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Marginalism and the development of micro economics
In the 1870’s, Jevons, Menger and Walras almost simultaneously and independently published their main work2, all of them grounded on a subjective theory of value. As underlined by Jaffé (1976), the historiographical practice then ‘homogenized’ their thoughts, by considering them as the independent discoverers of the marginal utility principle, without paying a closer attention to the differences of their respective approaches. We highlight in this section some of the main differences of their works, and in particular their distinct conception of the economic man.
The origins of microeconomics and the use of mathematics
The main theoretical contribution of the marginalists — by opposition to the clas-sical economists — is the explanation of the value of a good by its exchange value, defined as the ratio of the marginal utilities of the consumption of each good, rather than in terms of labour or any objective measure. The marginalists therefore pro-duced a subjective theory of value, according to which the value of a good is deter-mined by the personal tastes of the individuals, and focused on the phenomenon of the exchange in order to explain the formation of prices and the value of goods. As argued by Hébert (1998), it is probably this shift from macroeconomics to microeco-nomics that really constituted the paradigm shift between classical and neoclassical economics, more than the growing place of the notion of utility in economics as a motivating factor in human behaviour. His argument is that the need for a marginal notion of utility appeared during the industrial revolution, with the development of large infrastructures — such as the railroad —, whose marginal cost was different from the average cost: the real pioneers of the marginalist analysis were therefore engineers, such as Ellet (1839), Dupuit (1844, 1849), and Lardner (1850). Ekelund and Hébert (1999) suggest that the origins of modern microeconomics can be traced back to the works of those engineers — more particularly the French en-gineers from the Corps des Ingénieurs des Ponts et Chaussées — and that Jevons, Menger and Walras had all been influenced by their works. Jevons for instance stated that: To Lardner’s Railway Economy I was probably most indebted, having been well acquainted with that work since the year 1857. Lardner’s book has always struck me as containing a very able investigation, the scientific value of which has not been sufficiently estimated. (Jevons, 1871, p. xviii) The case of Walras is quite peculiar, since he was very critical of the work of those engineers — and more particularly Dupuit’s work — and only recognized his father Auguste Walras and Cournot as sources of inspiration for his work3. It seems however that his position was much more due to personal and affective reasons than scientific ones: Cournot was indeed a former classmate of his father Auguste Walras at École Normale Supérieure, and he confessed in his autobiography that he had no appetite for the technical details of engineering (Jaffé, 1965, vol.I, p.2). He also failed several times to graduate from engineering schools such as École Polytechnique and École des Mines. Those different elements could explain a certain resentment towards French engineers, and the systematic criticism of their work: Walras for instance blamed Dupuit for confusing the utility curve (i.e. the marginal utility an individual gets from the consumption of the good) and the demand curve (the willingness to pay for the good), since the willingness to pay a good also depends on the personal wealth, as well as the utility we get from the other goods4. We can however find a similar and earlier critic with Bordas (1847). Dupuit defended his approach by referring to a partial equilibrium analysis: he indeed recognized the influence of the personal wealth as well as the influence of the prices of other goods on the demand, but considered that economists could also focus on the analysis of a single market, since those different elements do not prevent the existence of a price for each object, each person at each moment (Dupuit, 1849, p.184). It seems therefore that Walras criticized Dupuit’s work by referring to general equilibrium considerations, whereas Dupuit explicitly placed his analysis in a partial equilibrium framework. Furthermore, and unlike Jevons and Menger, the notion of marginal utility is relatively secondary in Walras’ work: his objective was indeed to build a theory of price in interconnected markets, and the idea of marginal utility was only a convenient tool to deduce the demand curve from the utility curve (he did not in particular intend to elaborate a theory of subjective value in consumption, Jaffé (1976, pp.514-515)). In the case of Menger, no obvious link to this engineering tradition exists, since, according to Hayek, he was not acquainted with their works (Menger, 1871, pp.14- 15) and he also did not explicitly refer to them in the Grundsätze5. This could partly explain one of the most visible differences between Jevons, Menger and Walras, the use of mathematics: the mathematical tools in economics introduced for instance by Cournot and developed by the engineers are indeed of a great importance in the work of Jevons and Walras, but are lacking in Menger’s theory.
