8 - Marginalism in the twentieth century

Summary

At the beginning of this book, the development of marginalism was described not as a revolution, but as a slow, cumulative process. Many key ideas and theories had already been formulated before the 1870s, when the important works of Jevons, Walras and Menger appeared. But it was in the 1930s that “marginalism” started to gain a central place at the core of economic theory and the newly emerging economic discipline. This process was accompanied by a growing professionalization of the field. Furthermore, the use of mathematics within economic theory had gained general acceptance at around the same time. It was also the era in which methods were developed to measure important economic magnitudes, such as the national income (the total value of all goods and services produced by a nation within a year) and the rate of inflation (the level of price increases within the economy) (see Landreth & Colander 2002: 454–5).

In this chapter we will consider the contribution of “marginalism” to these developments. First, we will examine the extension of the marginalist vocabulary by John Hicks (1904–89) and Roy George Douglas Allen (1906–83). By introducing the notion of the “marginalist rate of substitution”, authors could circumvent concerns about the possible measurement and quantification of (marginal) utility. This approach also led to the development of “indifference curves” and “indifference maps”, which are now central components of microeconomic theory.

Marshall had realized that economists could not simply take the conditions of “perfect competition” for granted, since markets are often dominated by a small number of large firms, which therefore have substantial market power (though not a monopoly position). In order to deal with markets that are somehow “in between” perfect competition and monopoly, several approaches were developed. We will first examine the theories of imperfect competition that were posited by Joan Robinson (1903–83) and Edward Hastings Chamberlin (1899–1967). We will then investigate several models that pay closer attention to how exactly firms compete. The model of quantity competition emerged from the writings of Antoine Cournot. The model of price competition emerged from a paper written by the mathematician Joseph Bertrand (1822–1900), which was (ironically enough) intended to be a criticism of the approaches provided by Walras and Cournot.