ricardian theory. An important question, how were the bene­

fits of international trade divided among trading nations, had been left unanswered by Ricardo. What was the mechanism which distributed the gains?

Mill's answer emerged in two country terms, dependent upon intensely simpli­

fied assumptions. Such a state of affairs is not very different today.

As an example, let us suppose that Scotland and Ireland are the two coun­ tries in question, trading in only two commodities, cloth and wool. Also

in supposition, the output in each country proceeds at constant real cost.

Finally, we will suppose in Ireland, twenty yards of cloth cost as much

to produce as thirty yards of wool. In Scotland, twenty yards of cloth cost as much to produce as forty yards of wool. From this example, the principle of comparative advantage makes it unmistakable that Ireland would import wool and export cloth.

However, the real prices at which the transactions take place deter­ mine the distribution of benefit. Mill began by setting out the limits of these prices. Exchange would take place under two circumstances.

First, if, at one limit, twenty yards of cloth were exchanged for thirty yards of wool. Secondly, if, at another limit, twenty yards of cloth were exchanged for forty yards of wool. Quoting Mill: "What if the actual exchange was twenty yards of cloth for thirty-four yards of wool?"

The result produced might be from the relative strength of the demand for cloth and wool in the two countries.

2 A change in any of the conditions of the problem alters its conclusion.

According to Mill, a technical improvement in Irish wool manufacture reduces its price one-third. The Scottish demand for wool would increase and its price, in terms of cloth, decreases. What would transpire to the Irish demand for wool after Scotland lowered its offering price?

Mill's answer employed the comparatively modem notion of elasticity of demand. If Ireland's demand for wool was increased by the same percentage as its price decreased (an elasticity of unity) then, at the new equilibrium, twenty yards of Irish cloth would exchange for fifty-one yards of Scottish wool. If elasticity were less than unity, equilibrium would occur when twenty yards of wool were exchanged for more than fifty-one yards, but less than sixty yards of wool. Lastly, if demand elasticity were more than unity, the equilibrium solution demands that twenty yards of cloth be exchanged for less than fifty-one but more than forty-five yards of wool.

Mill's encumbering arithmetic example determines trade equilibrium under highly simplified conditions it assumes. From this analysis, Mill concludes that trade equilibrium between two countries finds each one exporting just enough to cover its imports. This was the "equation of international demand" or the "law of international values." It was a model for Alfred Marshall's sumptuous geometry and a jumping off place for twentieth century theorists.

Marshall and Edgeworth developed methods which, obsolete by now, gave satis­ faction to many in the 1890's. Edgeworth and others accused Mill of believing that a country's total gain from trade always increased or decreased as its gain per unit of exports.

3 The state of supply and demand in the international market between two countries, in our example, Scotland and Ireland, could be explained by the following graph:*

Y x

clo'fK The curve 01 shows that in exchange for any amount of wool (Oy),

Ireland is prepared to supply the quantity of cloth yp (equal to Ox).

In exchange for the quantity of Ox of cloth, Ireland demands xp (equal to Oy) of wool. The curve OS is similarly related to Scotland's supply and demand. The position of equilibrium is determined by the inter­ section of 01 and OS.

1F. Y. Edgeworth, Papers Relating to Political Economy (New York: Burt Franklin, 1925), p. 292.

4 Augustin Cournot

Augustin Cournot is one of the anticipators of marginal analysis.

He is given credit for defining supply and demand as schedules. He assumes that the demand for an article depends on the quantity of it consumed annually.

The form of the demand curve depends on the kind of utility of the article, on the nature of the services it can render or the enjoyments it can procure, on the habits and customs of the people, on the average wealth, and on the scale on which wealth is distributed.^

Y

The simplest case of exchange is where there are two large groups of uncombined individuals dealing respectively in two commodities, eg., c o m and money. To represent the play of demand and supply, let any abscissa

OX represent a certain price, and let the quantity of commodity demanded

^Augustin Cournot, The Mathematical Principles of the Theory of Wealth (Illinois: Richard D. Irwin, Inc., 1963), p. 38.

5 at that price be Xp. The locus of p may be called the demand curve. Simi­ larly, Xp represents the quantity offered at any price, Ox; and the locus of q is called the supply curve. The price Oa, at which the demand is just equalled by the supply, is determined by the intersection of these curves.^

Although writers had preceded him in the application of mathematics to

Political Economy, he was the first to have substantial results. Of the early writers, he exerts today a significant influence on economic thought.

Later writers, including Walras, have demonstrated how to arrive at the demand curve used by Cournot from a system of individual demand curves.

In doing this, they have not surpassed Cournot but have laid bare the foun­ dations on which he built.

3 F. Y. Edgeworth, Papers Relating to Political Economy (New York: Burt Franklin, 1925), p. 291.

6 Je H. Von Thunen

J. H. Von Thunen furnished proff of the Law of Diminishing Returns.

In Economics Principles and Problems by Anatol Murad, the Law of Diminishing

Returns is defined as "where successive quantities, or units, of labor and capital are applied to a given quantity of land, a point will be reached beyond which further additions of labor and capital will yield less than ii proportional increments of output.

Von Thunen proposed a large city situated at the center of a productive plain, not crossed by a river or canal. Land was uniform and plentiful.

Labor was uniform but not so plentiful that any of it could be had for nothing.

Capital was also scarce. With labor and capital used more widely, recognizing the presence of diminishing returns, Von Thunen perceived that the utilization of these factors would not be carried beyond the point at which the cost of a unit was barely covered by the increase it made to the product.

The application of Marginal Principles by Von Thunen can be explained in regard to wages. A certain point is reached where more workers yield an ever smaller return to the total product; so that the last worker hired yields an increase just equal to the pay which he receives. This then is a wage which sets the pace for all those employed. It is unlikely that the employer will pay disparate pay for the same kind of work.

7 Hermann Heinrich Gossen

H . H. Gossen advanced two original laws. They have become part of demand theory. His third law is derived from laws one and two. The laws are as follows:

Law I — From successive helpings of the same commodity, in a short time span, the satisfaction decreases as the amount in the hands of the consumer increases.

Law II is defined as a state of personal stability, satieties from the final units of commodities, comparable to the prices of the commodities.

Law III, deduced from the first and second ones, says that intrinsic

(use) worth attributes to a good only when the supply of the good is less than the quantity demanded. As more units are acquired, the intrinsic value of still more units approaches zero.

An illustration of Law I can be characterized by one who looks at his accomplished work; over a period of time, the less he will enjoy his activ­ ity or work. Boredom and disgust set in when the fullness point is reached.

Boredom and disgust can be avoided if man pays attention to the following factors: time, the assortment of needs, the pleasure-pain relation, and money.

Law II concerns time and pleasure.

8 If the available time is AD, then ED is a possible enjoyment. In all 4 fields of enjoyment men will reach ED.

4 Hermann Heinrich Gossen, Gesetze, 2nd edition (Berlin: Braunschweig, Fr. Viewig and Sohn, 1889), p. 29.

9 Fleeming Jenkin

In 1868, Fleeming Jenkin wrote an article for the British Quarterly

Review in which the law of supply and demand was reiterated in mathematical

language. In 1870 he wrote Graphic Illustration.

He was not a trained economist. He appeared to have read little other

than the work of J. S. Mill, and his main economic papers were spread over

a period of only four years. The clarity and originality of his economic

theorizing were of the highest order.

At first Jenkin wrote on trade unions. Working as an apprentice, he had become interested in trade unions because of a strike in a plant. He

does not use anything like the idea of utility in mathematical terms. He never showed a relation of utility to value. He stated a cost of production

theory of value when he said that the prices of goods which can be multiplied

at will are rightly supposed to depend ultimately on the cost of production.^

In 1870 Jenkin wrote again on trade unions, giving a graphic represen­

tation to his analysis of demand and supply. For the first time he gave to

British economics a full paraphernalia of demand and supply curves. The

article does not include a treatment of any aspect of supply curves.

Jenkin treated supply and demand as they existed in the market and

attempted to show graphically how price was determined.

^Fleeming Jenkin, Trade Unions: How Far Legitimate (London: North British Review. XLVIII, 1868), pp. 1-34.

10 Qt-jortfc.ru>

The graph above is the opposite of what is now the usual presentation.

Jenkin stated this proposition: In a given market, at a given time,

the market price of the commodity will be that at which the supply and

demand curves cut one another.^

According to Jenkip, when the price would be finally determined there

would be some traders who would be neutral as to whether they bought or

sold. However, at a particular price, the traders would be few in number.

There would be a gain in the bulk of buyers and sellers left in the market.

The following graph is an illustration of the representation of what

the buyers would be prepared to pay and what they actually did pay.

^London School of Economics and Political Science, The Graphic Repre­ sentation of the Laws of Supply and Demand and Other Essays on Political Economy (London: London School of Economics and Political Science, 1931)p.77 7Ibid., p. 78. 8Ibid., p. 108 11 In regard to Jenkin's treatment of supply, in the long run, the price of the manufactured article is chiefly determined by the cost of its pro­ duction and the quantity manufactured is chiefly determined by the demand 9 at that price.

9Ibid.. p. 89. 12 William Stanley Jevons

William Stanley Jevons stands out as the foremost English representative

of the later writers in the rediscovery and popularizing of the doctrines

concerning marginal utility. Even though H. H. Gossen was luckless in his

time about these, many of Jevons's ideas and illustrations have become

classic.

