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| marginalism | |
|---|---|
| Name | Marginalism |
| Discipline | Economics |
| Originated | 19th century |
| Main influences | Adam Smith, David Ricardo, Jean-Baptiste Say |
| Notable people | William Stanley Jevons, Carl Menger, Léon Walras, Alfred Marshall, Knut Wicksell |
| Related concepts | Utility theory, General equilibrium theory, Price theory |
marginalism Marginalism is an economic perspective that explains value and choice by reference to incremental changes. It emerged in the 19th century through debates among classical economics figures and the founders of the marginal revolution, and it underpins much modern microeconomics, welfare economics, and price theory.
Marginalism analyzes decisions at the margin—how a small change affects outcomes—linking concepts such as marginal utility, marginal cost, and marginal productivity to market prices and allocation. Prominent founders like William Stanley Jevons, Carl Menger, and Léon Walras framed marginalist reasoning in contrast to predecessors including Adam Smith, David Ricardo, and Jean-Baptiste Say. The approach informed institutions such as the Stock Exchange and regulatory debates in jurisdictions influenced by thinkers like John Stuart Mill and Alfred Marshall. Marginalist tools appear in texts by Vilfredo Pareto, Frank Knight, Joseph Schumpeter, and later in formalizations by Paul Samuelson, Kenneth Arrow, and Gerard Debreu.
The marginalist shift—often called the marginal revolution—rose in reaction to the labor theory of value advocated by Karl Marx and earlier classical writers. Jevons published work contemporary with Menger and Walras, each interacting with intellectual contexts including debates at universities like University of Cambridge, University of Vienna, and King's College London. Marginalist ideas spread through journals and societies associated with figures such as Alfred Marshall at University of Cambridge, John Bates Clark in the United States, and policy circles linked to Otto von Bismarck-era administrations. Subsequent developments occurred through intersections with marginal productivity theory advanced by Eugen von Böhm-Bawerk and institutional critiques by Thorstein Veblen. The 20th century saw rigorous formalization by scholars at institutions like Massachusetts Institute of Technology, University of Chicago, and Princeton University, shaping schools associated with Chicago school economists and Cowles Commission research.
Central principles include marginal utility, marginal cost, and marginal rate of substitution, which explain individual choice under constraints modeled with tools from calculus and optimization theory. Marginal productivity links factor payments to incremental contributions as discussed by John Bates Clark and debated by Sidney Webb and Beatrice Webb in policy circles. Equilibrium concepts derived from marginalist reasoning appear in general equilibrium theory by Léon Walras and efficiency criteria formalized by Vilfredo Pareto and later generalized in work by Kenneth Arrow and Gerard Debreu. Price formation mechanisms influenced market institutions such as exchanges and regulatory bodies like Federal Reserve System and Bank of England.
Marginalist ideas were given mathematical expression in demand and supply functions, utility maximization, and cost minimization problems using methods related to Lagrange multipliers and differential calculus developed alongside contributions from mathematicians at École Polytechnique and universities including Heidelberg University and University of Göttingen. Applications appear across fields influenced by marginalist models: industrial organization analyses in studies connected to Herfindahl-Hirschman Index debates, labor economics referencing marginal productivity theory in policy at ministries and unions, public finance guided by benefit-cost analysis used by agencies such as World Bank and International Monetary Fund, and welfare assessments using criteria from Pareto optimality and social choice theorems by Kenneth Arrow and Amartya Sen. Dynamic extensions inform growth models linked to work by Robert Solow, Trevor Swan, and real-business-cycle approaches from scholars at Princeton University and University of Chicago.
Critiques of marginalism emerged from proponents of Karl Marx's value theory, institutionalists like Thorstein Veblen, and heterodox schools including Austrian School dissenters and Keynesian economics figures such as John Maynard Keynes who emphasized macroeconomic aggregates and liquidity preferences. Methodological disputes involved realism of assumptions debated by Milton Friedman and empirical critiques associated with Paul Samuelson's revealed preference approach. Political economists including David Ricardo's followers and policy-oriented critics at institutions like Trade Union Congress questioned distributional implications, while philosophers such as John Rawls and Amartya Sen challenged welfare interpretations. Empirical anomalies—non-convexities, externalities, and market power—prompted responses invoking general equilibrium theory refinements, mechanism design by Leonid Hurwicz and Eric Maskin, and behavioral critiques by researchers at University of Chicago and Harvard University including Daniel Kahneman and Amos Tversky.
Marginalism shaped mainstream curricula at universities including University of Cambridge, Harvard University, and London School of Economics, influenced central banking frameworks at Federal Reserve System and European Central Bank, and informed policy instruments used by organizations like International Monetary Fund and World Bank. Its emphasis on marginal incentives guided regulatory analysis, taxation debates involving Laffer Curve discourse, and cost–benefit standards employed by development agencies and ministries of finance. Prominent policymakers influenced by marginalist training include alumni of Johns Hopkins University and Yale University who led institutions such as International Monetary Fund and World Bank.
Extensions and related frameworks include general equilibrium theory, welfare economics, price theory, marginal productivity theory, and behavioral modifications developed in schools tied to University of California, Berkeley and University of Pennsylvania. Alternative approaches in the 20th and 21st centuries—such as game theory by John Nash, mechanism design by Roger Myerson, information economics by Joseph Stiglitz, and experimental methods emerging from labs at MIT and Princeton University—build on or critique marginalist foundations. Interdisciplinary crossovers appear in environmental valuation debates involving Contingent Valuation in policy forums, resource economics influenced by Hotelling's rule, and health economics incorporating marginal analyses in institutions such as World Health Organization.