most to do (Essays in Biography, pp. 225–6). This was, I think, because of Marshall’s aversion to going through with pure analytic schemata and to his bent toward misplaced realism. He insisted on including internal and external economies in his (industrial) ‘supply’ schedules (though he noticed the objection to this, Principles, p. 514n.)—I suppose, in order to make these more realistic—in spite of the fact that he thereby destroyed their reversibility and rendered them useless for the purposes of static theory: they really represent pieces of economic history in the form of diagrams. 51 He thus blurred the clarifying distinctions between falling cost curves and downward shifts of cost curves and between costs that fall while production functions stay put and costs that fall in consequence of changes in production functions. 52 At any rate it is understandable that both the leads given by Marshall and the loose ends left by him must have started discussion in any environment that took any interest at all in the foundations of economic theory. The only thing to wonder at is that this discussion took so long to burst into print and to present results to the scientific public at large. For instance, Professor Viner’s famous paper on ‘Cost Curves and Supply Curves’ that, starting from Marshall’s analysis, successfully cleared up a large part of the ground, appeared only in September 1931 (Zeitschrift für Nationalökonomie); Professor A.A.Young’s paper on ‘Increasing Returns and Economic Progress’ only in December 1928 (Economic Journal). We shall group our brief comments around the topic Increasing Returns and Equilibrium, and even so shall have to confine ourselves to but few of the many valuable contributions that ought in fairness to be considered. 53 51 It is only from the standpoint of static theory that Professor Stigler’s strictures on Marshall’s concepts of external economies are fully justified (op. cit. pp. 68 et seq.). Both internal and external economies are concepts that denote undeniable facts which deserve to be divided up in these two categories (see, however, F.H.Knight, Fallacies in the Interpretation of Social Cost, first publ. in 1924, that is, at a very early stage of the controversy on decreasing cost; republ. in Ethics of Competition, 1935). We shall understand by external economies nothing but the downward shifts in the marginal and average cost curves of individual firms that may result from the historical growth of their environments (not necessarily from the growth of their ‘industries’), bearing in mind that Marshall expressed this fact by declining ‘cost curves’—which are similar in nature to demand curves that may rise owing to similar causes and, like these, are simply curves fitted to the points of a histogram—and that some of his followers, Professor Robertson particularly, kept to this method. 52 What seems to me to be overemphasis on industrial ‘supply’ schedules as against cost schedules may perhaps be explained similarly. We cannot go into this but shall, for the purposes of our exposition, use nothing but individual cost curves. 53 By a stroke of editorial genius, Keynes arranged a symposium (D.H.Robertson, G.F.Shove, and P.Sraffa) on the matter (‘Increasing Returns and the Representative Firm’ published in the Economic Journal, March 1930) that is still eminently worth reading. He prefaced it by a fragmentary bibliography to which I refer the reader. I wish to add several important notes by Mr. R.F.Harrod, especially his ‘Notes on Supply,’ Economic Journal, June 1930, and his ‘Law of Decreasing Costs’ ibid. December 1931; also Mrs. Robinson’s article, ibid. December 1932, and Professor Robbins’, ibid. March 1934. After rumblings which we must neglect, there appeared in the Economic Journal (December 1926) the famous paper by Professor Sraffa that was destined to produce the English branch of the theory of imperfect competition. 54 But for our present topic, his criticism was not anything like as ‘destructive’ as Keynes, to judge from his introductory History of economic analysis 1012 remarks to the Symposium, seems to have considered it to be. Sraffa had simply pointed out that, under conditions of pure competition, a firm cannot be in perfect equilibrium so long as increase in its output would be attended by internal economies. 55 Partly influenced by Sraffa and partly by way of developing Marshallian teaching, Professor Pigou, in his ‘Analysis of Supply’ (Economic Journal, June 1928, inserted in the third ed. of Economics of Welfare, Appendix III), pointed out that, if we base declining industrial supply curves on external economies only, we may still retain rising supply curves for individual firms and thus avoid—formally at least—any conflict between ‘increasing returns’ and competitive equilibrium conditions, granted that we really believe in the existence of such a conflict at all. He added that if the growth of an industry or its environment induces increased specialization and this again increased size of the firms com- 54 Piero Sraffa, ‘The Laws of Returns under Competitive Conditions.’ But the main ideas, critical and constructive, had appeared a year before: ‘Sulle relazioni fra costo e quantita prodotta,’ Annali di Economia, 1925, which shows Sraffa’s starting points and the nature of his brilliantly original performance much better than does the English article. See also his contribution to the ‘Symposium.’ 