In 1863 a meeting at Cambridge put the ideas of Jevons on marginal

utility into print. His title was, Notice of General Mathematical Theory a of Political Economy. The Notice" appeared on one page and was divided into

fourteen paragraphs. We will be concerned only with paragraphs dealing with

supply, demand, and utility. Paragraphs two to seven presented the idea of

diminishing marginal utility. Paragraph ten identified the conditions of

the equilibrium of exchange between two persons that bring two goods to mar­ ket. In paragraph eleven he expanded his model to several individuals and many commodities. Paragraph twelve connected production with the problem

of exchange. Jevons ended with a promise to amplify the model further in

the future.

In 1866 Jevons published a longer version of the "Notice" with the

title, "Brief Account of General Mathematical Theory of Political Economy." a Jevons made the most important changes in introducing the idea of

diminishing marginal utility. He used different terminology to express his

ideas. In the "Notice" of 1863 Jevons talked of the ration of utility on

the last increment and that it be named the final ration of utility. For

the first time he used the word final in relation with utility.

13 In 1866 he first referred to the utility of the last supply of an object.,

and then said, '•We must recede to infinitesimals, and what we shall call the coefficient of utility, is the ratio between the last increment or indefinitely

small supply of the object, and the one increment of pleasure which it occasions,

both, of course, estimated in their appropriate units."*^* The coefficient of utility is a new term with no definition. It is possible Jevons changed the

first final ration to coefficient but did not change the second.

An emphasis of the importance of the law of diminishing utility was

lacking in Jevons1s earlier publication; whereas, his later publication put emphasis on the law's importance. In 1866 this law was called by Jevons to be the most important law of the whole theory.

In his 1866 version the case of indivisible goods is included. Previously,

the case of perfectly divisible goods was adhered to. He commented on the economic significance of the failure of his system of equations in the case of indivisibility.

A paragraph was also included that pointed out that we will not find the conditions of his model, which are those of theoretical perfection and compli­ cation, in the real world where we will have to be content with approximate and empirical laws.**

According to Krider the law of diminishing utility is defined as "each

succeeding unit of any good satisfies a less intense desire than the previous one, until eventually some successive unit has no utility whatever, and one would pay nothing for it."

*^S. Jevons, Journal of the Royal Statistical Society, XXIX (1866), p. 283. 11Ibid., p. 285. 14 Jevons gave the following figure to illustrate the utility derived by an individual consuming ten successive units of food in twenty-four hours.

X 12

Even after corresponding with Jevons and after reading Jevons‘s theory,

Fleeming Jenkin would not accept the importance of the idea of utility in economic analysis. Jenkin states his objection to the use of utility curves rather than demand curves as follows: Professor Jevons has used curves to integrate what he terms the utility gained by exchange in a manner analogous to the above; but utility, as he defines it, admits of no practical measure­ ment , and he bases his curve, not on the varying estimates of value set by different individuals on what he has or what he wants, but on the varying utility to each individual of each increment of goods.^

William Stanley Jevons, The Theory of Political Economy (New York: Kelley and Millman, Inc. 1957), p. 46. 13 "The Graphic Representation of the Laws of Supply and Demand and Other Essays on Political Economy", The London School of Economics and Political Science, 1931, p. 109.

15 Jevons said that Jenkins' essay was ingenious and instructive and allowed

that he was probably correct at almost all points. He also said that from

about the year 1863 he had regularly employed intersecting curves to illus­

trate the determination of the market price in his lectures at Owens College.

Utility was defined by Jevons as the abstract quality whereby an object

serves our own purpose, and becomes entitled to rank as a commodity. Utility may be possessed by whatever can produce pleasure or prevent pain. Utility

here was not proportional to the quantity of the commodity. Quantity did

however influence its amount.

When Jevons learned about Walras's work on utility in 1874, Walras sent

him a copy. Walras did not realize that Jevons had written on a similar

subject. Walras was advised by Jevons that his own theory of exchange,

which, when published in England, was either neglected or criticised, was

practically confirmed by Walras's researches. His claim to priority in the

matter was pointed out in detail. He noted that Walras's theory substanti­

ally coincided with and confirmed his own, although the symbols were differ­

ently chosen, and there were incidental variations.

Johan d Aulnis de Bourowill informed Walras of Jevons* work. The dif­

ferences between Walras's and Jevons' papers were pointed out. Walras could

not see how Jevons had derived his equations from a consideration of maximum

satisfaction, and he couldn't see how Jevons had used them to obtain demand

functions with which to establish subsequently the equilibrium conditions.

Walras correctly sensed a difference in detail in both particulars. The

difference raises no contradiction between the two views however.

16 Details of his own ideas were worked out by Walras to demonstrate that he had received no help from Jevons. Walras offered to submit both Jevons'

and his letters to the Journal des Economistes for publication. The inde­ pendent research of Walras was acknowledged by Jevons. The concession was made to make England aware of Walras's theories.

d Aulnis de Bourowill wrote that he wished to treat the subject of the variation of the curves of utility. Jevons said that he regarded his own

indeterminate solutions as unsatisfactory. He again wrote to d Aulnis de

Bourowill that he had reflected much upon the point which you have mentioned, namely, the exchange of indivisibles..., but he could not find any way of 14 improving what he had already said.

Jevons expressed the belief that, instead of trying at the present to

work out the theory with fulness and correctness... more was needed at present

to make known its simple principles.

Jevons wrote that Walras's book was no way adapted to make the principles

of the theory of utility popularly known. He also gave a basic explanation

of the marginal utility theory of value in The Progress of the Mathematical

Theory of Political Economy.

In 1877 Jevons discovered Jules Dutuit. He informed Walras that Dutuit

had a very deep comprehension of marginal utility. Jevons began to assemble

a bibliography for a second edition of the "Theory." The work of H. H.

Gossen was discovered in his research. It was a shock to find that Gossen

had worked out the use of utility in a similar way to Walras and Jevons.

^Siilliam Stanley Jevons, Letters and Journal. (New York: The Macmillan Company, 1886), p. 302.

17 The second edition of the Theory of Political Economy was completed by devons in 1879. In it he included his discovery of Dutuit, Gossen, and

Walras. The idea of marginal utility was presented in the preface.

He introduced two new sections intended to supply additions to his utility theory. The first addition that devons made extends his theory to take into account cases in which the good has a negative or zero marginal utility, working out in detail the manner in which the difference in these signs affects his equations.of exchange.1'"’

Also, a new analysis of joint production, in which he came to the con­ clusion that cost of production never rules for these jointly produced goods, and that the utility theory of value consequently hold in all cases, was added. *

*5 Ibid., page 320.

18 Carl Menger

Carl Menger was the founder of the Austrian school of economics. He had a high reputation for teaching ability and scholarship. During his writings he found that English classical economics were in low estimation in Germany. Also, he found that there was a discredited approach of economic theory, as such. For the publication of his doctrine and for his later career the above intellectual bias had substantive consequences.

In 1871 Monger’s book Principles of Economics appeared. His claim to the invention of the marginal principle was as good as Jevons’. There was a sim­ ilarity, but the contrast between the two writers was greater. Jevons’s arg­ ument was clothed in mathematics. Monger's work was totally nonmathematical.

He did not use any diagrams and his illustrations were simple and numerical.

In understanding the works of the pioneer trio (Walras, Jevons, Menger),

Menger is the easiest. He was careful in his exposition by polishing and proportioning very well. Mongers work was not done in haste and was complete in all aspects; whereas, Jevons's work was marred by these factors. Monger's definitions were a bit excessive in length and finesse.

Satisfactions differed in their importance. The continuance of life depends on the gratification of some wants. Other satisfactions serve less important purposes. Menger implied that men agreed on their priorities*

"...there can...be no doubt that, when men have a choice between doing with­ out a comfortable bed or doing without a chessboard, they will forego the latter more readily than the former. *

*6 Carl Menger, Principles of Economics, translated by James Dingwell and Bert F. Hoselit,, (New York: Free Press, 1950), p. 123.

19 However, different quantities of an item, whatever its significance to continued life, possessed different meanings. Although food was essential to life, a person could skip a meal and live. Time was the important point.

He shortly came to a clear statement of the marginal principle: "...further attempts to satisfy the same need will bring at first a greater and then a smaller enjoyment, until eventually a point can be conceived, for each person, at which the further employment of available accomodations would become a matter of complete indifference to him, and finally even burdensome."^

To this definition Menger appended a notable illustration.*8

I n m IE 3E w HI m j x X 7

£bid., p. 125. ^ 18 Ibid., p. 131.

20 Leon Walras

Like Mill, Leon Walras was the son of an economist. In both cases, the fame of the son exceeded that of the father.

Leon Walras claimed that the main source of his ideas on utility and value was drawn from his father. His father had not found a use for his talents in economics in France. This was also true about his son. Both represented unpopular views. France offered a limited market for their specialized talents.

Auguste Walras saw the flaws in the existing theories and tried to remove them with a new theory. Likewise, these flaws were seen by Jevons,

Menger, and his own son, Leon. Auguste traced the cause of the value of a good to a phenomenon which he termed "rarete." Leon Walras adopted this word, rarete, from his father and used it in the sense of marginal utility.

Auguste Walras sought only the cause of value. He wanted mostly to find some criterion by which to decide whether a good does or does not form a part of the wealth of the country. His interest in investigating the relative values of the different goods that constitute the wealth of the country was nil. He had no interest in price as an allocating device.

The advantage which the pioneers of the Marginal Utility School (Walras,

Menger, Jevons) had was that each of them had sought the principle that ap­ portions the economy's resources to the production of different goods and then divides these goods among the various consumers. Auguste Walras needed to know only a principle through which he could select things to be included in his definition of property. For such a limited purpose rarete served well.

