Lesson 2 of 7
The unit you actually choose about
Value is set by the least urgent use the last unit goes to. A short schedule shows why, and three economists reached it independently within four years.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A person puts successive units of a good to progressively less urgent uses, so the value of one more unit is the value of the least urgent use it can serve.
- That last use is what the good is worth per unit, which is why abundance makes a useful good cheap without making it less useful.
- Menger was one of three. Jevons in 1871 and Walras from 1874 reached the same principle independently, and the standard account credits all three.
Suppose you have units of a good and several uses for them. You will not spread them evenly. You will serve the most urgent use first and work down, which means the last unit always goes to the least urgent use you still bother with.
Five units of water, five uses, one price
- Unit 1: drinking10 rank
- Unit 2: cooking8 rank
- Unit 3: washing5 rank
- Unit 4: the garden3 rank
- Unit 5: washing the car1 rank
Reading the schedule
The numbers are an ordering, not a measurement. They say the household would rather drink than wash the car, and nothing more precise than that.
Now ask what one unit is worth. Not the first one, which would be the difference between drinking and not drinking. Any one unit, because the household can rearrange: losing any single unit costs it the car wash, which is the least urgent use it was serving. So the value of a unit is the value of the marginal use, the one at the bottom of the list.
That is Menger's principle. In chapter III of Principles of Economics he builds it from the dependence of a particular satisfaction on command of a particular quantity, and shows that the importance which governs value is the importance of the satisfaction that would be given up.
Why abundance makes a useful good cheap
Add units and the list gets longer at the bottom, so the marginal use gets less urgent and the per-unit value falls. Take units away and the list is cut from the bottom, so the marginal use gets more urgent and the per-unit value rises.
Neither movement says anything about how useful water is. The paradox in the previous lesson was built entirely on confusing the value of a class with the value of a unit, and the schedule keeps them apart.
Three people, at almost the same time
This is the part usually left out. Jevons published The Theory of Political Economy in 1871, the same year as Menger's book. Walras began publishing his Elements of Pure Economics in 1874. All three arrived at the principle independently, and the standard history of economics treats it as a joint discovery rather than as Menger's alone.
They differed in what they did with it. Jevons and Walras built mathematical systems; Menger refused mathematics and worked in causal sequences, which is why this tradition reads the way it does. The term marginal utility itself came later, from Wieser.
Check yourself
What sets the value of one unit of a good?
- The most urgent use it could serve
- The average of all the uses it serves
- The least urgent use it still serves
Show the answer
Answer: C.
Losing any one unit costs the least urgent use, because the holder rearranges the rest. That marginal use is what a unit is worth.A household holding five units values a unit less than one holding three. Why?
- Its tastes are different
- Its marginal use is less urgent, because the list of uses runs further down
- The good is of lower quality
Show the answer
Answer: B.
The ordering of uses is the same for both. Quantity held determines which use sits at the margin, and that determines the value of a unit.Who reached the principle of marginal utility?
- Menger alone, in 1871
- Menger, Jevons and Walras, independently, between 1871 and 1874
- Bohm-Bawerk, in 1889
Show the answer
Answer: B.
Jevons published in 1871 and Walras from 1874. The joint discovery is the standard account, and a lesson that gave the principle to Menger alone would be wrong.Sources
- Menger, Principles of Economics, 1871, English translation 1950, chapter III, on the original measure of value and the dependence of particular satisfactions on particular quantities of a good.
- Menger, Principles of Economics, chapter II, on requirements and available quantities.
- Jevons, The Theory of Political Economy, 1871, and Walras, Elements of Pure Economics, first part 1874, as the two independent statements of the same principle. Named here for the joint discovery; their texts are not the source of anything else in this lesson.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The ranks in the figure are invented and are an ordering only. Menger's own position is that value cannot be measured on a cardinal scale, so treating these numbers as quantities of satisfaction would misread the lesson.
- This lesson treats one good in isolation. What happens when a person holds many goods and can exchange them is chapter IV of the book and a later lesson here.