THE MARGINALIST REVOLUTION

Expanding upon Mark Blaug’s reference to Thomas Kuhn’s The Structure of Scientific Revolutions with respect to both the Marginalist (p. 289) and the Keynsian Revolutions (Blaug 1996, 642), one might say that economic thought prior to Adam Smith was pre-paradigm. The puzzle-solving virtues of normal science were not available to the discipline. There was no ‘discipline’. There was no consensus. There was no shared window upon the world; there was no shared vocabulary. There was no metabolism.

Arguably, however, the Physiocrats’ vision of agriculture as the root of economic surplus with law as the instrument with which to cultivate a laissez faire, laissez passer economy to maximize growth of national wealth and well-being (Samuels 1961, 1962) was the first ‘scientific’ paradigm of economics. It, however, together with Quesnay’s Tableau Économique, was literally cut short by the French Revolution. Its legacy, its episteme, is two-fold. On the one hand, laisser faire is a critical element of the contemporary economic landscape. On the other hand, laissez passer has passed from sight, an example perhaps of Kuhnian loss (Fuller 2000) or perhaps a reflection of the “peculiarities of labour” (Blaug 1996, 282) or of the ideological belief that “if things do not work well, it is precisely because the ‘workers’ coalitions’ hinder the functioning of the market” (Screpanti & Zamagni 2005, 173). That is to say, labour, specifically organized labour, is not appreciated in economic thought after the Marginalist Revolution. The labour theory of value withers away. A volitional variable is inconsistent, a wild card, with the calculus of billiard ball mechanics that economics was about to become.

It was Adam Smith and his successors from Bentham (Marshall 1920, 628) to Ricardo to John Stuart Mill who made up the Classical School (or paradigm) of economics. For almost one hundred years, its vocabulary of aggregates and classes as well as distribution of shares of growing national wealth was the paradigm of economic thought. In this sense Marx is a ‘Classical’ economist. It was, however, Marx himself who named all those who came before as the ‘Classical School’.

In what follows, I will review the nature and the causes of the Marginalist Revolution from the stereoscopic perspective of Mark Blaug (1996) and Screpanti & Zamagni (2005) and then project them through my own eyes.

Nature of the Revolution

For Blaug (1996) the Marginalist Revolution involved three changes to the economic paradigm. These are: (a) the shift from the growth and evolution of the economy as the focus of attention to allocative efficiency; (b) the shift from descriptive to mathematical reasoning with a concentrated focus on the maximization principle; and, (c) resolution of the Classical disjunction between the theories of value and distribution on the basis of a single principle – scarcity relative to consumer wants, needs and desire. I will review each in turn.

a) Shift from Growth & Evolution of the Economy to Allocative Efficiency

According to Blaug, the Classical paradigm focused on growth and the evolution or progress of the economy as a whole while with the Marginalist Revolution:

“For the first time, economics truly became the science that studies the relationship between given ends and given scarce means that have alternative uses for the achievement of those ends” (Blaug 1996, 278).

In effect, the Classical model was concerned with the dynamics of growth, e.g., through increasing division and specialization of labour while the Marginalist or Neo-Classical paradigm was focused on comparative statics assuming fixed inputs and technology.

b) Mathematics & the Maximization Principle

“The dominant role of the concept of substitution at the margin in the new economics accounts for the sudden appearance of explicitly mathematical reasoning. Again, it is not utility theory but rather marginalism as such that gave mathematics a prominent role in economics after 1870.” 279

“The kind of mathematics that economists employed in this period was confined to calculus.” 280; “…The whole of neo-classical economics is nothing more than the spelling out of this principle in ever wider contexts, coupled with the demonstration that perfect competition does under certain conditions produce equimarginal allocations of expenditures and resources.” 280

C) Value & Distribution:

“Classical economics derived the prices of products from the so-called ‘natural’ rates of reward of the three factors of production. These were in turn explained by three separate theories…” 281

“In the ‘new economics’, distribution theory was treated as nothing more than an aspect of general value theory. Factors were rewarded because they were scarce relative to consumers’ wants for the products that the factors could produce.” 281

“The real claim of the new economics was that it broke down the departmentalised approach of Ricardian economics.” 281

