Law and Justice – Prices and Values – 23.3 Jevons and Marginal Utility

Law and Justice – Prices and Values – 23.3 Jevons and Marginal Utility


>>>>Adam Smith and Karl Marx had both been
flummoxed when they turned to the problem of prices and tried to describe how something
acquired the price that it had, and how that related to something’s value. In fact the
discussion of prices and value make up some of the worst passages in the “Wealth of Nations”,
as we see one of the great economists sputter and strain to try and explain something that
he has not fully understood. The same with Marx, Marx spends truly decades trying to
explain how prices work and in the end his explanations are complete nonsense. So this
truly giant problem that is essential for a theory of justice would only be solved in
the later 19th century. It would first be resolved by a young British scholar, then
only 27 years old: William Stanley Jevons. The age of 27 he had applied himself to the
problems of economics and he had profoundly studied Jeremy Bentham, and if you read his
text he describes his debt to Bentham and his belief that there is only utility and
that it is only comprised of pleasure and pain. And so, there’s a direct line from Bentham’s
thinking, from Bentham’s utilitarianism, to the economic work of Jevons. Jevons is the
discoverer of what we can call marginal utility. And it is the discovery of marginal utility
that is at the base of what is called the marginal revolution, and in fact two other
economists besides Jevons on the continent simultaneously discover marginal utility.
And so it’s actually a breakthrough that happens in multiple places at once, although Jevons
is the earliest discoverer and as a quite young thinker, comes to a theory of marginal
utility. And it is the great breakthrough that leads to the breakdown of classical value
theory and the rise of neoclassical economics. Jevons, when he was a boy, said that a book
had been read to him that was written by an Irish Archbishop that contained an argument
against the value theory of labor. It was a book on economics for the ordinary person,
it was economics made easy, and it had some profound arguments. He said that he remembered
a passage in which it was said that labor doesn’t cause the value of something. Value
causes people to labor, and the example that was in this book was of two fishermen who
took out two different boats onto a body of water to go fishing and they worked equally
hard, and one of them got lucky and pulled in a thousand fish and one of them was unlucky
and pulled in one little fish. So they put in the same amount of labor, but the one fish
wasn’t a thousand times more valuable than the others in fact the value of a fish would
be equal because it had nothing to do with the amount of labor that went into it. And
so Jevons had absorbed this idea. He said that sometimes, a fish will jump in to your
boat. He read this in the same book, but there was no labor that went into catching the fish.
But guess what? It would sell for whatever the price of a fish was, because it had nothing
to do with the amount of labor that went into it. He said imagine that you’re eating oysters
and that you start to eat an oyster and you see a pearl there. That pearl is going be
valuable, but it has nothing to do with the amount of work that you did to eat the oyster.
So Jevons had already as a boy absorbed this idea that labor wasn’t the cause of value,
but that instead value was what caused people to labor. Why do people go out and work hard
to catch fish? Because they’re valuable, because they will sell. And so already he had the
germ of the idea that labor isn’t the source of value, and he would profoundly deepen the
idea that usefulness was the ground of value. In his breakthrough text he said utility,
the usefulness of something put in this terms of Bentham, the utility of something is not
an intrinsic quality. That’s a profound and philosophical statement– that the utility
of something isn’t an intrinsic quality, that it doesn’t inhere objectively or naturally
in the usefulness of something. Instead, he says, the utility of something lies in the
addition that it makes to a person’s happiness. Simple propositions with the profoundest consequences,
utility doesn’t lie in some intrinsic quality of a thing, and utility doesn’t exist proportionally
to the quantity of a thing. Utility exists in the– a value that is added, in the additional
happiness that’s produced in an additional quantity of a thing. So think about what Jevons
is saying. Think about it in regard to the water and diamond paradox that Smith had never
been able to resolve completely. Utility is not an intrinsic property of a thing. Utility
isn’t proportional to the quantity of a thing. So water isn’t as valuable to us, no matter
how much of it we have. Instead he says, the utility of something is the additional happiness
we get from the additional quantity of a thing. So why is water not expensive. Why does water
cost so little? Because they’re so much of it. If you had no water and you were desperate
for it to survive, and you needed the first quantity of water, you needed that first drink
that you had had in days, would you rather that or a diamond? Imagine that you’ve been
out in the desert and you’re parched and you’re on the brink of death and you come back, and
you have five dollars and there’s someone with a stand that is selling a five dollar
bottle of water and a five dollar diamond. On the brink of death, you’re, you’re in the
middle of the desert. What are you going to pay the five dollars for? The water. Why?
Because the additional happiness you get from that water is what matters. This is the idea
of marginal utility. It’s a profound idea that will ultimately come to explain how markets
work and how prices work. It allows Jevons to explain what it is that a price really
represents, which is an equilibrium between supply and demand. And so Jevons’ ideas allow
him to explain a price in terms of the equilibrium between supply and demand. A supply curve
says that the higher the price of a good, the more of it that will be supplied, and
a demand curve says that the lower the price of something, the more that people will want.
And so prices are the equilibrium of supply and demand, of scarcity, that is of how rare
something is and how much it costs to produce more of it, and demand. That is, how much
people want things, people’s preferences. And so Jevons explains prices in terms of
the marginal utility the additional amount of happiness of pleasure, because he will
use Bentham’s terms, that people get from an additional quantity something. So the reason
why water is cheap is because you already have plenty of it and if you drink one glass
of water when you walk out of a desert and you’re on the brink of death, that will add
greatly to your happiness. But if you drink a fiftieth glass of water a day, that will
not add a great amount to your happiness. And that is the is the basic principle that
Jevons comes to explain in his profoundly insightful writings in the 1860s and 1870s,
and the idea of marginal utility and marginal costs would foster what is called the marginal
revolution: a revolution in the way that economics was conceived and the power of economics to
explain exchanges. It’s an advance on the theories of Smith and Marx, and one that has
profound implications for a theory of justice.

4 Comments

  1. Isone Somperk says:

    great video

  2. Wade Alexander says:

    thank you!

  3. Mouna ALAAZ says:

    I like the quality of the content, made me see clearly what I already know. Thanks for the effort.

  4. Na Yong Teck says:

    Great Video, originally i thought i understood jovens theory, but now i understand even deeper. Thank you for the wonderful video

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