21 A concept as elaborate as marginal utility was not required.

The fact that he never considered the problem of an individual’s con­

sumption of different quantities of a single commodity constituted a second circumstance that made it impossible for Auguste Walras to conceive of the

idea of marginal utility. In his analysis the consumer consumes different goods, and includes which different goods give the consumer different levels of satisfaction. However, Walras never varies the amount of consumption of a particular good. Utility varies in quantity only in its extension, which meant to Walras, the number of individuals who enjoy the good. In Auguste

Walras's clear analysis, the consumer has only the choice of consuming or not consuming. The consumer never has the opportunity to consume more or less of a good.

In Auguste Walras's writings, the ratio of the quantity of the good available to the number of prospective customers (each of whom uses a single unit of the good) gives the rarete of the good. Rarete, as a number, means the fraction of the population that can have its wants for this particular good satisfied. It does not mean "marginal utility" as we now understand this term.

When he likened rarete to speed at one place in his writing, he appeared to come close to the essentials of marginal utility. He did not intend to imply the idea of speed at a point. He thought of speed as average speed over the entire distance. Likewise, he thought of rarete as the average number of consumers per unit of the good.

Auguste Walras left his son an impressive list of views on economics, even though Auguste did not have a notion of marginal utility of the kind

22 that later came into such prominence in economics. Since his son regarded the list seriously, this helped turn him in the direction of marginal utility analysis. Noticeably, Auguste Walras introduced his son to a radical view­ point in economics. This was the viewpoint that neither the utility theory of value nor the labor theory of value can stand close investigations.

Therefore a new theory should replace them. Rarete was the name that Auguste

Walras called the new theory that replaced the older theory.

The changes that Leon Walras made in his father's system of thought that introduced the complete idea of marginal utility were not made until after his father's death. The publications he wrote between 1860 and 1873 help in the understanding of his reliance on his father's economic views. They showed in this way the nature of his early conception of utility.

| £ Economie Politique et la Justice was Leon's first book. Here he follow­ ed his father's theory of value to the letter. Nothing was added to his father's value theory at this time beyond an attempt to relate the idea of rarete to the notion of supply and demand. The relation to an individual's satisfaction of the consumption of different amounts of a commodity was never considered.

Unless the satisfaction from a good as a function of the amount of the good consumed was considered, Leon had no chance to encounter the key idea of mar­ ginal utility.

The unequal importance of successive units of consumptions was not looked at by Auguste Walras. Ten years later his son Leon, and Jevons and Menger did look at it. Possibly Auguste Walras stopped where he did because he did not think that the individual could freely choose to consume either much or little wine, or to have many or few shoes. Instead, he may have thought that the

23 individual could afford either much or little wine. Or he may have felt that some force within or without the nature of the individual requires that he regulate his consumption in a particular way. However, unless the consumer can choose freely, he cannot experience or, at the very least, cannot make use of, any concept of marginal utility.

At first, Walras characterized the phenomenon now called marginal utility. Then he suddenly began to use "rarete" instead, a term that he likewise had borrowed from his father and the term for marginal utility most closely associated with the writing of Leon Walras. He defined rarete as ‘the intensity of the last want satisfied by any given quantity consumed 19 of a commodity...11

Discontinuities did not trouble Walras in the first edition of the I Elements as they had Jevons, but at several places he clearly showed his awareness of the problem. Walras first called attention to discontinuous variables in his discussion of individual demand curves. He drew a step curve to illustrate a discontinuous individual demand curve. He offered the same resolution of the difficulty that Jevons had brought forward, when he mentioned that these discontinuities disappear, or apparently dis­ appear, when the demand of a large number of individuals replaces the de- mand for a single individual. 20

Later, Walras had another suggestion for handling discontinuous utility functions. He suggested the substitution of continuous functions for dis- 1920

19 Leon Walras, Elements, (Homewood, Illinois: Richard I. Irwin, Inc., 1954)$ translated by William Jaffe, p. 119. 20Ibid., p. 95.

24 continuous ones, presumably as approximations. 21 Here, Walras gave the best solution of the problem of indivisibilities.

Part of the correspondence between Leon Walras and Jevons on the origin of their ideas on value was one of the first new things that he published on the subject of utility. This afforded a second occasion on which Walras wrote on utility. He also publicized his study of Gossen. Leon Walras wrote about the main known facts on the life of Gossen, and set forth his own claim to originality instead of Gossen*s. Walras came to the conclu­ sion that although Gossen may have anticipated all or most of Jevons*s discoveries as Jevons said he did, Gossen had not anticipated his own.

Leon Walras thought he was fortunate that he had carried his analysis to a point that Gossen had not attained. He felt he had retained his priority for a good part of his discovery.

Gossen*s and Jevons*s priority in the use of utility was accepted com­ pletely by Walras. He retained credit for extending the conditions of ex­ change to many exchange ; for treating the prices of the factors of pro­ duction more thoroughly, especially for considering the general case in which the producers hire the use of productive services and sell the fin­ ished product to the consumers, and for the use of marginal utility in the consideration of his theory of capital.

When Leon Walras published his Theorie de las monnaie in 1866, the idea of marginal utility was again put before economists who read French.

In this publication Walras announced his discovery that Menger had used the idea of marginal utility. 21

21Ibid., p. 577.

25 Walras thought that he and the others who knew the secret of marginal utility, could judge of reforms in a way that neither the socialists nor the conservatives could match. He did not come back to marginal utility.

He felt that he had developed those tools sufficiently. Therefore he also felt his time could best be spent in the use of these tools.

Leon's Theorie de la monnaie opened with a sketch of his whole system that gave due prominence to the idea of raretes. He could not resist the impulse to give marginal utility a special place as a cause, instead of treating it in the way his system implied that he should treat it, as one of many variables, simultaneously determined.

Since marginal utility played the key role in his system, Walras gave a basic explanation ofi the idea. He began by describing a curve that traced the raretes, as a function of the quantity consumed. The curves used to describe these functions differed from the similar curves that had been drawn in the first edition of the Elements. Walras drew linear utility curves in the Elements. Jevons criticized this shape as misleading. Linear curves were avoided in the Theorie de la monnaie. Here, Walras drew a con­ cave curve, a convex curve, and curves with both concave and convex segments.

In the Theorie de la monnaie his explanation brought out most of the problems concerning marginal utility that Walras had tack'ed in the Elements.

He spoke of indivisible goods. For the sake of simplicity he added that he intended to discuss only goods for which the individual can change his consumption by infinitely small quantities. He mentioned the difficulty that arises, in his equilibrium conditions, when an individual consumes none of a good.

26 His entire elementary discussion of marginal utility followed on the

same lines that he had chosen in the Elements. The idea of average raretes was one addition he introduced. Jevons had averaged utility in the Theory.

However, Walras had not averaged utility in the 1874 edition of the Elements.

Many changes were introduced by Walras in the second edition of the Elements.

Only a few of these concern marginal utility. A further discussion of the maximum conditions in the case of a discontinuous utility curve was pointed out by Walras to be what he considered the main addition.

Walras had mentioned the case of indivisible goods in the first edition of the Elements. He examined the exchange of a good that has a continuous utility curve for a good with a discontinuous curve in the second edition.

Walras showed that a very close approximation to his equilibrium conditions i held in the case of discontinuous goods.

27 Aspects of Marginal Theory as set by Jevons, Menger and Walras

The Marginal Utility School was launched by three important books which came out at the beginning of the 1870's. The books were; Theory of Political Economy written by William Stanley Jevons, Grundsätze, written by Carl Menger, and Leon Walras's Elements. These three books provided the sound base upon which the Marginal Utility School rose as they offered a body of discussion of utility theory far higher in quality and much greater in scope than that contained in the many earlier frag­ mentary discussions. I The term "marginal utility", had not been used by one of these pio­ neer members of the Marginal Utility School. The term did not enter the

German language until 1884, the English until 1888, and the French until later. The term, "marginal utility" came into common use before Jevons died but it had never been used by him. Walras never adopted the new term. He stuck to his father's peculiar and original synonym for it.

The term "utility" with the meaning now usual in economics was at least employed by both Jevons and Walras. However, Menger did not even do that. Menger insisted that utility, as we now define the word, plays no part in the determination of the value of a good. Menger avoided the term "utility" for the most part. He pointed out its inappropriateness for the consideration of value whenever he did use it. How Menger could have used "utility" in such a way that it had little to do with value was likely accounted for by the chief difference in Menger's use of the

28 term. He refused to associate variations in the quantity of a good.

Menger used importance of satisfactions instead of marginal utility.

Like utility, satisfaction itself was never varied in amount. The impor­ tance of the satisfaction varied.

Menger limited himself to a discussion of the importance of satis­ factions that fill concrete needs, by which he meant needs filled by some part of the total quantity of the good. This was the way in which he spoke of the idea of marginal utility. These procedural and varbal differ­ ences are apparent in his first general statement of what later becomes known as the law of diminishing marginal utility:"...the satisfaction of any one specific need has, up to a certain degree of completeness, rela­ tively the highest importance, and that further satisfaction has a pro­ gressively smaller importance, until eventually a stage is reached at which a more complete satisfaction of that particular need is a matter of indifference.^2

Jevons organized his exposition in terms of the very goods never

specified by Menger. At the beginning of his discussion of utility,

Jevons said that, "it is convenient to transfer our attention as soon as possible to the physical objects or actions which are the source to us of pleasure or pains." This resulted in Jevons attributing the power to

satisfy wants to a good. He called this power, utility. Jevons had the

following description of diminishing marginal utility outwardly dissimilar

to the one Menger gave: "The variation of the function expressing the final degree of utility is the all important point in all economical problems."

22carl Menger, Principles of Economics, Translated by James Dingwall and Bert F. Hoselitz, (New York: Free Press, 1950), p. 125. 29 As a general rule, it may be stated that it varies with the quantity of com­ modity, and ultimately decreases as that quantity increases.