“Classical economics, therefore, was forced to operate with two theories of value: the price of industrial goods depended solely upon conditions of supply, while the price of agricultural goods varied with the scale of output and hence the pattern of demand. This implied a fatal indeterminacy...” 281

“Ultimately, classical economics provided no determinate analysis of the conditions governing the supply of capital and never gave the state of demand a position coordinate with the conditions of supply.” 281

“Neo-classical theory achieved greater generality and economy of argument by explaining both factor and product prices on the basis of a single principle. The new theory encompassed both reproducible and nonreproducible goods, both constant and varying costs.” 282

HHC - ‘economy of argument’ consistent with Kuhn

HHC: note that in new model “the capital market presents unique problems because of the omnipresence of the time-discount factor. The ‘peculiarities of labour’ 282

(Screpanti & Zamagni 2005)

1. Shift from Growth & Evolution of the Economy to Allocative Efficiency under conditions of scarcity

“a reduction of interest in economic growth, the great theme of the economic theories of Smith, Ricardo, Marx, and all the classical economists. Attention, instead, was focused on the problem of the allocation of given resources.”

“the neoclassical theoretical system basically did not consider the problem of the evolution of industrial economies. The central argument of the theoretical research in this period was the study of a static equilibrium system, that is, an economy … (Fisher) ‘free to find the final levels of equilibrium determined by the factors available at any given moment of time’.

“identified a universally valid principle, one which was able, alone, to embrace the entire economic reality. As Robbins said: ‘Scarcity of means to satisfy ends of varying importance is an almost ubiquitous condition of human behaviour” 165

or, “Samuelson that there is a simple principle at the heart of all economic problems: a mathematical function to maximize under constraints.” 166

2. Acceptance of Utilitarianism

“acceptance of the utilitarian approach” 166

“Their marginalism gave credit to a special version of utilitarian philosophy, one for which human behaviour is exclusively reducible to rational calculation aimed at the maximization of utility. They considered this principle to be universally valid: alone, it would have allowed the understanding of the entire economic reality.” 166

3. Methodology

“The neoclassical method is based on the principle of the variation of proportions, the so-called ‘substitution principle’, a method which has no equivalent in classical economics” 166

“to search for the conditions under which the optimal alternative is chosen” 166

4. Economic Agents

- shift from collective agents and aggregates to the individual decision-maker

“With neoclassical thought methodological individualism definitely entered economic science: knowledge of the properties of a system comes from the knowledge of the properties of its elements.” 166

5. Historicity of Economic Laws

“Economics was likened to the natural sciences, physics in particular, and economic laws [finally assumed that absolute and objective characteristic of natural laws. The pervasiveness of the problem posed by the neoclassical economists, the problem of scarcity, establishes the universal validity of the economic laws. But for this to make sense, it is necessary to remove social relations from the field of economics, exorcizing them as a superstition, a waste of time, a subject not in line with the new scientific achievements. With the marginalist revolution also originated that reductionist project of economics which has marked all the successive neoclassical thought, a project according to which economics has no other field of research than technical relationships (the relationships between man and nature). Thus, while individualistic reductionism had led to the elimination of social classes, the anti-historicist reduction led to the elimination of social relations - which obviously meant that the study of their change also lost importance.] 166-7

- with respect to 'natural laws' and economics please see:

Taylor, O. H., Economics and the Idea of Natural Laws, Quarterly Journal of Economics, 44 (1), Nov. 1929, 1-39.

Taylor, O. H., Economics and the Idea of Jus Naturale, Quarterly Journal of Economic, 44 (2), Feb. 1930, 205-241.

6. Substitution for the objective theory of value of a subjective one

“An immediate and important consequence of the neoclassical approach in regard to the question of value is that the theory of the distribution of income becomes a special case of the theory of value, a problem of determining the prices of the services of the productive factors rather than of sharing out income among the social classes.” 167

Its Causes

(Blaug 1996)

1. an autonomous intellectual development within the discipline of economics

“most plausible single explanation … It points to the bankruptcy and disintegration of classical economics in the 1850s and 1860s, to the virtual abandonment of the labour theory of value in Mill’s Principles and, in particular, to Mill’s recantation of the wages fund doctrine in the late 1860s.” 282; HHC variation on anomalies

