Lecture4_Marginalist_revolution_critique_utilitarianism

The Marginalist Revolution and Critique of Utilitarianism

Instructor: Louison Cahen-FourotCourse: SIB, Spring 2025Date: 25/02/2025Institute: Institute of Social Sciences and Business (ISE)

Outline of Key Topics

• The market as a socially constructed institution

• The marginalist revolution's impact on Political Economy

• Core neoclassical theory

• Transition from labor theory of value to utility theory of value

• Concepts of marginal utility, productivity, cost, and benefit

• Profit maximization and market equilibrium

• Assumptions of core neoclassical theory

• Group exercise on solving supply and demand problems

• Critique of utilitarianism and utility theory of value

The Market: A Socially Constructed Institution

Definition of a Market:A market is an institution that facilitates transactions between buyers and sellers, enabling the exchange of goods, services, or assets for currency. It encompasses various settings, from traditional marketplaces to modern online platforms.

Transaction:A transaction involves a mutual agreement to exchange goods or services, which is typically mediated by monetary payment. This exchange creates value and is fundamental to economic activity.

Social Construction Factors:

• Property Rights: Legal frameworks that define ownership and the rights to use resources can significantly impact market functionality and efficiency.

• Laws: The legal system plays a crucial role in building trust in the market by providing enforceable contracts and protecting property rights, essential for facilitating capital aggregation.

• Competition: Healthy competition, characterized by the absence of coercion and monopolistic practices, is vital for the efficiency and innovation of markets.

Infrastructure Supporting Markets

• Physical Infrastructure: Essential elements like roads, railways, and buildings provide the necessary foundation for facilitating economic interactions and logistics.

• Legal Infrastructure: A robust legal framework governing market activities ensures compliance, fairness, and predictability in business operations.

• Informational Infrastructure: Access to reliable information through various channels (media, internet, and market analysis) enables informed decision-making among consumers and producers alike.

• Financial Infrastructure: A stable currency, an efficient banking system, and effective payment mechanisms are crucial for market transactions and economic stability.

Historical Context of Markets

Markets historically evolved alongside the formation of states; societies lacking markets typically did not possess structured governance or formalized state institutions.

The Marginalist Revolution

Marginalism Definition:Marginalism focuses on the examination of incremental changes in economics, notably how price changes affect supply and demand dynamics.

Shift to Economics:The marginalist revolution marked a significant transition where economists sought precision in Political Economy through mathematical models and logical reasoning derived from natural sciences. Key figures like Walras, Jevons, and Menger endeavored to formulate universal laws governing economic behaviors, much like physical sciences.

Marginal Utility:The concept of marginal utility emerged as a pivotal means of determining value, shifting the discourse from labor-based measures to utility-centered approaches, emphasizing individual consumer satisfaction as the basis for value assessment.

Core Neoclassical Theory

Break from Labor Theory of Value:The labor theory of value, which posited that the value of a good is determined by the labor invested in its production, was largely replaced by utility theory due to the evolving social and economic conditions of capitalists needing justification for their profit motives.

Utility Theory:Utility theory became prominent as it allowed for a more dynamic understanding of value, where market forces dictated valuation based on subjective consumer preferences and production costs, fundamentally altering how economic transactions were viewed.

Subjective Theory of Value:Value is perceived as a personal reflection of utility to individual consumers, establishing that market prices arise from the collective desire for satisfaction among consumers. The principle of diminishing marginal utility implies that the satisfaction derived from consuming additional units of a good decreases with each unit.

Marginal Productivity and Costs

• Marginal Productivity:Marginal productivity refers to the additional output generated from employing one more unit of a given factor of production. Initially, specialization can enhance productivity, but this often leads to diminishing returns, where further inputs yield progressively less output.

• Marginal Cost:Marginal cost is defined as the expense of producing one additional unit of a good, closely relating to supply fluctuations. The marginal cost curve typically exhibits a U-shape; it decreases during periods of specialization but increases due to the law of diminishing returns as more units are produced.

• Marginal Benefit:This term denotes the additional benefit received from consuming or producing one more unit. As consumption increases, the marginal benefit assumedly decreases due to the diminishing utility principle.

Market Equilibrium and Profit Maximization

Equilibrium Definition:Market equilibrium is achieved when the quantity supplied equals the quantity demanded, balancing marginal utility with marginal cost. This state is dynamic and influenced by changes in market conditions, including consumer preferences and producer costs.

Conditions for Profit Maximization:Profit maximization occurs at the output level where marginal revenue equals marginal cost. In perfectly competitive markets, firms adopt pricing strategies that align with market equilibrium to maintain profitability while responding to consumer demand changes.

Assumptions of Core Neoclassical Theory

• Consumers are rational utility maximizers who are knowledgeable about pricing and behave predictably in economic scenarios.

• Market operations are predicated on assumptions of perfect competition, including homogeneous products, where no single firm can unduly influence prices, along with barriers to entry that allow seamless competition among market players.

Critique of Theory

Critique of Utilitarianism and Core Neoclassical Theory:Critics emphasize the unrealistic portrayal of consumer behavior that assumes rationality and self-interest; cognitive biases and emotional factors often significantly disrupt economic decision-making.Ideological Interpretations:Utility theory can be interpreted through various ideological lenses, accommodating both socialist and liberal viewpoints, thereby revealing conflicts surrounding wealth distribution versus individual choice.

Revision and Class Structure

A comprehensive review of critical moments and concepts will be held in preparation for the next class, which will focus on the Depression and Modern Macroeconomics.