Walras had the same approach as Jevons. The circumstance that the in­

dividual derived satisfaction from filling wants was merely mentioned. At­

tention was concentrated on the goods that have the power to satisfy wants

and that, accordingly, have utility. For this reason, Walras's first expres­

sion of the law of diminishing marginal utility reads somewhat like Jevons

but not like Menger's. Walras states; "I postulate that intensive utilities

always diminish from that of the first unit of fraction of a unit consumed

to that of the last unit or fraction of a unit consumed."

The phenomenon now called marginal utility was at first characterized

by Walras by the expression ‘intensive utility.' This term had been borrowed

from his father. Aftet the expression 'intensive utility' was introduced by

Walras, he repeated it ten times within a few pages. Suddenly he began to use

'rarete' instead of intensive utility.' He had borrowed the term 'rarete'

from his father. This term for marginal utility is most closely associated

with the writing of Leon Walras. He defined 'rarete' as the intensity of the

last want satisfied by any given quantity consumed of commodity.' From his

definition on, Leon Walras used either the expression 'rarete' or his defi­

nitional phrase 'intensity of the last want satisfied' to denote marginal

utility.

Walras's terms were evidently changed in the midst of his composition.

This partly underlined the influence of the last unit of consumption in the

consumer's behavior. He presumably wished, by the use of the term 'intensity

of the last want satisfied' to reveal an order of consumption that his graphs

and functions did not show. It was not a good reason to make the change.

30 The same dubious procedure was followed exactly by Jevons in the Theory.

Marginal utility was first defined without regard to any specific order of

consumption on the part of the consumer. Then it was changed to a terra he hoped would convey an idea of the importance of the final or terminal unit

of any good which the consumer used. First he spoke of intensity of utility,

or of degree of utility. When he wished to stress the order of consumption

he substituted final degree of utility or terminal utility. Menger did not

emphasize any time pattern of consumption.

It was recognized by all three of the pioneer writers on utility that

the factors of production yield utility only in that they produce goods to

satisfy consumer's wants. The most elaborate study for this relationship

was singled out by Menger. All goods were divided artificially by Menger into

1 different orders in which the value of a higher order good depends explicitly

upon the values of the goods of the first order. He referred to the direct

and indirect satisfaction of human needs from goods of the first and higher

orders respectively. In this way Menger has a sort of general equilibrium

model. As it stresses a cause and effect relationship that makes it the exact

opposite of a market in which there is simultaneous determination, the model

is an imperfect one. Walras's view of the economic process was superior to

the one that Menger offered, because in his most complete system, Walras had

the values of all products and all factors completely interconnected.

Mediate utility was Jevons's name for the utility from a factor or pro­

duction. This was in contrast with immediate utility for a consumption good.

In general he gave the least satisfactory treatment of the relation of the

price of factors to the marginal utility of the consumption goods that they

31 produce. Jevens began with an analysis of the determination of the value of consumers' goods. This was done by both Menger and Walras also. Menger and Walras later tied production to consumption. Jevons never completely accomplished this even though he may have had some similar procedure vaguely in mind.

Jevons remarked that people value goods because they satisfy needs when consumed. People also value goods because the individual may exchange them for other desirable goods. The name, "acquired utility," was fastened by

Jevons to things that have the power of procuring us direct utility through exchange. A further use of this concept of acquired utility was tried by him. Jevons said that the intensity of the need that we have for more of a commodity measures i,ts value. He also added: "But the power of exchang­ ing one commodity for another greatly extends the range of this utility.

We are no longer limited to considering the degree of utility of a commodity as regards the wants of its immediate possessor; for it may have a higher usefulness to some other person, and can be transferred to that person in exchange for some commodity of superior utility to the purchaser. The general result of exchange is, that all commodities sink, as it were, to the same level of utility in respect of the last portions consumed."23

Menger used the adverbs "directly" and "indirectly" to modify the activity of the individual in obtaining satisfaction, depending on whether the person obtains the enjoyment by the consumption of the commodity itself, or by means of exchange. Menger separated value into "use value" and "ex­ change value", depending on whether it refers to goods which derive their

^William Stanley Jevons, The Theory of Political Economy (New York: Kelley and Millman, Inc., 1957), p. 120.

32 "value by being employed directly in the first case and indirectly in the 24 second. He showed that while goods may have use value only or exchange value only, usually they have both, in which case the greater of the two determines the importance of the satisfaction and consequently the economic value of the good.

Jevons and Walras found it convenient to assume the continuous divisi­ bility of quantities since they both used mathematical models in the expo­

sition of their ideas on utility. Their models did not fit reality because all or most of the quantities that concern economic life did not divide in this way. Both Jevons and Walras realized this. Both of them altered their basic models to forestall criticism on these grounds. This made room for

indivisibilities in thp quantities of good consumed. Since Menger used

arithmetic tables that are discontinuous by nature, there was no call to amend his analysis to encompass obviously indivisible goods. He paraded his discontinuities and emphasized them. This characteristic of his work was even imparted by Menger to his immediate successors in Vienna. His suc­ cessor never used continuous functions. They consequently had their work encumbered in a way that writers elsewhere avoided.

Jevons began with increments of finite size but soon thereafter stated

that the law of diminishing utility "may be considered to hold true theoreti­

cally, however small the increments are made...^5 He knew that indivisibili­

ties did not fit into his most general model. Here they would be another *25

2^Carl Menger, Principles of Economics, Translated by James Dingwall and Bert F. Hoselitz, (New York; Free Press, 1950), p. 228. 25William Stanley Jevons, The Theory of Political Economy (New York: Kelley and Millman, Inc., 1957), p. 57.

33 cause of "failure" of his equations of exchange. He constructed special models to deal with inequalities. The first model was for the exchange of two indivisible goods in which the equations of exchange reduce to two inequalities. These show that each of the two exchangers prefers the good of the other person. He went on to more elaborate cases.

Walras was not troubled by discontinuities in the first edition of the

Elements as Jevons had been. Walras clearly showed his awareness of the problem at several places. He first called attention to discontinuous variables in his discussion of individual demand curves. A discontinuous individual demand curve was illustrated when he drew a "step curve." Walras offered the same resolution of the difficulty that Jevons had brought forward, when he mentioned that1these discontinuities disappear, or apparently disappear, when the demand of a large number of individuals replaced the demand for a 26 single individual. Mainly Walras's models rested on utility function.

Walras later had another suggestion for handling discontinuous utility func­ tions. The substitution of continuous functions for discontinuous ones, pre­ sumably as approximations was suggested. The best solution of the problem of indivisibilities was given here by Walras.

Jevons, Menger, and Walras implied the measurability of pleasures, wants, needs, or utilities in their systematic presentations. Each realized in some degree the necessity for facing the contradiction that, although his discussion assumed the measurability of such things, no one ever had measured this kind of quantity. That procedures consequently required a defense against future *

^Leon Walras, Elements, Translated by William Jaffe, (Homewood, Illinois: Richard Irwin, Inc., 1954), p. 95.

34 critics was correctly sensed by each one. No part of marginal utility analysis was more steadily attacked through the years. The question of the measurement of subjective quantities is still a lively one in economic theory.

Menger was the least worried by the problem. His effort to justify his procedure consisted in a single footnote in which he stated that he did not intend the numbers that he had assigned to represent successive degrees of importance "to express numerically the absolute but merely the relative mag­ nitudes of importance of the satisfactions in question."^7

The objection that Walras treated immeasurable things as measurable was anticipated by Walras. In the following paragraph Walras cut the Gordian knot by saying that he had "assumed" measurability.

The above analysis is incomplete; and it seems impossible, at first glance, to pursue it further, because intensive utility, considered absolutely, is so elusivs; it has no direct or measurable relationship to space or time, as do extensive utility and the quantity of a commodity possessed. Still, this difficulty is not insurmountable. We need only assume that such a direct and measurable relationship does exist, and we shall find ourselves in a position to give an exact, mathematical account of the respective influences on prices of extensive utility, intensive utility and the initial stock possessed.

I shall, therefore, assume the existence of a standard measure of intensity of wants or intensive utility, which is applicable not only to similar units of the same kind of wealth, but also to different units of various kinds of wealth.27 28

27 Carl Menger, Principles of Economics, Translated by James Dingwall and Bert F. Hoselitz, (New York: Free Press, 1950), p. 183. 28Leon Walras, Elements, Translated by William Jaffe, (Homewood, Illinois: Richard Irwin, Inc., 1954), p. 117. 35 After Walras's fiat on measurability he admitted that his utility functions were not determinable and that only the demand function which depends on the utility functions remains empirical. He would have no part in the measurement of utility by means of the pecuniary sacrifice of the consumer (as shown by a demand curve). He pointed out in this regard all the inadequacies of the analysis of Dupuit.

Some might think the study of economics impossible because of an in­ ability to measure utility. Jevons first offered the hope to relieve the honest doubts of those, that, although measurement at the time was impossible, it might well be measured in the future.

Jevons pointed out that measurement had come slowly in studies other than economics. "Previous to the time of Pascal," he asked, "who would have

OQ thought of measuring doubt and belief?" Jevons used electricity and heat as illustration of fields of study in which measurement came only after stu­ dents had investigated them for some time.

Jevons insisted that "there can be no doubt whatever that pleasure, pain, labour, utility, value, wealth, money, capital, are all notions admitting of quantity...," and, therefore, presumably measureable. He mentioned Bentham's suggestion that pleasures and pains be measured in order to test legislation.

