The greatest contribution to the development of the concept of English marginalism was made by A.
The upper, maximum limit of change in the market price of any product depends on the subjective assessment of its usefulness by the buyer; the lower, minimum price limit is determined by the subjective assessment of the usefulness of the specified product, which is in the seller.
O. Bem-Bawerk faced the problem of explaining the mechanism of measuring and comparing these subjective assessments. He tried to solve it with the concept of marginal utility of money, equating it to the sum of marginal utility of goods that an individual can buy for the last unit of their monetary income. However, such a subjective mechanism for setting market prices did not agree well with the capitalist high-commodity economy.
The theory of interest developed by O. Bem-Baverk can be considered original. It is based on the idea that for a rational subject, in particular for the owner of money capital, a certain benefit has a greater marginal utility now than in the future. The individual, the scientist believed, expects that in the long run the stock of goods will increase, and therefore predicts a decrease in its assessment of its marginal utility. O. Bem-Bawerk associated the origin of interest with the influence of the time factor on marginal utility.
O. Bem-Bawerk, having developed the idea of JB Sey about the productivity of factors of production, studied how interest is formed on capital and how it affects other categories of income. What is new in the study of capital is the assessment of the present value of future goods (discounting) *, the need for which is caused by the time gap between the advance of funds for production and the receipt of the final product.
The longer this period, the greater the difference in assessments of the good “now” and in the “future”, the more aware becomes the need to bring these assessments to one point in time. Defending the thesis of own productivity of capital, O. Bem-Bawerk defined the interest on capital as part of the value of the future marginal product produced using current means of production (capital). Wages and rents are the value of the future marginal product according to labor or land, multiplied by the number of products and discounted relative to that point in time (the market interest rate acts as a discount).
Modern economic theory, accepting these conclusions, proposes the following formulation: the productivity of capital is determined by subtracting from the product of production all opportunity costs; the resulting balance tends to the level of the annual interest rate. Thus, the characteristic of the classical school category “return on capital” is replaced by the neoclassicists with the term “interest on capital”.
Rational subjects in the Austrian theory of marginalism form their estimates of marginal utility only in relation to consumer goods (consumer goods). Individuals are unable to assess the usefulness of factors of production (production goods). This means that the prices of the latter are determined not directly, but indirectly, through the marginal utility of consumer goods produced with capital and labor.
This phenomenon was noted by K. Menger, formulating the theory of skill: the goods of the first order (consumer goods) themselves endow the value of the goods of higher orders (factors of production) involved in their production. This means that no value and price depend on
production costs, and vice versa, due to the fact that consumer goods have value, there is an assessment of factors of production, which forms the cost of production. However, the same production good can be used to produce different consumer goods, which are characterized by different marginal utility.
The price of this production good, according to F. Wieser, is determined by the lowest marginal utility of the consumer good. This statement was explained as follows: if the price of the production good did not depend on the lowest marginal utility, then the corresponding increase in production costs caused a loss to the production of a number of consumer goods.
In economics, it was F. Wieser who introduced the concept of “opportunity costs” without which no modern study is possible. The idea of opportunity costs is as follows: when producing (buying) a certain product, the entrepreneur (consumer) takes into account the value of all alternative ways of using material or monetary resources, which must be abandoned in case of their use in the chosen way.
Any resource can be used in different industries, ie have an opportunity cost. The cost of producing this product depends on the alternatives that are neglected as a result of its production. Analysis of the concept of opportunity costs shows that F. Wieser departs from the subjective assessments of the individual (as was the case with K. Menger) and considers economic patterns, consisting of many individual assessments and preferences.
At the same time, the condition of opportunity costs is the presence of competition – for stock ownership and for the use of resources, as well as between producers and consumers, sellers and buyers. And last but not least, the concept of opportunity costs loses its economic meaning and role as a regulator of the consumption of goods when the amount of goods is unlimited.
