A complete and consistent theory of value is essential to any sound and credible system of economic thought. At the foundations, prices and value creation reflect back on the stability or otherwise of the economy, the smoothness of its exchanges, and the effectiveness of its signalling mechanisms. The marginalist revolution inaugurated a simple and precisely defined theory that negated discussion of issues such as these. Yet throughout its history, leading neoclassical figures have been divided over whether marginal utility determines prices. The main proposition put forth in this paper is that, as successive waves of neoclassical thought had corrected and modified the ideas of their predecessors, the role of marginal utility in determining prices diminished over time. This paper is structured along these three ‘waves’ of thought, beginning with Jevons’ declaration that value depends entirely upon utility, followed by Marshall’s supply-and-demand ‘scissors’ that, it is argued, diminished the role of marginal utility. The analysis concludes with the third wave of thought, which more or less abandoned marginal utility, but at the same time, accentuated marginalism.
In the history of neoclassical economics, the relationship between marginal utility and prices has never been fixed, but rather subject to continual revision and clarification. Three periods which stand out shall be defined here as falling under one of three ‘waves’: the first, (1870-1874) associated with Jevons (2013 ), Menger (2007 ), and Walras (1954 ), is marked by its vision of simplicity, employing analogies with the natural sciences; the ‘second wave’ (1881-1906), peaking with the publication of Marshall’s Principles of Economics (2013 ), and associated with the works of Edgeworth (1881) and Pareto (2014 ), is defined by its clarification of the crucial relationship between utility and demand, as well as prices and supply, reconciling bilateral exchange (or partial equilibrium) with multilateral exchange (or general equilibrium); and the ‘third wave’, dated between 1934-48, led by Allen and Hicks (1934), as well as Samuelson (1948), saw the introduction of formal axiomatic derivations of the theory of consumer choice, including ‘revealed preference’ and the theory of the marginal rate of substitution, all superseding marginal utility.