Jevons admitted that he did not know where Bentham's "numerical data are to be found."'*®

Jevons said that the numerical data are more abundant and precise than those possessed by any other science. However, he said, we have not yet 2930

29 William Stanley Jevons, The Theory of Political Economy (New York: Kelley and Millman, Inc., 1957), p. 8. 30 Ibid., p. 12.

36 known how to employ them. He mentioned as examples of the raw data of economics, great ledgers of merchants and bankers and public offices, private account books, price lists and share lists, bank returns, mone­ tary intelligence, Custom-house and other Government returns, and thou­ sands of folio volumes of statistical, parliamentary, or other publications.

Jevons offered two excuses or explanations why he did not construct util­ ity curves from these abundant data. He mentioned first, want of method, and secondly he alleged a want of completeness. His earlier estimate of the abun­ dance and precision of the raw data in economics was contradicted by his second excuse. Also contradicted was his statement that the very abundance of our data is perplexing. The want of completeness of the basic statistics was thought by Jevons to be the more important of the two circumstances.

Only after he already had used the utility functions in his determination of exchange rates did Jevons explicitly sketch his plan to use demand curves as approximations of utility curves. The utility functions that served him in the analysis of exchange presume cardinal utility. Jevons used a general functional notation and illustrated his conclusions with graphs of utility curves that retain only the principal characteristics he attributed to his generalized functions. Therefore, the assumption of the cardinal measurement of utility does not stand out.

None of the principal arguments of Jevons, Menger, and Walras depend on the assumption of an ability to compare the utilities of different individ­ uals. Mainly, these three economists never implied interpersonal compara­ bility. The units chosen for any one individual have no specified relation to the units of any other individual although each supposes the cardinal measurement of utility.

37 Jevons.was the only one who emphasized the impossibility of interpersonal comparisons. Menger and Walras never made interpersonal comparisons any more than Jevons did. Menger and Walras never stated a general objection to the practice either.

In the following passage, Jevons gave the classic statement of the ob­ jection to such comparisons, in a form agreed to, more or less generally, by all economists down to the present: "The reader will find, again, that there is never, in a single instance, an attempt made to compare the amount of feel­ ing in one mind with that in another. I see no means by which such comparison can ever be accomplished. The susceptibility of one mind may, for what we know, be a thousand times greater than that of another. But, provided that the susceptibility was different in a like ratio in all directions, we should never be able to discover the profoundest difference. Every mind is thus inscrutable to every other mind, and no common denominator of feeling is possible."-*1

Menger assumed that he knew enough about what went on in the human mind to say that "the use value of one and the same good is usually very different 3 2 for two different individuals..." Walras attempted proof that free compe­ tition maximized the utilities of an economy. Because of this he had been charged with the assumption of interpersonal comparability.

When Jevons resorted to totals or averages of different individuals’ utilities he also deviated from the assumption of interpersonal incomparability.* 33

31Ibid., p. 21.

33Carl Menger, Principles of Economics, Translated by James Dingwall and Bert F. Hoselitz, (New York: Free Press, 1950), p. 299.

38 Jevons was unable to avoid the attraction of the average even though it con­

tained the seed of comparison. This use of the average was approached by

Jevons when he stated that economics usually treated an aggregate of indi­ viduals. Without making a comparison between the individual parts of the

aggregate it could not be treated sensibly. Since they were of demand curves, his first aggregates did no harm. Jevons finally resorted to the concept of

a "trading body." Despite the fact that he had declared against interpersonal comparisons this permitted him to aggregate utility functions. The term

"trading body" denoted any body either of buyers or sellers, from an individ­ ual to the "inhabitants of a continent." Jevons referred to consumption in connection with a "trading body." Where he discussed a "trading body" in

general terms he made no reference to the utility of goods. Jevons suddenly 1 gave his "trading body" a utility function when he came to use the idea in his determination of the rates of exchange. Thereafter, the "trading body"

behaved exactly as a person, and Jevons referred to it as such. He presented his general statement of the equilibrium of exchange in terms of the utility

functions of "trading bodies."

Menger avoided this use of averages or totals. He probably had a less

strictly quantitative outlook and he felt no need to avoid the use of indi­

visibilities by this route. Menger commented only once on the idea of average

use value and then, unfavorably. The utilities of different individuals was

not averaged by Walras in the first edition of the Elements. He introduced

averages of this kind in the second edition.

The form of the utility function that was used was never discussed ex­

plicitly by Jevons, Menger, or Walras. From the number of things they stated

39 incidentally, however, a good idea of the kind of functions that they must have had in mind can be pieced together. They agreed in many other ways besides on the general characteristics of these functions. A function in which the marginal utility of a certain good to an individual depends on

the quantity of that good, and on the quantity of that good alone, was used by all three of the writers.

The fact that the marginal utility decreases when the quantity of the good increases (diminishing marginal utility), as the most dignificant char­

acteristic of their marginal utility functions was most properly emphasized

by Jevons, Menger, and Walras. This characteristic was thought of by Menger

as reflecting common experience. He noted that scholars had not paid much

attention to it. Both the naturalness and the importance of diminishing marginal utility was stressed by Jevons. Walras spole of "postulating" the

quality of diminishing marginal utility in his utility function. However, he probably did so on the same assumption of common experience that Jevons

and Menger made. No exception ot this fundamental relationship was given

by any of them. Jevons stated that there were no exceptions. None of the

three writers attached significance to changes in the rate at which marginal utility declined.

All of Jevons*s curves were concave from above. Both Menger1s tabular

representations and the curves in the first edition of Walras's Elements 33 were linear.

Jevons avoided the problem of dynamics. He thought it to be absurd to

attempt the more difficult question when the more easy one was yet so imper- 33

33R. S. Howey, The Rise of the Marginal Utility School (Laurences University of Kansas Press, 1960), p. 53.

40 fectly within one's power. The fact that Walras used a static analysis only was never mentioned in the first edition of the Elements, In later editions he inserted a sentence to this effect, Menger used the idea of

"time" occasionally. This was largely in connection with the nature of production.

At the beginning of the 1870's nonw of these writers (Jevons, Menger,

Walras) paid strict attention to the general circumstances of consumption in their examples of diminishing utility. It was implied by them that the goods which their functions represent consist of physically homogeneous commodities that the consumers intend to consume in addition to the other

(unspecified) goods that they utilize in the consumption process during the period in question. Jevons, in his first example of diminishing mar- 1 ginal utility, asked that the whole quantity of food which a person con­ sumes on an average during twenty-four hours to be divided into ten equal parts be considered. He must have meant some abstract quantity of food, as he could not physically divide a day's food into equal and similar parts with qualities which the consumer would recognize and value. Jevons later stipulated for his theory of exchange a commodity perfectly uniform or homo­ geneous in quality. This was so it would have a single price in a market.

Evidently Jevons assumed that the consumer has exactly the same quantities of clothing, shelter, and all incidental goods whether he consumes one unit of food or ten. That the level of consumption of other goods must be the principal circumstance that determines the shape of the consumer's utility function for food was never pointed out by Jevons.

Menger's table (see page ) supposed the same situation. Menger took even less pains to explain his variable than had Jevons. A reader must con­

41 strue the first column in Menger's principal illustration to represent the additions of total satisfaction from eleven equal portions of some homo­ geneous food, on the assumption that the amounts of the other goods the person consumes do not influence his satisfactions. Walras's statement that first introduces his utility function implies likewise a homogeneous commodity added to units of consumption, with the quantities of all other goods not influencing the outcome in any way.34

The utility functions used by Jevons, Menger, and Walras all related to the utility that an individual receives from the goods that he consumes, and these functions lead him to buy and sell quantities of the goods in his own interest. Consumption presumes the physical use of the good by the in­ dividual to whom the function relates. Nothing was mentioned by the three writers on utility at this time. Later, only a few mentioned about the circumstance that the purchaser of consumers's goods buys the bulk of his purchases for the other members of a household.

The assumption that the satisfactions from different goods have some common abstract quality that the individual can sum for a total that has meaning to him was shared by Jevons, Menger, and Walras.

Jevons had a good idea of the notion of the marginal utility of income.

He made a considerable use of it. JEvons was familiar with Daniel Bernoulli's application of the marginal utility of income to gambling. This was an ad­ vantage to him. Jevons was also familiar with Laplaces' distinction between fortune physicue and fortune morale.

34Ibid., p. 54.

42 Jevons defined the idea of the marginal utility of income in these words: "It will be seen that we can now conceive, in an accurate manner, the utility of money, or of the supply of commodity which forms a person’s

livelihood. Its final degree of utility is measured by that of any of the other commodities which he consumes."^ This is probably the first express

statement of the marginal utility of money or income in its modem form.

Jevons reveals why marginal utility of income must decrease as income in­ creases. The possibility that the individual may change the character of his consumption as well as the amount when his income increases was not taken into account.

Jevons drew a graph that assumed a constant marginal utility of income over a range of income sufficient to buy six bottles of ink, in order to show how the individual would decide the optimum number of bottles of ink to purchase.This was the first demand curve ever drawn that makes ex­ plicit the assumption of the constancy of marginal utility of income. Many other writers employed the same device at later times.

In connection with the problem of exchange, or value, Jevons, Menger, and Walras made a central and important use of their utility functions.

They differed from such earlier writers on utility as Senior, Dupuit, and

Bernoulli. They had written utility functions of much the same kind. How­ ever, they never had used them for the expression of an equilibrium in ex­ change. *36

■^William Stanley Jevons, The Theory of Political Economy (New York: Kelley and Hillman, Inc., 1957), p. 154.

36Ibid., p. 126.

43 Menger stated a version of the notion of maximization towards the com­ mencement of his discussion of economy when he promised to show how the con­ sumers "direct the quantities of goods (consumption goods and means of pro­ duction) at their disposal to the most effective satisfaction of their needs.

