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TGIF: Frédéric Bastiat and Subjective Marginal Utility

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In the 1870s economics took a radical turn in what is known as the “marginal revolution.” Whereas the classical economists, beginning with Adam Smith, cleaved use-value from exchange-value and thought in terms of the total utility and total supplies of goods, Carl Menger, William Stanley Jevons, and Leon Walras realized that people act at the margin. They never choose between all the water and all the diamonds; rather, they act to acquire an additional unit of water or that particular diamond.

How one views a unit of a good depends on how many one already has, as well as what one must give up to obtain it. Thus, what had stumped the classical economists could easily be explained, namely, why water — so vital to life — is cheap, while a mere luxury like a diamond is dear.

While Jevons and Walras were interested in general equilibrium and mathematical economics, Menger launched the Austrian school, with its emphasis on verbal logic about human action and its institutional implications. It was thoroughly subjectivist. Subjectivism here means that individuals act at the margin — attempting to satisfy “concrete wants” with “concrete goods” — according to how they see things. Objective facts of which market participants are ignorant (though they may be known to others) cannot figure into an analysis of price formation. The idea of a “good” means that some individual sees a relationship between a thing (that would take action to acquire) and a need or want. Value grows out of that relationship.

Menger went further in pointing out that in a world of scarcity and tradeoffs, people subjectively rank their wants and preferences in terms of importance (to them). This leads to the law of diminishing marginal utility: as one increases one’s supply of a good, the value of any given unit diminishes, because the last unit acquired was aimed at satisfying a less urgent want than were the previously acquired units. (This is simply a matter of logic. No one can attend to a lower ranking end before a higher ranking end. The end attended to is by that fact the higher ranking end.) As Menger wrote in his path-breaking Principles of Economics,

Accordingly, in every concrete case, of all the satisfactions secured by means of the whole quantity of a good at the disposal of an economizing individual, only those that have the least importance to him are dependent on the availability of a given portion of the whole quantity. Hence the value to this person of any portion of the whole available quantity of the good is equal to the importance to him of the satisfactions of least importance among those assured by the whole quantity and achieved with an equal portion.

Economists of the Austrian tradition have been spinning out the logical implications of Menger’s principles ever since. As one can easily appreciate, the primary focus is on the individual, who acts in the face of alternatives and tradeoffs; groups don’t act. This is methodological individualism.

Menger was indeed a revolutionary, but that does not mean that no one before him glimpsed ideas that would later blossom into the Austrian school. As far back as Socrates, thinkers grasped the theory of subjective value in the praxeological sense, and we find a nearly complete subjectivist-marginalist framework 20 years before Menger took pen to paper — in the work of Frédéric Bastiat.

In Bastiat’s unfinished magnum opus, Economic Harmonies (1850), he, like Menger, put the spotlight on the choosing individual and what she tries to accomplish through exchange. Trade, for Bastiat, is an exchange of services that will render useful things: I’ll do something for you (furnish a useful thing, for example) if you do something for me. It’s up to each individual to evaluate the terms and decide if the exchange is worthwhile. Methodological individualism, marginalism, and subjectivism are all to be found in Bastiat.

In deciding if the terms of an exchange are attractive, he wrote, the parties “take into account … the services that anyone acquiring [the particular good] would have to perform himself or have another perform for him in order to obtain it.” This is obviously a personal matter, depending on one’s own circumstances, including one’s vision of the future. It is not an objective matter.

Value is determined after bargaining between two contracting parties. Each one brings to the bargaining his own point of view. You offer me wheat. Of what importance to me are the time and trouble it may have cost you? What I am concerned about is the time and trouble it would cost me to obtain it elsewhere.… Hence, there can be no necessary measure of the payment you are to receive for your labor. That depends on circumstances and the value they give to the two services being exchanged. [Emphasis added.]

“The trouble it would cost me to obtain it elsewhere” is of course a subjective matter. Not only does it differ from person to person, but for the same person it may differ from time to time. Bastiat goes on:

Value does not necessarily imply labor; even less is it necessarily proportional to labor. I showed that value is based less on the pains taken by the one who surrenders what is exchanged than on the pains spared the recipient [emphasis added], and for that reason I attributed it to something that includes both elements: service. A great service can be rendered, I said, at the cost of very little effort, and a very minor service can be rendered with great effort. [Note the subjectivism. -SR] The only result, then, is that labor does not necessarily receive a remuneration that is always proportional to its intensity, either in the case of the man living in isolation or in that of the man living in society.

Bastiat understood that the value (or price) of a service can be too low to persuade anyone to render it. That’s just another way of saying what he already said.

We might call Bastiat’s theory a labor-spared theory of value. But when you recall that for Bastiat a thing has to be found useful for it to be a valuable good, there is perfect harmony with the theory of subjective marginal utility: Given that I find a good useful, what’s the best way for me to obtain a unit of it? If someone is willing to furnish it to me, what service must I render in return to that person? Can I obtain the unit on better terms either by making it myself or by exchanging services with someone else?

The two services exchanged must be carefully evaluated and compared. All the circumstances must be taken into account: the difficulties to be overcome, the dangers to be faced, the time to be lost, the pains to be taken, the skill required, the risks to be run, the possibility of satisfying the want in some other way, etc., etc.…

Everything depends on the judgment passed on the services.

It’s nice to see that, subjectivist though he was in economics, Bastiat was no moral subjectivist. “It can happen,” he says, “and often does, that we rate a given service very highly, because we judge it to be very useful, whereas in reality it is detrimental.” Subjective marginal utility underlies price formation, but the kind of beings we are and the nature of the world ultimately determine what constitutes the good. So in another sense — the moral sense — value is objective. (Menger, who distinguished “true goods” from “imaginary goods,” wouldn’t disagree.)

We can see that Bastiat significantly anticipated Menger and the Austrian school, but unfortunately he did not get it all. His lapse was his stubborn refusal to acknowledge that when two people engage in exchange, each profits, because they evaluate goods differently. A double inequality of value must exist for a trade to take place. Bastiat partly grasped the point implicitly but would not explicitly recognize it, insisting that “two services that are exchanged are equal to each other.” He was a great theorist nonetheless.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.