Marginalism Guide, Meaning , Facts, Information and Description

In economics, marginalism is the belief that economic value is set by the consumer's marginal utility. The origins of marginalism can be seen in David Ricardo's theory of land-rent, in which the price of land depends on the productivity of the least productive land in cultivation, i.e., the marginal land. Thus, all else equal, as the demand for agricultural crops increases, the price of land rises as farmers move to less productive land. Modern neoclassical economics has generalized that theory to develop an understanding of all of supply and demand.

The marginal theory of value was first broached in the 1870s, and it revolutionised economics. An earlier theory (embraced by Ricardo for most products) holds that the value of an item is a reflection of the work and resources devoted to making it, or the cost-of-production theory of value. In long-run equilibrium, prices reflect costs per unit produced and a rate of profit that is equalized between sectors. Some economists, particularly many classical economists still believe this. Most Marxist economists also accept a version of the earlier theory, the labor theory of value.

In one interpretation, neo-classical economists accepted the marginal utility explanation for value and grafted this insight on to the classical economics of cost-determined prices (to explain demand and supply, respectively). Although the scarcity of factors of production were still thought to be important, customer demand and the marginal benefits that they would obtain from a good is seen as the driver of the whole process and the ultimate source of economic value.

The Austrian School accepted marginalism more completely. They made a clear break from the factor-input theories of value. They used marginal utility as a starting point: rather than simply being given, the supply of labor, for example, reflects the subjective marginal disutility of work. The Austrian economist Eugen von Böhm-Bawerk gave probably the most memorable description of the marginal theory of value, one often used by economics textbooks. Loosely translated it is:

A pioneer farmer had five sacks of grain, with no way of selling them or buying more. He had five possible uses - as basic feed for himself, food to build strength, food for his chickens for dietary variation, an ingredient for making whisky and feed for his parrots to amuse him. Then the farmer lost one sack of grain. Instead of reducing every activity by a fifth, the farmer simply starved the parrots as they were of less utility than the other four uses, in other words they were on the margin. And it is on the margin, and not with a view to the big picture, that we make economic decisions.

Karl Marx died before marginalism took hold of the economics profession and neoclassical economics replace classical political economy. Thus the task of critiquing this theory fell to his followers, most of whom instead hold to the labor theory of value. Perhaps the most important critique is that marginalism looks at the capitalist system totally from the point of view of its individual participants and thus falls for the ideological mirage termed "commodity fetishism" or the "illusions created by competition." Thus, they miss the social-structural nature of capitalism, how the capitalists dominate the working class and exploit them. Though individual economic visions and decision-making play a role in Marx's theory, he thought that it was necessary to understand the totality of capitalist social relations (in volume I of his Das Kapital) before it possible to understand this consciousness and action (in volume III of that book). Thus, some argue that on one level there is no conflict between marginalism and Marxism: one could employ a marginalist theory of supply and demand within the context of a "big picture" understanding of capitalist exploitation of labor.

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