Jevons said that economics concerns the process of maximization of utility.

'•To satisfy our wants to the utmost with the least effort..., in other words, to maximize comfort and pleasure, is the problem of Economy.®® Walras's

"Theorem of Maximum Utility" expresses the proposition that the "object in trading is to gratify the greatest possible sum total of wants...

The earlier economists thought that people pursued their self-interest in a world where the determination of the important parameters of conduct such as value and the quantity of goods produced proceed from sterner or different outside causes (such as pain cost). If Jevons, Menger, and Walras had continued to restrict their analysis as the earlier economists did, they would have found little use for the utility functions. Before there could be a Marginal Utility School there had to be an important use for utility in economics.

Menger did not employ any mathematical analysis. Therefore he would not use the methods of maximization common to mathematics. Jevons and Walras both used mathematical notations and procedures. All three writers began their analysis with the marginal utility functions which they could use immediately to express the conditions of the maximum even though all three 39

®^Carl Menger, Principles of Economics, Translated by James Dingwall and Bert F Hoselitz, (New York: Free Press, 1950), p. 80. ®®William Stanley Jevons, The Theory of Political Economy (New York: Kelley and Millman, Inc., 1957), p. 44. 39 Leon Walras, Elements, Translated by Wm. Jaffe, (Homewood, Illinois: Richard Irwin, Inc., 1954), p. 121 44 certainly knew the importance of the total utility function of the consumer.

More concern was shown with the existence, as a fact in experience, of mar­ ginal utility than with its related quantity, the total utility of the in­ dividual. They described the idea of marginal utility at length.

Menger's idea of a demand function was looser than either Jevons's or

Walras's. Menger realized that the quantity sold in a market depends on the price asked for the good. Menger did not connect demand function directly with the satisfactions that the individuals receive from the goods they buy.

Walras began his analysis with given demand curves. He obtained his equili­ brium market conditions before he ever said a word about utility. Later, utility to establish the foundations on which his demand functions rest was introduced by Walras. Jevons regarded demand curves from another view­

point. He hoped to discover some way to obtain data for the construction of

an individual's utility curves.

While the demand curves of Jevons appear to the eye to be exactly the

same (with axes reversed) as those of Walras, they are drawn on quite dif­

ferent assumptions. The demand curves of Walras also differ from the partial

equilibrium demand curves now in use in economics. Walras's first demand

function has two variables because the market he considers holds definite

quantities of only two goods and because the traders express the price of

one good in terms of thdpnits of the other good. Jevons's curves are more

in the spirit of the demand curves that later became popular. He assumed

that the individual surrenders such a minor part of the good that he brings

to market, that the exchange does not alter the marginal utility of his own

good, or in other words, that the marginal utility of money for any individual

45 remains constant. Walras never used this hypothesis and upbraided Dupuit for undertaking an analysis which does. Jevons, of course, realized that he could not draw a demand curve of this kind for any commodity that took 40 a large part of the individual's income. 40

40E. Kauder, A History of Marginal Utility Theory (Princeton, New Jersey: Princeton University Press, 1965), p. 60.

46 Rudofl Auspitz and Richard Lieben

Untersuchungen uber die Theorie des Preises was published in 1889.

The authors were Rudolf Auspitz and Richard Lieben. Nothing had been written

by them that foreshadowed this book's appearance. A good deal on economics

had been published by Auspitz after the middle of the 1870's but wholly on

popular subjects. Before this date, Lieben evidently had done no writing

for publication. The two authors stated in the preface that their interest

began ten years earlier. They do not say what brought about their interest

or what kept it alive in the interval. It is learned from the preface that

they acquired by 1888 an acquaintance with the literature on utility theory

that must have equaled that of any other economist. The work of Thunen,

Dupuit, Jevons, Cournot, Gossen, Leon Walras, and Menger was evidently known

by Auspitz and Lieben. Because they possessed both the ability to read the mathematical sections of Thunen, Cournot, Jevons, Walras, and Gossen they

had an advantage over all other Austrian writers.

The-Theorie des Preises ought to command respect as an example of book

production. The form of the book is as outstanding as is its use of utility

theory. The book utilizes this idea on a scale and with a degree of care

not duplicated in the work of any other economists of the time, except for

F. R. Wicksteed. Auspitz and Lieben combined a perfect understanding of much

of what had been written earlier, their worldly experiences, their mathematical

facility, and their ingenuity into an elaborate exposition of consumption

economics. The book did not have the impact it ought to have had. The impact

was not what it ought to have been because it contained more mathematics than

47 the Austrian and other economists of the time could tolerate. The authors,

Auspitz and Lieben, had no connection with the University of Vienna. The book contained some annoying faults.

Auspitz and Lieben evidently began in their own minds, although not in their book, with the whole of the consumption and the production of an individual in view for a specified and long period of time, a year. They gave as their most general statement of the relationships the massive £ function e , g , sv, tg^; vfc, e^, g., s„, tg^,... vrt, f , f h, e n, gn, f , s„, tg^ ;-u.). In this expression the annual satisfaction z_ of an individual depends on six aspects of the n goods in the economy, and upon the stock of money-u. These aspects are the following: the anticipa­ ted prices of each good tg^, the quantity of each good consumed v or pro­ duced by the individual; and three different (g,f,s) non-consumption uses e of the goods. This long expression, which lumps together satisfactions of every kind, whether in consumption or production, certainly transcends in generality all pictures of utility relationships given either before its time or later, but it has the disacvantage of including too much.^ When

Auspitz and Lieben started to talk about any aspect of utility, they appro­ priately spoke of simpler functions derived from their basic function.

Auspitz and Lieben started with a description of collective total utility curves. Later they turned to the individual curves and the method by which they are compounded into collective curves. The collective curve, like the individual curve, starts at the origin, rises to a zenith, and then approaches

S. Howey, The Rise of the Marginal Utility School:(Laurence: University of Kansas Press, 19600, p. 53

48 A O a vertical asymptote. * This curve evidently traces the addition to the sum of the jz's (in their basic functions) due to the uses of the specified good and on the assumption that the prices, but not the quantities of the other goods, as well as the desires of the individuals, remain constant.

The collective curve is constant in terms of the annual consumption as is the individual utility curve. It may also be noted that, unlike most utility curves, the goods referred to may be either consumed or used in production. Utility was measured by Auspitz and Lieben by the sum of money just necessary to compensate individuals for the loss of a given amount of the good. This curve is used in conjunction with the symmetrical collective total cost function to determine the price of the good and the amount of the consumer's rent. I The next section included a long discussion of the manner in which utili­ ty curves change as the Lebensweise of an individual alters. The Lebens- weise changes whenever any other condition (besides the quantity of the good in question) changes essentially — an admittedly somewhat vague and also amazing concept. The representation of all the total utility curves of a good for the different possible Lebensweisen gives a graph as below. *4343

^Rudolf Auspitz and Richard Lieben, Untersuchungen über die Theorie des Preises (Liepzig, Germany: Duncker and Humblot, 1889), p. 10.

43Ibid., p. 113 49 The envelope curve drawn to these curves measures the maximum utility availa­ ble to the individual when he can make the necessary adjustments in all as­ pects of his life. Auspitz and Lieben have been the only ones to use curves of this nature in connection with utility. However, similar curves with respect to production were also employed by Auspitz and Lieben. These curves are sometimes called "planning curves," and have found wide adoption.

The Lebensgenusskurve was also introduced by Auspitz and Lieben. This enjoyment curve differs from the utility curve only in that it is not zero for a zero consumption of the good. It equals whatever total satisfaction would result if the consumer had none of thés good to consume throughout the year. The Lebensgenusskurven show the total satisfaction that the individual in question obtains. It is not merely that part resulting from the good under consideration. Enjoyment plus the initial satisfaction equals utility.44

Auspitz and Lieben investigated at length the many influences on the slope of the Lebensgenusskurve.

We could imagine that all the other members of the Marginal Utility

School would have been pleased with this book. It could be expected that

Leon Walras, who could follow the mathematics, would have recognized the value of their work and be grateful for the support it gave his own. It especially paid him high compliments and in part used his method of general equilibrium. The mathematics in parts might have been obscure to the more literary members of the School of Vienna. The other members of the Marginal

Utility School failed to show any enthusiasm. Walras even wrote an unfavor­ able review of the book. Walras apparently did not examine the book thor­

44Ibid., p. 149.

50 oughly. None of his observations extend beyond the first chapter. In his comments on this chapter he contented himself with a recital of seven num­ bered errors and permitted himself no word of praise. As his strictures concern utility, Walras charged that Auspitz and Lieben fell into the same error that he had charged Dupuit with in Walras's Elements. This was the error of confusing the demand curve with a utility curve. Auspitz and

Lieben replied to Walras's criticisms by pointing out that they assumed the individual's valuation of money or numeraire constant, as well as all other prices fixed, in which case, according to Walras's suppositions, the utility curve and the demand curve coincide. They held that Walras had ob­ tained his result only because he had used a utility curve with a single argument, the quantify of the good. Their utility functions had as their arguments, the quantities of all goods and of numeraire.

51 Alfred Marshall

Alfred Marshall reviewed Jevons' Theory in 1872. He published an article,

"On Mr. Mill's Theory of Value," in 1876 in which he might have expressed his views on utility. Marshall mentioned Jevons twice, although he himself, did not use the term "utility" at any point in the article.

An economic analysis that made use of marginal utility was first pub­ lished by Alfred Marshall in 1879. Jevons* influence showed in The Economics of Industry, and The Pure Theory of Domestic Values. Marshall began his in­ vestigation of value with the introduction of demand and supply curves in The

Pure Theory of Domestic Values. Afterwards he came around to the use of the idea of utility. The demand schedule carries most of the burden of his expla­ nation of consumer's rent. Consumer's rent was discussed initially in terms of satisfaction rather than of utility.

