One of the more ironic incidents in the history of economic thought was the development of a theory of socialism utilizing the very ideas employed to attack Marx. Dismayed by the sharply critical turn he had given to classicism, economists in the late 19th century resorted to the psychological notions of utility as an escape from the radical implications he had underscored. Beginning with W. Stanley Jevons (an interesting theoretician in spite of his silly sunspot business cycles notions) and the Austrian economists, Carl Menger, Friedrich von Wieser and Eugen von Bohm-Bawerk, a new approach to economics was worked out. This was known as marginalism, and it is one of the dominant themes in economics today. Seeking to create a sound psychological basis for economic science, the marginalists concentrated on the behavior of individual firms rather than the totality of economic action. As suggested, one of their many noteworthy ventures was a broadside attack on Marxism. The Austrians particularly were determined to root out this alien influence in Western economics and they chortled approvingly when Eugen von Bohm-Bawerk announced the complete and utter demise of the Marxian heresy and the end of socialist doctrine. Yet, it was the very marginalism that stemmed from Austrian theory which provided the building blocks with which a non-Marxian socialist theory could be constructed.
Marginalism sets up conduct models of the firm. In more modernistic terminology, it attempts to delineate a decision-making procedure. The behavior of firms is concerned fundamentally with purchases of labor and other resources, conversion of these into products, and the sale of what is put out. Since these can be expressed as “schedules of quantitative relationships” it becomes logically feasible to subject these patterns to a kind of mathematical treatment. Implicit in this is the assumption that the business man always wants to maximize his profit. Within this framework, marginalism becomes a rather powerful analytical tool. The process of finding a maximum is precisely what is involved in the concept of allocating scarce resources to alternative uses. What the theory says is that economic behavior has a large and significant rational component which, revolving as it does about measurable pecuniary quantities, is subject to analysis. Cost, revenue and productivity in their marginal form are said to simplify economic thinking.
From the vantage point of marginalism, Bohm-Bawerk could be extremely critical of Marxism. He derided it because the transformation of value into prices was a logical mish-mash. He argued that the theory of market exchange in Vol. III of Das Kapital contradicted the theory of Vol. I. He insisted that the subjectivist marginal approach was logically superior to cost of production notions such as the labor theory of value. Moreover, marginalist theory was capable of much greater theoretical generality and could be employed...
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