HHC: Blaug argues applicable in England but not on continent

2. the product of philosophical currents

“Some authors have been struck by the renaissance of Kantian philosophy somewhere around the middle of the century, beginning in Germany and spreading out over the Continent. ‘Back to introspection and sense-impression’ was the watchword of this philosophical trend.” 284

HHC – Blaug argues no for Walras & Menger

“subjective value theory is the product of a Catholic culture, whereas the labour theory of value naturally emanates from a Protestant outlook on the world.” 284

HHC – rationale of why took so long in England; Blaug points out contradictions

“Mirowski’s controversial study More Heat Than Light (1989), which argues that the whole of neo-classical economics ever since the marginal revolution has been an attempt to create an economics that emulates all the essential features of nineteenth-century physics” 284

HHC – Blaug argues ‘no’

3. the product of definite institutional changes in the economy

“In a book entitled Economic Theory of the Leisure Class (1927), Bukharin explained the marginal revolution in ‘relativist’ terms on the basis of two very questionable assumptions: (1) ‘the psychology of the consumer is characteristic of the rentier’, and (2) marginal utility theory is ‘the ideology of the bourgeoisie who has already been eliminated from the process of production’.” 285

4. a counterblast to socialism, particularly to Marxism

HHC – Blaug argues dates of Das Kapital versus the trio; does not consider continental socialism and the revolutions of 1830, 1848 and the Paris Commune of 1870; does not argue the shift to individualism as fundamental ideological difference

HHC – was a 2^nd generation revolution following Kuhn’s dying off thesis

(Screpanti & Zamagni 2005)

“The correct way to pose the problem of the historical sense of the marginalist revolution seems to be this: it is not the problem of finding the reasons why the fundamental works of the three great neoclassical economists were published in the early 1870s, but rather of understanding why, in a period of a few years, the message contained in those works was accepted as the ‘New Testament’ by the majority of the economists who counted.” 170

1. Internal

“inability of the classical orthodoxy to solve a series of theoretical problems” 170 [HHC: anomalies]

- labour theory of value, theory of value based on the cost of production, theory of income distribution and theory of wages (Malthus – subsistence; Ricardo – wage fund) 171

2. External

“Ricardian theory had been used for critical purposes by the socialist economists. In particular, the theory of surplus had been used as a foundation for a theory of capitalist exploitation.” 171

“In order that the criticisms of socialism, and of Marxism in particular, should not seem too ideological, it was necessary to focus on their analytic bases. But these were the same as those of classical economic theory. It was necessary, therefore, to ‘re-invent’ economic science, reconstructing it on a foundation which would allow the deletion of the concepts themselves of ‘social class’, ‘labour power’, ‘capitalism’, ‘exploitation’, ‘surplus’, etc. from the body of the science. The theory of marginal utility provided the solution. Moreover, it seemed that it would permit the demonstration that an almost perfect kind of social organization would be realized in a competitive economy; a kind of organization in which the market rules would allow an optimum allocation to be reached and, with it, the harmony of interests and the maximization of individual objectives.” 172

“marginalism, while presenting itself as an alternative to the classical approach at the level of economic theory, preserved the basic philosophy of the latter on at least one essential question… laissez-faire” 173

“We should not be surprised, therefore, by the great success of a theory proving that the market, far from being anarchical, is the best allocator of resources, and that, if things do not work well, it is precisely because the ‘workers’ coalitions’ hinder the functioning of the market.” 173

[HHC: no mention of the Conspiracy Act and liberation of labour and why]

Its Significance

a) Birth of the Social Sciences

The modern social sciences arose out of two forces. First, the cult of the genius found expression in two individuals (excluding Marx and Freud) – Adam Smith (1723-1790) and Auguste Comte (1798-1857). Smith gave birth to economics out of moral philosophy. Writing in 1969, economist Kenneth Boulding could observe:

Adam Smith, who has strong claim to being both the Adam and the Smith of systematic economics, was a professor of moral philosophy and it was at that forge that economics was made. Even when I was a student, economics was still part of the moral sciences tripos at Cambridge University. It can claim to be a moral science, therefore, from its origin, if for no other reason. (Boulding 1969)

Comte gave birth to sociology by way of the natural sciences and in the process spawned Positivism. This, in turn, led to the Logical Positivists and the Vienna Circle of the twentieth century in the philosophy of science with significant epistemological consequences. For Comte, all sciences pass through a theological then metaphysical stage before entering a final positive or ‘mathematical’ stage. In the case of both Smith and Comte, it took until the last quarter of the 19th century before the university formally admitted economics and then sociology.