Marshall measured in his example the satisfaction of an additional ton of coal by the price of the coal. "Now that which a person would be just willing to pay for any satisfaction rather than go without it," Marshall writes, "is... the 'economic measure' of the satisfaction to him.4"’

To obtain the whole of the "economic measure" of the individual's consumer's rent in the coal example he added the differences between the prices the indi­ vidual would pay for each successive ton rather than go without, and the price he does pay, and concluded that the "whole consumers' rent which he derives... is ...22 1/2.46 45

45Alfred Marshall, The Pure Theory of Domestic Values (London: The Mac­ Millan Company, 1879), p. 20. 46Ibid., p. 2 1.

52 Marshall restated his earlier argument except that he replaced the word satisfaction with the word utility, and whild doing so mentioned Jevons' name twice. Marshall interpreted the demand curve of an individual as the individual's utility curve for the good.

Demand for a good is a schedule which shows the quantities of goods that buyers are willing to purchase at all possible prices at only one point of time.

The law of demand states: the quantity demanded decreases with a rise in price and increases with the lowering of price. In other words, the quantity demanded varies inversely with price. 47

The demand curve for any commodity in a market during any given unit of time is the locus of demand points for it. That is to say, it is a curve such that if from any point P on it, a straight line PM be drawn perpendicular to 0 , PM represents the price at which purchasers will be forthcoming for 48 an amount of the commodity represented by OM. PT is inclined negatively.

Marshall apparently concluded that only the fact "we cannot estimate the quantity which he would purchase at a given price..." prevented the con-

47 Alfred Marshall, Principles of Economics, 8th ed. (New York: The Mac­ Millan Company, 1948), p. 99. 48Ibid., p. 99.

53 struction of the utility schedule for any individual. Marshall said that

"the statistics of trade will generally enable us to draw the demand curve

of the commodity for the whole market..." and "by this means we are enabled

to find the economic measure of the value in use of the commodity to the 49 several members of the community."

Marshall admitted the new difficulty that his composite value-in-use

curve measures human satisfaction only roughly. The measure involves the

assumption that "a pleasure that is worth a shilling to one man... (equals

the)...pleasure that is worth a shilling to any other man."-’®

Another limitation was added by Marshall on the use of the demand

curve to determine consumers' rent of a group. The demand curve can be known accurately only in the immediate vicinity of the existing market price.

Therefore the market demand curve can be used only to estimate changes in

the total utility and not the amount of the total itself.

A briefer statement was made by Marshall on marginal utility in The

Economics of Industry than in The Pure Theory of Domestic Values. The latter

was designed to be read by professional economists. The former was prepared

for the quite unprofessional use of extension classes. Essentially the use

of marginal utility is the same in both books. Marshall used price to

measure utility. His example here concerned flannel instead of coal. The

phrase "final utility" pleased Marshall. He called it a "happy phrase."

For undefined reasons he later turned against it. The phrase "marginal util­

ity" was substituted for "final utility."

^Alfred Marshall, The Pure Theory of Domestic Values (London: The Mac­ Millan Company, 1879), p. 22. 50Ibid., p. 22.

54 Marshall did not incorporate the idea of marginal utility into his theory of value by 1879. He used the idea of utility in connection with value. His use remained secondary or incidental. Marginal utility partly explained demand. Demand partly determined value. The position that

Marshall assigned Jevons is clear from his evaluation of Jevons* contention that utility rather than cost of production determined value. Marshall gave support to neither Ricardo nor Jevons but attempted characteristically to reconcile the two:

It is then incorrect to say, as Ricardo did, that Cost of production alone determines value: but it is no less incorrect to make utility alone, as others have done, the basis of value. It is certainly true that utility is a condition of value always; and that in cases in which the supply of the commodity is fixed, utility determines price. It is true that the price 1 of every commodity must be the measure of its Final utility; that is of its value in use to those who are only just induced to purchase it. But it is not true that this Final utility determines value: for it changes itself, according to the Law of Demand, with every change in the amount of the com­ modity that is offered for sale. This amount, and therefore the Final utility of the commodity, depend upon the relation between the circumstances of supply and those of demand.

The part on value of The Economics of Industry dissatisfied Marshall.

Because of this he finally suppressed the book after the publication of his

Principles. He often expressed a poor opinion of The Economics of Industry.

Not everyone shared his views after Marshall suppressed The Economics of

Industry. Edgeworth thought well of it. Jevons had praised it highly to

Edgeworth.

51Ibid., p. 148.

55 When Marshall reviewed F , Y. Edgeworth's Mathematical Psychics for the

Academy in the middle of 1881, he mentioned marginal utility. This book pleased Marshall as much as Jevons' Theory had annoyed him in 1872. Marshall thought the book showed clear signs of genius. He felt it was a promise of great things to come. Marshall never attempted to substantiate his initial sentence of praise. He criticized mildly, methods or minor points. Edge­ worth's principal result paralleled Jevons. Marshall attributed to Edge- worth "a new interpretation," an application to "new uses," and the deduction of a "list of cases in which the terms of contract are unstable or indeterminate."

Marshall did not specifically connect Jevons with utility. Marshall re­ viewed the position of economics in 1885 without ever using the word utility at all. Marshall never approached closer to the idea of utility than when, for instance, he said that the organon of economists must have "reference to an analysis of the positive motives of desire for different goods...or when he said that "the same sum of money measures a greater pleasure for the poor than for the rich...."52

Marshall supported the view that he had originated the idea of marginal utility theory. He implied this in print. When he reviewed Jevons* Theory,

Marshall's readers were led to believe that he had known about marginal utility all along when he introduced the subject of marginal utility by callint it a

"familiar truth." In the first edition of the Principles he said that he had borrowed the term "marginal" from von Thunen, then adopted Jevons' "final" 53 but "had been gradually convinced that marginal is the better."

^Alfred Marshall, The Present Position of Economics (London: The Mac­ Millan Company, 1885), p. 31. ^Alfred Marshall, Principles of Economics (London: The MacMillan Company, 1890), p. 1, xn.

56 In speaking of consumer’s rent, the topic in connection with which he first used the idea of marginal utility, Marshall said that the "motion of consumers' Rent was suggested to the present writer by a study of the math­ ematical aspects of demand and utility under the influence of Cournot, von

Thunen and Bentham." This quotation remains in the third edition (1895) of the Principles» Marshall removed it from the fourth edition (1898)

Marshall once stated in correspondence that he taught the doctrine of marginal utility in 1869. In a letter, written in 1883, to Leon Walras he said he did not accept the Jevons doctrine of "final utility." Marshall had used another name, "terminal-value-in-use," in lectures at Cambridge before Jevons' book appeared.

The book, Principles, was organized around supply and demand. Marshall said much more about supply than demand. His reason was characteristic:

...while wants are the rulers of life among the lower animals, it is to changes in the forms of efforts and activities that we must turn when in 55 search for the keynotes of the history of mankind.

Wants are created by activities, not the other way around.

Marshall, as a system builder, combined a marginal productivity expla­ nation of supply, with a marginal utility explanation of demand. The inter­ action of supply and demand determined price.

Marshall's economics can be divided into two parts. One, his systema­ tization of marginal theory. Second, his armory of toos. Marshall combined a marginal-productivity explanation of supply, with a marginal-utility expla­ nation of demand. Price was determined by the interaction of supply and de­ mand. In Marshall's words, "the general theory of the equilibrium of demand54 55

54Ibid., p. 184. 55Alfred Marshall, Principles of Economics (London: The MacMillan Company,

1920), p. 85.

57 and supply is a Fundamental Idea running through the frames of all the various parts of the central problem of distribution and exchange.

Ricardo and Mill had argued that, practically if not theoretically, the value of an article tended to reflect the number of hours required to pro­ duce it. Different market prices indicated different quantities of labor employed in producing different commodities. Their analysis centered upon supply. The procedure had been reversed by Jevons, Menger, and Walras. Their neglect of supply was much less grave than the classicist's neglect of demand.

Marshall's theory of supply started with work. Even if work were pleasant to begin with, it became painful in the end. The longer one worked, the more ones' pain. The marginal disutility of labor was a function of time. Why did anyone work? Wages assuaged the pain. Why did anyone stop working? The wages offered at some point failed to compensate the worker adequately for the fatigue of his labor. Marshall grafted the marginal idea upon the older conception of labor as simple homogeneous pain. His theory could examine degrees of pain.

A time-and-a-half rate of pay for overtime labor presumably compensated the worker for his additional (marginal) fatigue.

Demand was another side of the story. The key was the marginal principle.

Its application was easy. The satisfaction yielded to us (its marginal utility) diminished as we acquired more of anything. This would include money. Corre­ spondingly, the price we offer for additional amounts decreases. A never end­ ing balancing act at the margin engaged the rational consumer. A comparison was made on the additional satisfaction derivable from an alternative purchase.

In equilibrium, the consumer reflected with gratification that no reallocation of his income could increase his satisfaction. If he were not in equilibrium,

~^Ibid., p. viii.

58 he would arrange his future purchases so as to maximize his total satisfaction

or utility. A condition of equilibrium was proportionality of prices to

utilities: a pound of steak at $1.00 a pound could result in ten times as

much satisfaction as an ice cream cone at ten cents, and the ice cream cone

ten times as much satisfaction as a piece of bubble gum at one cent."^

The producer acted like the consumer. He allocated his funds among the

elements of production although his object was maximum profit rather than maximum utility. This compared to the thrifty housewife who allocated her

food budget among the hundreds of items which clamored for her attention.