55 This means only that, given a market price at which any single firm is able to sell as much as it pleases, it will, so far as pure logic is concerned, always be advantageous for the firm to increase its output if this can be done at falling marginal costs in the short run and at falling average costs in the long run, and that therefore equilibrium output cannot be attained before these conditions have ceased to operate. Hence the proposition in our text above may well seem self-evident. Nor had it ever been denied by Marshall, whose equilibrium points on falling supply curves—industrial supply curves—must, as we shall see presently, be based upon the facts of external economies. Only, Marshall was so anxious to point out the many circumstances that in practice (where pure competition practically never prevails) prevent the firms we have any opportunity of observing from acting upon our proposition that it nowhere stands out clearly. His followers, especially Professor Robertson, whose common sense was impressed by the ubiquity and importance of internal economies even in industries that are considered as competitive, thought that denying the presence of internal economies amounted in these cases to denying the obvious. It is interesting to notice why: they thought so for the same reason that is at the bottom of the reluctance of so many economists to admit the proposition that there are no net profits in perfect equilibrium of pure competition (see below, footnote 56 and subsec. e). Both theorems apply to states of perfect equilibrium only and, since perfect equilibrium exists in real life still less often than does pure competition, internal economies, just as net profits, may in fact be ubiquitous without thereby impairing either the validity or the value of either theorem. But if the proviso ‘in the point of perfect equilibrium’ be left out and still more if our proposition be thrown into the faulty form that makes it read ‘pure competition and internal economies are incompatible,’ then we speedily cease to wonder how it was possible for a proposition to be considered as obviously wrong by some that appeared as self-evident to others. Equilibrium analysis 1013 posing that industry and increased opportunities for harvesting internal economies, we get a type of external-internal economies (as Professor Robertson called them) that may be of some analytic use. More important was his suggestion to make the costs of firms functions both of their own outputs and of the output of the industry or group—provided we can make definite sense of these concepts—to which they belong. Much has been done to put the topic into a more promising shape by Harrod, Shove, Viner, and Young, but I have said all I can say in the available space to convey to the reader this striking instance of the slowness and roundaboutness of analytic advance, 56 and to set him pondering over the question why results were established in and after 1930 that might easily have been established by 1890. Instead of grouping our comments around decreasing costs we might as well have grouped them around Marshall’s complex doctrine of Normal Profit, which survived well to the present time when it is still quite common to find teachers dividing the profit item into Marshallian normal profits and windfall profits. 57 Since we have dealt with this range of problems already (see above, ch. 6) we have only to add two points that are more easily dealt with on the higher theoretical level on which we are moving now: the one refers to the relation between production functions and cost functions in general and the other to the ‘tendency toward zero profits’ in particular. [(e) Tendency toward Zero Profits.] But since the subject of profits is still more than are others infested by confusions, it will be well to restate first a few propositions that will serve to disentangle the points that interest us now from others with which they are habitually associated. Marshall as a rule considered the profit item of the balance sheets of business practice—and especially the balance sheets of owner-managed firms—rather than anything that 56 The reader must not think, as he might from the brevity of my account, that this bit of housecleaning was all that resulted from the work that went into that controversy. Thus, the useful distinction between the marginal value product to the individual firm (the marginal private net product) and the marginal social net product was worked out by Pigou and Shove. In a sense this work culminated in R.F.Kahn’s, ‘Some Notes on Ideal Output,’ Economic Journal, March 1935. 