>>>>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.