Subjective-psychological theory of the Austrian school of marginalism failed to achieve its goal, namely: to find the ultimate basis of price. The theory of the Cambridge school is represented by the research of Alfred Marshall, Francis Edgeworth, Arthur Pigou. The greatest contribution to the development of the concept of English marginalism was made by A. Marshall, the foundations of whose theory are set out in the book “Principles of Economics” (1890).
He overcame the limitations of the marginalist conceptions of the Austrian school by combining them with some provisions of post-Cardian English political economy and adding a certain amount of mathematical analysis. This makes it possible to consider A. Marshall as the founder of a new direction of economics – neoclassical analysis, which means a compromise combination of different theoretical concepts. A. Marshall and representatives of the Cambridge school made a detailed description of the free enterprise system and developed approaches to solving the problems faced by producers and consumers in the market.
The focus of Cambridge school economists was the mechanism of market price formation. A. Marshall writing lab report recognized only functional analysis, so all three parameters of the market (price, demand, supply), he considered together in their interaction. A. Marshall formulated his conclusion as follows: neither supply nor demand are crucial in terms of determining the price; supply and demand are equal elements of the market pricing mechanism.
On the one hand, the market mechanism, operating in conditions of unlimited competition, establishes the dependence of supply and demand on price. If, for example, in a particular commodity market the price increases, then demand decreases and supply increases. On the other hand, the market system operates in the opposite direction, determining the movement of prices by the ratio of supply and demand. The Cambridge school widely used the concept of market equilibrium – a state of the market when the demand for a particular product is equal to its supply, ie there is a constant market price – the equilibrium price.
Actively using partial equilibrium analysis and graphical method of research, A. Marshall for the first time combined in one coordinate system graphs of supply and demand, called the “cross” of Marshall (Fig. 1).
Curve D – graph of demand (demand), reflecting the law of decline of the marginal utility of goods for consumers; curve S – graph of supply (supply), displaying the law of growth of marginal costs for producers. The equilibrium price p and the quantity q satisfy both consumers (buyers) and producers (sellers). At a higher price (px), producers could sell more goods, but consumers will not buy this quantity, and producers will have to reduce the price from / ij in the direction of p.
Lower price (p2) encourages consumers to increase purchases, but producers do not respond to adequate growth in output, they will increase the price from p2 in the direction of p. Market value (value) is determined by the balance of supply and demand, marginal utility of the product and marginal cost of production.
According to A. Marshall’s position, such a picture of market interaction is ideal, when supply and demand equally affect the change in price. However, the nature of this interaction varies depending on the length of time under consideration. Within the short-term interval, priority is given to demand because supply is more inertial, requiring the introduction of new production facilities or new production conditions.
The magnitude of supply, therefore, is constant, and demand becomes a decisive pricing factor. Within a long-term interval, the main price-forming force is performed by supply and related production costs. The longer the period, the stronger their impact compared to the action of the demand factor.
The reason for this situation in the long run, A. Marshall saw in the fact that production itself determines the movement of needs, which then take the form of marginal utility and demand. The concept of market price formation was logical and balanced, so it significantly influenced the further development of economic theory. The idea of the crucial role of demand in short-term price regulation has become one of the principles of the Keynesian system of macro-regulation. Another conclusion – about the predominance of supply in the long-term dynamics of prices – developed by theorists of modern conservatism.
A. Marshall, generally positive about the methodological system of marginalism, reasonably criticized the position of the Austrians and rejected the primacy of subjective assessments of marginal utility in the analysis of prices, treating them as one of the factors influencing demand. He rejected the point of view of British economists (for example, J. McCulloch), who saw the final basis of price in the cost of production.
Seeking to combine the theory of marginal utility with the theory of production costs, A. Marshall carried out a reform within marginalism – marginal characteristics began to be applied not only to demand and consumption, but also to supply and production. The concept of marginal cost – the cost of production of the last unit of a particular product, which was identified with the minimum price (supply price).