The scope of economic analysis
An interesting similarity between Jevons, Menger and Walras is that they all had the same ultimate objective, the production of scientific laws of exchange: it is indeed the core phenomenon that must be studied within the context of a subjective theory of value. For instance, Jevons implicitly recognized that the aim of economic theory is the production of laws of exchange: The Theory of Economy thus treated presents a close analogy to the science of Statical Mechanics, and the Laws of Exchange are found to resemble the Laws of Equilibrium of a lever as determined by the prin-ciple of virtual velocities. (Jevons, 1871, p. vii) Similarly, Menger — defending the legitimacy of investigating economic laws against the argument that human free will does not enable the existence of laws that could determine human behaviour — placed the explanation of exchange at the core of economics: Whether and under what conditions a thing is useful to me, whether and under what conditions it is a good, whether and under what conditions it is an economic good, whether and under what conditions it possesses value for me and how large the measure of this value is for me, whether and under what conditions an economic exchange of goods will take place between two economizing individuals, and the limits within which a price can be established if an exchange does occur — these and many other matters are fully as independent of my will as any law of chemistry is of the will of the practicing chemist. (Menger, 1871, p.48) This objective was even clearer with Walras, who explicitly recognized that: For my part, I have done my utmost in the present half-volume to give a very thorough account of the mathematical theory of exchange (Walras, 1874, p.36) The main difference between their works is that they did not adopt the same strategy in order to study the phenomenon of exchange: while Jevons and Menger tried to explain why the individuals are driven to exchange, Walras studied the exchange itself, and paid little attention to the underlying motives of the individuals.
Jevons and the ‘lowest rank of feelings’
Several years before the publication of the Theory of Political Economy, Jevons argued in a ‘Brief Account of a General Mathematical Theory of Political Economy’ that a theory of exchange can only be deduced from the fundamental determinants of individual behaviours: Jevons adopted a utilitarian perspective by considering that ‘[his] theory […] is entirely based on a calculus of pleasure and pain; and the object of Economics is to maximise happiness by purchasing pleasure, as it were, at the lowest cost of pain’ (Jevons, 1871, p.23), defining pleasure as ‘any motive which attracts us to a certain course of conduct’ and pain as ‘any motive which deters us from that conduct’ (p.26). Such a definition implies that human action necessarily results from a calculus of pain and pleasure, but it also implies that we cannot homogenize and simply aggregate pleasures and pains, since ‘a single higher pleasure will sometimes neutralise a vast extent and continuance of lower’ (p.27). Therefore Jevons assumed the existence of a hierarchy of feelings, and specifically assigned to economics the study of the actions that result from ‘the lowest rank of feeling’ (p.27), i.e. the accumulation of wealth: Each labourer, in the absence of other motives, is supposed to devote his energy, to the accumulation of wealth. A higher calculus of moral right and wrong would be needed to show how he may best employ that wealth for the good of others as well as himself. But when that higher calculus gives no prohibition, we need the lower calculus to gain us the utmost good in matters of moral indifference. There is no rule of morals to forbid our making two blades of grass grow instead of one, if, by the wise expenditure of labour, we can do so. And we may certainly say, with Francis Bacon [about the riches], ‘while philosophers are disputing whether virtue or pleasure be the proper aim of life, do you provide yourself with the instruments of either’. (Jevons, 1871, p.27)
Table of contents :