The second force leading to the emergence of the modern social sciences was the apparent success of the experimental instrumental sciences and the accelerating progress of technology. In Smith’s case this connection with the natural sciences is made in his early essay of about 1750: Principles which lead and direct Philosophical Enquiries, illustrated by the History of Astronomy (Thomson 1965, 213). This success also led the poet Coleridge to ask the philosopher of science, William Whewell, to rename natural philosophers. In 1833, he did so, coining the term ‘scientist’ (Snyder 2000).

There were, however, two contrary tendencies. The first was towards a unified single social science, e.g., the sociology of Comte. The second was towards specialization. In the end, the second triumphed. Today the Social Sciences breakout into a very wide range of disciplines and sub-disciplines funded by the Social Sciences & Humanities Research Council of Canada including: administrative studies, archaeology, communications & journalism, criminology, demographics, economics, education, geography, industrial relations, information science, law, library science, political science, psycholinguistics, psychology, recreology & physical education, science policy, social work, sociology and urban & regional studies (Chartrand 1980).

The limited success of the social sciences in generating new knowledge compared to the natural & engineering sciences can be attributed to the absence of the Pythagorean, Instrumentation and Puzzle-Solving Effects noted above. First, while there may be some relationship, there is no apparent cognate relationship between mathematics and human behaviour. Second, social scientific evidence – in its collection, compilation and analysis - is subject to intermediation by human subjects all along the evidence trail, limiting objectivity. Third, with the possible pedagogic exception of economics and its Standard Model, there is no generally accepted paradigm in any social science discipline corresponding to ‘normal science’ that, according to Kuhn, is required for efficient puzzle-solving.

Nonetheless, the desire to make economics a ‘science’ first in the Newtonian fashion and then in the general Positivist and mathematical fashion of Comte lays at the roots of the discipline and the Marginalist Revolution arguably realized that desire. There were no more social classes, no more history and custom, no ‘qualitative’ elements as in the Classical School. With the Marginalist Revolution or what Thortsein Veblen called ‘the Neo-Classical School’, economics arguably attained to Comte's final stage of its development - all math, all calculation and reason, all atomistic elements governed by the universal law of choice under conditions of scarcity.

b) Atomic Economics: Marriage of Felicitous & Newtonian Calculus

While Blaug emphasizes the importance of ‘marginal’ and its benefits to economic analytics he explicitly downplays ‘utility’ as defined by Bentham as the unit measure of pleasure-pain corresponding to the atom in physics. The 'utile' is in fact the elemental building block of human knowing and being and subject to a ‘felictous calculus’ according to Bentham. Through the Marginalist Revolution his felicitous calculus married the mechanical calculus of Newtonian motion - all atoms and mechanics. I will first explain Bentham's felicitous calculus and then the origin of Newtonian calculus.

i - Felicitous Calculus & 'Me-ism’

According to Marshall (1920, 628), the most influential successor of Adam Smith (1723-1790) was not an economist but rather Jeremy Bentham (1748-1832), a radical reformer who formalized Utilitarianism as a comprehensive philosophy (Clough 1964, 605). Bentham’s epistemology is based on the atomic materialism of Epicurus (341-271 B.C.E.). He acquired this view from the De Rerum Natura (On the Nature of Things) by the Roman Epicurean poet Lucretius (99-55 B.C.E.), whose work, unlike those of Epicurus, survived the fall of the Roman Empire and the censorial fires of the Church.

Like Epicurus, Bentham believed that physical sensation was the foundation of all knowledge. Knowledge, including preconceptions such as ‘body,’ ‘person,’ ‘usefulness,’ and ‘truth’, form in the material brain as the result of repeated sense-experience of similar objects. Ideas are formed by analogy between or compounding such basic concepts (O’Keefe 2001).

For Bentham sense experiences involved a unit of pleasure and pain called the ‘utile’ from which the philosophical school of thought known as ‘Utilitarianism’ emerged. Utiles would eventually, according to Bentham, be subject to physical measurement and he proposed a ‘felicitous calculus’ of human happiness. One corollary of the utile, however, is that customs, traditions and taste cease to be independent variables. Compulsory standard education would ensure, Bentham believed, that everyone’s customs, traditions and taste would eventually become identical and therefore irrelevant.