57 The concept of a normal rate of profits has been refined by several modern economists, particularly by Mrs. Robinson, Mr. Shove, and Mr. Harrod. See especially Harrod’s ‘A Further Note on Decreasing Costs,’ Economic Journal, June 1933. The concept of windfall profits is now mainly in use for aggregate profits that arise (if for this purpose we may use the terminology of Keynes’s Treatise on Money) from a sur plus of investment over saving, so that individual profits that are due to chance tend to drop out of the picture. It might be argued that this arrangement misses the essence of the profit phenomenon and falls below the level attained by Marshall. It might also be argued that Mr. Harrod’s definition—the normal rate of profit is the rate of expected profits that leaves a firm without motive either to increase or to decrease its capital commitment— re-establishes the connection between profits and return to physical capital, which it was the main achievement of the period before 1914 to sever. But all this does not matter here where we are concerned only with the question of the surplus of receipts over payments (actual or imputed) to ‘factors’ that is relevant to the construction of cost curves. History of economic analysis 1014 has any claim to be called ‘pure profit,’ and he considered this profit item as it is rather than as it would be in (static) equilibrium of a stationary process. Though careful analysis, in this as in other cases, can no doubt unearth the contours of a comprehensive schema in which everything finds its appropriate place—but of a schema that is Ulysses’ bow to less powerful minds—the ordinary reader simply finds a fricassée of such things as: earnings of management of all possible kinds, including also the earnings of better- than-common management; gains from successful risk-taking and uncertainty-bearing, that is the sort of thing that gives a favorable bias to the relation between expected and actual results; gains from advantages incident to the control of particular factors, some of which would, in other firms, not contribute as much to results as they do where they are; chance gains that go to the owner as residual claimant, due regard being paid to the wisdom of Goethe’s dictum that only the able enjoy consistent luck; and, among other things, gains that accrue to a firm as it grows, or else, because it has grown, relatively to its competitors or absolutely or both; an element of monopoly entering, implicitly or explicitly, wherever required. Evidently, these items do not constitute a logically homogeneous whole, in the same sense as do for instance wages, in spite of all the qualifications that have to be added also in their case. Nevertheless Marshall created a sort of normal rate of profit out of this compound—warily treading his way through the dangers of circular reasoning—which he associated felicitously with the representative rather than with the marginal firm. 58 This normal rate of profit may be loosely defined as the rate that makes it worth while to enter, and to stay in, business (these expressions mean the same thing in the end), and thus acquires a distinction from the managerial salary that is easier to justify in a common-sense manner than in strict logic. Somehow all this has grown into the simplified normal profit of Marshall’s followers and then into the marginal efficiency of Keynes’s General Theory. Now, nobody has ever asserted that this rate of profit either is or tends toward zero. Walras meant something entirely different when he set up his concept of an entrepreneur ne faisant ni bénéfice ni perte. 59 What he did mean 58 Observe the wisdom of this move. Operating with the marginal firm, the theorist leaves out of account the broad fringe of ‘submarginal’ firms, the existence of which often dominates an industry’s situation and casts doubts on the very definition of the marginal firm. This is another argument for the concept of the representative firm, to which justice has not been rendered even now. 59 The almost violent aversion displayed toward Walras’ concept, first by Edgeworth and then by a long line of economists to this day, is therefore wholly unjustified and rests on nothing but a complete failure to understand Walras. Barring this, however, I wish to repeat that two objections to it are invalid on logical grounds. First, it has been asserted, already by Edgeworth, that to speak of a zero profit, in an analysis of a capitalist economy the motive force of which is profit, is in itself absurd: but there is nothing absurd or self-contradictory in holding that the drive for profit is the motive force of the private-enterprise economy and in holding at the same time that profit would be eliminated in perfect equilibrium of pure competition. Second, it has been asserted that the zero- profit proposition is ipso facto disproved by economic reality. But for the analogous reason, even if the existence of net surpluses were much more of Equilibrium analysis 1015 can be most easily realized if we analyze the list of causes that produce the Marshallian rate of profit. We then also realize that the Marshallian theory, according to which profits have no tendency to vanish, and the Walrasian theory, according to which they do, not only do not contradict one another but, referred to the same level of abstraction, turn out to be identical. The reader can satisfy himself of this by observing, first, that Marshall’s theory, as he himself presented it, is geared to phenomena of change or growth that static equilibrium excludes; 60 second, that the monopoloid elements that enter Marshall’s analysis, though implicitly more than explicitly, and which are not necessarily excluded by the assumptions of static equilibrium, do violate the assumptions of pure competition; and that, if we are resolved to display the logical properties of perfect equilibrium in pure competition, Marshall’s profits will in fact vanish as completely as will Walras’. Observe that this does not necessarily exclude institutional gains such as may accrue to an innkeeper from good relations with the police. 