Introduction
I A Rational Self Trapped in a Psychological Shell
1 Preference Purification and the Inner Rational Agent
1.1 Introduction
1.2 Background
1.3 Behavioural welfare economics and preference purification
1.4 Hausman on preference purification
1.5 The inner rational agent
1.6 Is the model of the inner rational agent tenable?
1.7 Purification — or regularisation?
1.8 Conclusion
2 How we Became Rational: the Duality of the Economic Man
2.1 Introduction
2.2 Marginalism and the development of microeconomics
2.2.1 The origins of microeconomics and the use of mathematics
2.2.2 The scope of economic analysis
2.3 Individual behaviour in economic models
2.3.1 Economics as a science of individual choice
2.3.2 Economics as a science of social institutions
2.4 Pareto and the Homo economicus
2.4.1 Pareto’s science of logical actions
2.4.2 Homo economicus and the economic way of looking at behaviour
2.4.3 Rational choice and preference shaping
2.5 Conclusion
3 The Paretian Foundations of Behavioural Welfare Economics
3.1 Introduction
3.2 Preferences and mistakes
3.3 Logical actions and the Homo psychologicus
3.4 Should I be rational?
3.5 Eliciting one’s true preferences
3.6 Oscar-case
3.6.1 Regrets and mistakes
3.6.2 Does time inconsistency matter?
3.7 Conclusion
4 Preference satisfaction and individual autonomy
4.1 Introduction
4.2 The market and the hive
4.3 Preference satisfaction and autonomy
4.3.1 Why libertarian paternalism is not libertarian
4.3.2 Preferences and autonomy
4.4 Normative economics and democracy
4.4.1 The Social Planner and the Leviathan
4.4.2 Autonomy and the social contract
4.4.3 The management of common-pool resources
II A Model of Endogenous Preferences
5 Choosing One’s Preferences
5.1 Introduction
5.2 A model of endogenous preferences
5.2.1 Bluff and commitment
5.2.2 Preliminaries
5.2.3 Subgame perfect equilibrium of commitment
5.2.4 Illustration
5.3 Optimal interdependent preferences
5.3.1 Stackelberg best reply and payoff functions
5.3.2 Optimal weights
5.3.3 Symmetric games
5.4 Application: climate change negotiations
5.4.1 How public policies shape individual preferences
5.4.2 Model
5.4.3 Scenario ICT
5.4.4 Scenario TS
5.5 Conclusion
6 The Rationale of Team Reasoning
6.1 Introduction
6.2 Collective intentions and social preferences
6.2.1 Two puzzles of game theory
6.2.2 Individual rationality with collective preferences
6.2.3 Collective rationality with individual preferences
6.3 Team reasoning and frames
6.3.1 Variable frame theory
6.3.2 Unreliable team interactions
6.3.3 UTI and Bayesian equilibria
6.4 What does ’we’ want?
6.4.1 UTI as a game between selves
6.4.2 Within-group preferences
6.4.3 Between-group preferences
6.5 Why should we team reason?
6.5.1 Choosing one’s frame
6.5.2 Optimal frames
6.6 Conclusion
7 The Ecological Rationality of Team Reasoning
7.1 Introduction
7.2 Cooperation in a prisoner’s dilemma
7.2.1 Cooperation in standard evolutionary game theory
7.2.2 Cooperation and heuristics
7.2.3 Indirect evolutionary approach
7.3 Heuristics game
7.3.1 Definitions
7.3.2 Dynamics
7.3.3 Evolutionary stability
7.4 Stability of payoff-maximising behaviour
7.4.1 -core
7.4.2 Evolutionary stability of PMB
7.4.3 Team reasoning as an ecologically rational heuristic
7.4.4 Illustration
7.5 Conclusion
Conclusion
A Appendix of chapter 5
A.1 Lemma 1
A.2 Lemma 2
A.3 Lemma 3
A.4 Proposition 1
A.5 Proposition 2
A.6 Proposition 3
B Appendix of chapter 6
B.1 Proposition 4
B.2 Proposition 5
B.3 Proposition 6
B.4 Proposition 7
B.5 Proposition 8
C Appendix of chapter 7
C.1 Proposition 9
C.2 Proposition 10
C.3 Proposition 11
C.4 Proposition 12
Bibliography