The producer compared the additional product, which $100 spent on labor would

produce, with the additional product the same sum expended on a small machine, 1 or better materials, or increased maintenance might occasion. Many factors

and subfactors were juggled with the design of making their marginal products

proportional to their prices. The parallet to the consumers' operation was

precise. If the producer spent $50 on a machine, and $100 on better materials,

it was anticipated that the machine would add ten times as much product as

the man. The great principle of substitution guided him. The cheaper was

substituted for the more expensive.

Was it utility of cost of production which determined price? Both: "We

might as reasonably dispute whether it is the upper of the under blade of a

pair of scissors that cuts a piece of paper, as whether value is governed 58 by utility or cost of production."

^Robert Lekachman, A History of Economic Ideas (New York: Harper and Row, 1959), p. 270. ■^Alfred Marshall, Principles of Economics (London: The MacMillan Com­ pany, 1948 ed.), p. 348.

59 Supply and demand still determined price, but we now knew what influ­ enced them. Marshall's explanation simplified understanding.

Part of the amplification concerned time, the center of the chief diffi­ culty of almost every economic problem. How did prices behave over time?

How did the forces which determined supply and demand work themselves out?

Marshall said the world was very complex and time was continuous. Marshall was perfectly aware of general interdependence. He was a mathematician and grudgind student of Walras. He was also aware of the fact that everything affected everything else. He, nevertheless, saw how hopeless it was to examine any concrete problem from a general equilibrium standpoint. He in­ vented one of the fictions which have been referred to, the device of partial analysis. Marshall ,asked his readers to pretend to concentrate attention upon one industry and, within that industry, upon one business unit, the equally fictitious Representative Firm. What happened in one industry in­ evitably altered the sales of other industries. However, the fiction misled very little if the industry were small and firm nearly typical. Marshall described this method, which was at the heart of his procedure, in these words: "The force to be dealt with are, however, so numerous that it is best to take a few at a time; and to work out a number of partial solutions as auxiliaries to our main study."59

Marshall did not invent elasticity. It was discussed by Cournot. Mill hinted at it. Marshall refined, amplified, and applied the concept. Marshall described easy substitution as the prime cause of high elasticity. The Prin­ ciples discussed difficulties in the way of deriving at statistical demand

-^Robert Lekachman, A History of Economic Ideas (New York: Harper and Row, 1959), p. 271.

60 curves. Marshall was convinced that long-run elasticity was higher than short-run elasticity.

The elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price.

Let a straight line touching the curve at any point P meet 0 in T and 0 in t then the measure of the elasticity at the point P is the ratio of PT to Pt.60

Alfred Marshall introduced the important concept of elasticity of de­ mand. In a casual bargain that one person makes with another, as for in­ stance when two lumbermen barter an ax for a saw, there is seldom anything that can properly be called an equilibrium of supply and demand. There is probably a margin of satisfaction on either side. It is possible that a true equilibrium may be arrived at in bartering, but the simplest cases of a true equilibrium value are found in the markets of a more advanced state of civilization. The amount of the commodity demanded may increase much or little according as the demand is elastic or inelastic. A long or short time may be required for developing the new and extended uses of the commodity, which are rendered possible by the fall in price. Those demands which show

^Alfred Marshall, Principles of Economics (London: The MacMillan Com« pany, 1948 ed.), p. 102.

61 high elasticity in the long run, show a high elasticity almost at once; so that, subject to a few exceptions, we may speak of the demand for a commodity as being of high or low elasticity without specifying how far we are looking ahead.

But there are no such simple rules with regard to supply. An increase in the price offered by purchasers does indeed always increase supply.

Thus it is true that, if we have regard to short periods only, and espec­ ially to the transactions of a dealer's market, there is an "elasticity of supply" which corresponds closely to elasticity of demand. That is to say, a given rise in price will cause a great or a small increase in the offers which sellers accept, accordingly, as they have large or small reserves in the background, andias they have formed low or high estimates of the level of prices at the next market. This rule applies nearly in the same way to things which in the long run have a tendency to diminishing returns as to those which have a tendency to increasing returns. Therefore, the elas­ ticity of supply of a commodity which conforms to the law of Increasing

Return, or even to that of Constant Return, is theoretically infinite for long periods.

The theory of stable equilibrium of normal demand and supply in its elementary stages deverges but little from actual facts; but when pushed to its more remote and intricate logical consequences, it slips away from the conditions of real life and its practical value rapidly diminishes.

It is true then that a position of equilibrium of demand and supply is a

^Alfred Marshall, Principles of Economics (New York: The MacMillan Company, 1948), p. 457.

62 position of maximum satisfaction of the two parties concerned increases until that position is reached; and that any production beyond the equili­ brium amount could not be permanently maintained so long as buyers and sellers acted freely as individuals, each in his own interest.^

An increase in normal demand for a commodity involves an increase in the price paid by each of several purchasers. Changes in the opposite direction will cause a falling off in demand and a sinking of the demand prices. Similarly an increase of normal supply means an increase of the amounts that can be supplied at each price, and a diminution of the price at which each separate amount can be supplied. The effects of an increase of normal demand can be regarded from three points of view. In the first case an increase of demand simply increases the amount produced without altering its price; for the normal price of a commodity which obeys the law of constant return is determined absolutely by its expenses of pro­ duction. In the second case, if the commodity obeys the law of diminishing return, an increase of demand for it raises its price and causes more of it to be produced; but not so much more as if it obeyed the law of constant return. In the third case, if the commodity obeys the law of increasing return, an increase of demand causes much more of it to be produced, more than if the commodity obeyed the law of constant return, and at the same time lowers its price. If it happens that the demand is very elastic, then

a small increase in the facilities of normal supply, such as a new invention,

etc. may cause an enormous increase of production and fall of price.

Ibid., p. 471.

63 Market values are governed by the relation of damand to stocks actually in the market; with more or less reference to "future" supplies, and not without some influence of trade combinations. But the current supply is in itself partly due to the action of producers in the part; and this action has been determined on as the result of a comparison of the prices which they expect to get for their goods with the expenses to which they will be put in producing them. The market value of anything may be much above or much below the normal cost of production and the marginal costs of a particular producer at any time may stand in no close relation to mar­ ginal costs under normal conditions. In any given case there is a certain proportion between the amounts which may with best advantage be spent, for instance on a farm, on the ploughing and harrowing, or fertilizing. Margi­ nal uses and costs do not govern value, but are governed together with 63 value by the general relations of demand and supply.

The element of time is a chief cause of difficulties in economic inves­ tigations. The first step towards studying the influences executed by the element of time on the relations between cost of production and value may well be to consider the famous fiction of the "Stationary state." This state obtains its name for the fact that in it the general conditions of production and consumption, of distribution and exchange remain motionless; but yet it is full of movement for it is a mode of life.

The unit of time may be chosen to the circumstances of each particular problem, but in every case it must be short relatively to the period of the

^-*Ibid., p. 410.

64 market under discussion. It is assumed that there is no change in fashion, no new substitute which might affect the demand, no invention to disturb the supply. The conditions of supply will vary with the length of time.

When the demand price is equal to the supply price, the amount produced has no tendency either to be increased or to be diminished; it is in equili­ brium. When demand and supply are in equilibrium, the amount of the commod­

ity which is being produced in a unit of time may be called the equilibrium

amount, and the price at which it is being sold may be called the equilibrium price. It may be concluded that, as a general rule, the shorter the period which is being considered, the greater must be the share of attention which

is given to the influence of demand on value, and the longer the period,

the more important ^ill be the influence of cost of production on value.

65 Conclusion

It is hoped that the information about supply and demand will enlighten readers about the similarity of procedures carried out by the various econ­ omists. Many times a procedure being done at a particular time by one economist was unknown to another doing a similar procedure. The troubles encountered by some, because their efforts were not recognized by their native country, did not discourage them. The evolution of supply and demand did not come easily.

66 Bibliography

Books

Auspitz, Rudolf and Lieben, Richard. Untersuchungen uber die Theorie des

Preises. Liepzig: Duncker arid Humblot, 1889.

Cournot, Augustin. The Mathematical Principles of the Theory of Wealth.

Illinois: Richard D. Irwin, Inc., 1963.

Edgeworth, F. Y. Papers Relating to Political Economy. New York: Burt

Franklin, 1925.

Gossen, Herman Heinrich. Gesetze. Berlin: Braunschweit, Fr. Viewig

and Sohn, 1889.

Howey, R. S. The Rise of the Marginal Utility School. Ann Arbor:

University of Michigan Press, 1960.

Jevons, William Stanley, Letters and Journal. New York: The MacMillan

Company, 1886.

Jevons, William Stanley. The Theory of Political Economy. New York:

Kelley and Millman, Inc., 1957.

Marshall, Alfred. Principles of Economics. London: The MacMillan

Company, 1890.

Marshall, Alfred. The Present Position of Economics. London: The

MacMillan Company, 1885.

67 Marshall, Alfred. The Pure Theory of Domestic Values. London: The

MacMillan Company, 1879.

Menger, Carl. Principles of Economics. New York: Free Press, 1950.

The Graphical Representation of the Laws of Supply and Demand and Other

Essays on Political Economy. London: London School of Economics and

Political Science, 1931.

Walras, Leon, Elements. Illinois: Richard D. Irwin, Inc., 1954.

Articles and Periodicals

\ Jenkin, Fleeming. Trade Unions: '•How Far Legitimate," North British

Review, XLVIII, 1868.

Jevons, William Stanley. "Bried Account of a General Mathematical Theory

of Political Economy," Journal of the Royal Statistical Society,

XXIX, London, 1866.

68