Even aesthetics shrank to analysis of pleasurable sensations evoked by a work of art. A thing is beautiful because it pleases, it does not please because it is beautiful (Schumpeter 1954, 126-7). This, combined with Benthamite emphasis on functionality, meant application of artistic effort was “irrational”. In industrial design and architecture, this aesthetic reached its logical conclusion in the aphorism form follows function, the Bauhaus and the glass and steel towers of the International School of Architecture (Hughes 1981).

In the hands of Francis Ysidro Edgeworth (1845-1926) Bentham’s calculus was reduced to geometric expression subject to mathematical proof in his Mathematical Psychics (Edgeworth 1881). As absorbed and developed by Marshall and his colleagues at Cambridge, this geometry and its related calculus permitted the erection of what became the Standard Model in economics.

The budget (income and prices) constrains maximization of pleasure by the individual consumer yielding a demand curve while the cost constrained profit maximization of the firm yields a supply curve. When put together in the ‘Marshallian scissors’ of supply and demand, a determinant geometric, mathematically precise equilibrium emerges. It is an ideology framed by an ‘X’ - the intersection of market supply and demand curves - marking the spot where human happiness is to be found, where, at one and the same time, consumers maximize their self-interest and producers their profits; everyone is happy here - if one accepts certain very strict assumptions.

Joseph Schumpeter called Bentham’s philosophy “the shallowest of all conceivable philosophies of life that stands indeed in a position of irreconcilable antagonism to the rest of them” (Schumpeter 1954, 133). John Maynard Keynes went further identifying its dangerous ideological flaws:

I do now regard that as the worm which has been gnawing at the insides of modern civilization and is responsible for its present moral decay. We used to regard the Christians as the enemy, because they appeared as the representatives of tradition, convention and hocus-pocus. In truth, it was the Benthamite calculus, based on an over-valuation of the economic criterion, which was destroying the quality of the popular Ideal. Moreover, it was this escape from Bentham, ... which has served to protect the whole lot of us from the final reductio ad absurdum of Benthamism known as Marxism. (Keynes 1949, 96-7)

In this regard it is important to note that maximizing pleasure was restrained by Bentham’s tenets of Ethical Hedonism, which is what he called his philosophy. The ethic, beyond concern with the moral value of work, also involved social inhibitions against conspicuous consumption (Veblen 1899). As noted by Daniel Bell (1976, 20-22), however, with the collapse of the Protestant Ethic after the Industrial Revolution, only hedonism remains - in all its unrestrained, irrational incarnations. Without a generally accepted moral code, the law became the accepted social mechanism to moderate individual pleasure-seeking. In fact, the Benthamite tradition in crime and punishment continues to guide both legal and economic research, e.g. Bentham’s famous and seemingly plausible dictum “the more deficient in certainty a punishment is, the severer it should be” (Becker 1968). Arguably, Bentham’s ethical hedonism has given way to what can simply be called ‘Me-ism’. Everything is about ‘Me’ and my pleasure. Anything that inhibits Me from gaining my pleasure is to be eliminated.

There is, of course, continuing disquiet around the world about the last ideology standing after the end of the Market/Marx Wars that reduces human choice to atomistic calculation of profit and loss, not just in the marketplace, but in all human activities ranging from marriage and child rearing to art, education and culture. It is an ideology framed by the ‘X’ of intersecting market supply and demand curves marking the spot where human happiness is to be found.

ii - Newtonian Calculus

It is the innovation of the concept of ‘marginal’ (rather than its invention) in the 1870s that allowed felicitous and Newtonian calculus to marry begetting the Marginalist Revolution. In the 1670s, what was known as ‘the geometry of infinitesimals’, i.e., geometric exhaustion, achieved a breakthrough with the simultaneous invention of ‘the calculus’, independently by Newton (1643-1727) and Leibniz (1646-1716). Calculus provided a true mathematics of motion – changing spatial position through time expressed in algebraic rather than geometric terms. This breakthrough was then extended by Newton in his three laws of motion which arguably served as the foundation stone of modern natural science. By the middle of the 18th century, in France, ‘scientific’ engineering emerged with a requirement for formal training in calculus (Kranakis 1989, 18).

It should be noted that it was Leibniz’s notation and terminology that actually triumphed. Thus what is today is called a ‘derivative’ was for Newton a ‘fluxion’ meaning “the rate or proportion at which a flowing or varying quantity increases its magnitude” (OED fluxion, 5). He also used the expression “corresponding fluxion” or “rates at which two interdependent quantities may change simultaneously”

With respect to the Newtonian as opposed to Leibnizean calculus, it is interesting and perhaps revealing that in 1936, Sotheby's in London auctioned off a cache of writings by Newton - journals and personal notebooks deemed of no scientific value. The winning bidder was John Maynard Keynes who, after perusing the papers, noted on the tercentenary of Newton's birth, that Newton, the supreme figure of seventeenth century science, was not the first of the Enlightenment but rather “the Last of the Magicians” and “the last wonder-child to whom the Magi could do sincere and appropriate homage.” (quoted in Thorndike 1953, 704). It is also interesting that Shackle refers to the Keynesian process of estimating the marginal efficiency of capital as “psychic alchemy” perhaps recognizing Keynes’ interest in Newton’s hidden works (Shackle 1967, 129). What was the fascination?

c) Chemical Economics: Equilibrium as Chemistry

A body is said to be in stable equilibrium, when it returns to its original position after being disturbed; in unstable when it continues to move in the direction given to it by the disturbing force; in neutral, when it remains stationary in its new position. (OED, equilibrium, 1a)

- Boyle (William Petty) first to use the word in English in New experiments physico-mechanicall 1660

- first use in economics appears to be by J.S. Mill in 1860 Considerations on representative government 1861 (1865) “A government so situated is in the condition called in mechanics unstable equilibrium, like a thing balanced on its smaller end.”

OED ADDITIONS SERIES 1993

equilibrium, n.

Add: [2.] d. spec. in Econ. A situation in which supply and demand are matched and prices stable.

1871 W. S. JEVONS Theory of Pol. Econ. iv. 109 In practice, no market ever long fulfils the theoretical conditions of equilibrium, because, from the various accidents of life and business, there are sure to be many people every day compelled to sell or having sudden strong inducements to buy. 1911 Encycl. Brit. XVII. 731/2 Supposing equilibrium to have been attained in a given market,..the price of the commodity dealt in, in the market, will remain practically unchanged during that period. 1936 J. M. KEYNES Gen. Theory Employment I. iii. 26 Effective demand, instead of having a unique equilibrium value, is an infinite range of values. 1953 J. L. HANSON Textbk. Econ. x. 166 Both supply and demand vary with price, and so at the equilibrium price these two forces can be balanced. 1976 Economist 16 Oct. 21/3 So there is obviously a connection between balance of payments equilibrium and money market equilibrium, although the two are not the same. 1984 F. HAHN (title) Equilibrium and macroeconomics.

d) Democratic Economics: Dénouement of the Republican Revolution

- dollar democracy

e) Darwinian Economics

- survivability of the Standard Model in post-genomic era - gestalt knowing

- cum Kauffman S.A.

Investigations, Chapter 9: The Persistently Innovative Econosphere, Oxford University Press, 2000, 211-241.

- cum Dutton's 'Darwinian Aesthetics' Hardwired to seek beauty
Denis Dutton, January 13, 2006

http://www.theaustralian.news.com.au/common/story_page/0,5744,17805214%255E16947,00.html

- cum Schlicht, E., On Custom in the Economy, Introduction, Oxford Clarendon Press, 1998, 1-8.

Schlicht, E., On Custom in the Economy, Chapter 14: The Division of Labour , Oxford Clarendon Press, 1998, 242-265.

- cum Loasby

Loasby, B.J., “Hypothesis and Paradigm in the Theory of the Firm”, The Economic Journal, 81 (324), Dec., 1971, 863-885.

Loasby, B.J., “The organisation of capabilities”, Journal of Economic Behavior & Organization, 35, 1998, 139-160.

Loasby, B.J., Options and Evolution, DRUID Summer Conference 2002 , Helsingør 6-8 June.

Loasby, B.J., The Innovative Mind, DRUID Summer Conference 2003 on Creating, Sharing and Transferring Knowledge, The role of Geography, Institutions and Organizations., Copenhagen June 12-14, 2003.