61 Nor does it exclude the existence of net surpluses in the system. Only they should in good logic not be associated with profits but rather with the control of the thing that gives rise to them. Even with the most perfect competition, ‘factors’ will frequently receive more than is necessary to induce them (a) to offer their services for productive use and (b) to offer their services at any particular spot in the system. 62 As mentioned before, Pareto also noted, from a somewhat different angle, the surpluses that may arise from technological or institutional obstacles to optimum allocation of resources (transformations incomplètes) that are the cornerstone of his theory of rent. Careless handling of these surpluses may easily lead into circular reasoning or to ‘meaningless’ appeal to some logical necessity, according to which they ‘must’ be associated with some an established fact than it is, there would be no force in such an appeal from an equilibrium proposition of the kind involved to facts culled from an evolutionary reality, which is never in equilibrium and never is, or can be, purely competitive. Observe this interesting feature of the situation: we have here a proposition that can hardly apply to reality under any conceivable circumstances; and which is nevertheless of the utmost importance in order to understand this reality. 60 In particular it excludes the function of managing uncertainties, whose importance links up with change. 61 Such institutional positions of vantage, if their importance is asserted, must of course be identified and established or reference to them is indeed meaningless. But since, subject to this condition, theorists can stress them as they please, I have never been able to understand why denial of the zero-profit proposition should have become the cherished badge of theorists with radical leanings. Moreover, for their comfort, there is always the monopoly element to fall back upon. 62 These two cases are not always kept distinct. Thus, Mrs. Robinson (Economics of Imperfect Competition, 1933) defines such surpluses in the first sense on p. 102, and in the second sense on p. 103. But it should be noted that her distinction between cost curves that do and cost curves that do not include such surpluses (ch. 10) spelled an important advance. She called all these surpluses Rents. We have already noticed that this concept of rent (foreshadowed, as we know, by Senior, J.S.Mill, and also Marshall) comes in usefully for some purposes. History of economic analysis 1016 factor or other. But their existence and also this association are indubitable facts that are not difficult to establish. Because of this I feel unable to give instances from the literature that would clearly illustrate either of these mistakes. 63 Finally, it is convenient to use this opportunity to point out the relation between decreasing costs and profits, even though we have already seen that, so far as perfect equilibrium in pure competition is concerned, there is no need to worry about them. For this purpose we cannot do better than borrow the argument of Marx. As we know, he made investment of industrial exploitation gains—which are not profits, though he called them so, but capital gains—the main motor of economic evolution. If we press this process into a schema of cost curves that fall owing to internal and external economies 64 and incidentally to increasing sizes of individual firms, we immediately realize two things. First this process, while it does not benefit the individual firms or the bourgeois class as a whole ultimately, is attended at every step by temporary gains that are profits in our sense and accrue to firms that grow in this manner more quickly or more successfully than do others. Disequilibrium prevails throughout, but Marx saw that this disequilibrium is the very life of capitalism, 65 and it is with this disequilibrium, on the one hand, and with decreasing costs in this sense, on the other, that pure profits are chiefly associated. Second, Marx’s process, as he did not fail to notice, must in strict logic lead to monopolies or oligopolies of those firms that have once gained an initial advantage. Marshall’s treatment of the same set of problems in general, and of decreasing costs in particular, really comes to the same results on both points due allowance being made for his superior technique and his anxiety to do justice to all the facts, frictional and other, that prevent those individual trees from growing into the high heavens. We shall have to return once more to this historically important, though only ‘objective,’ doctrinal affinity. Having thus cleared the ground we can settle our two questions very quickly. The emergence of the production function into explicit recognition, a development that we may for our present purpose associate with Wicksteed’s Essay on the Co- ordination of the Laws of Distribution (1894), raised a problem of co-ordination of the theories of production and of cost that did not exist before. The old theory of production, such as we find it in J.S.Mill and even in Marshall, was simply a discussion of the ‘factors of production’ and fitted in easily with the ‘laws of cost.’ But however effectively the intrusion 63 The difficulty of agreeing on such instances is greatly increased by the fact that authors who levy this charge, from Marshall to Samuelson, have invariably abstained from giving references. Of course there may be plenty in bad textbooks. 64 This is not quite correct, of course. But it will do for our present purpose. 65 An inkling of this truth must have been present in the mind of A.Smith when he wrote that it is the firm with the lowest average costs in the industry that sets the price of the product. This does not, as Marshall thought (Principles, p. 484), contradict Ricardo’s opposite statements: Smith thought of an evolutionary and Ricardo thought of a stationary process, and there is in fact a tendency for the lowest costs to prevail in the first case and a tendency for the highest costs to prevail in the second case. Equilibrium analysis 1017 of the production function clarified other problems, it obscured for a considerable time the problem of the relation between the technology and the economics of production, or, as we may also say, between technology on the one hand and cost and distribution on the other. This may be best illustrated by Wicksteed’s own attempt to derive a proposition on the distribution of the national dividend, namely the proposition that distributive shares determined according to the marginal productivity principle will just exhaust the national dividend, apparently 66 from nothing else than a property of the production function, namely first-order homogeneity. It is easy to see now that the production function alone does not determine either cost of production or distribution and in particular that, by itself, it cannot tell us much about the existence or absence of net gains to firms. Not less easy is it—now—to see how the production function fits into the cost and distribution phenomena. All that we need for this purpose is to keep in mind that, in the sphere of pure economic logic, the production problem is the problem of maximizing the difference between a firm’s receipts and costs and that this maximum is subject to the technological restrictions embodied in the production function. 67 But around 1900 this was not so easy for the average economist to see, especially if he was not in the habit of throwing his ideas into the simple mathematical form which in this instance clears up everything. A center of such confusion as there may have been 68 was of course the zero-profit proposition, the meaning of which we have taken pains to make clear. From what has been said above it should be clear that there is a perfectly good way of satisfying ourselves that, on the way toward perfect equilibrium in pure competition, with the qualifications that have been indicated—and do not render the proposition either circular or tautological—pure profits tend to vanish. All we have to do is to list all the sources of such surpluses over paid out or imputed costs we can think of 69 and then to show cause why they all shrink and, in the limiting case, disappear on that way. Equality between (properly discounted) planned receipts and planned costs may be legitimately inferred from this—though only with the reservation that somebody may any day present specific instances to the contrary—and is further strengthened by the consideration that firms that make less than total costs in the sense above 66 I say ‘apparently’ in order to emphasize that this interpretation is unfair and not only because of his later recantation. Other conditions are partly stated and partly implied. 67 There may be of course many other restrictions. Among them is one that is very important from the standpoint of any individual firm and that has not received the attention it merits, viz. the funds at the disposal of the firm. 68 Again I do not wish to mention instances. For, with economists’ loose ways of expressing themselves, I find it very difficult to array individuals whose statements might be amenable to more favorable interpretations. 69 It is particularly important to keep in mind that, with correct handling of imputation, imputed subjective costs of managerial activity are no loophole for circularity or tautology to enter. On the contrary, it is the objector who commits these sins if he vaguely refers to unspecified possibilities of unspecified gains. History of economic analysis 1018 will, in the long run, go out of business and men who expect to make more than total costs in the sense above will, under the conditions assumed, be drawn into business in the long run. 70 But a more rigorous though still elementary proof has been offered and has gained some currency in classroom work. For brevity’s sake we assume away all but substitutional factors—so that the only restriction upon a firm’s maximizing behavior is the ordinary or ‘normal’ production function as defined above—and also the problems that arise in the case of discontinuities of cost curves. 71 In perfect equilibrium and perfect competition, marginal costs to a firm will be equal to the price of the product which, like all factor prices, the firm accepts as data. In a large class of cases this condition determines output uniquely. Since, in strict logic, the firm will minimize total and average costs for any output, average costs must be at a minimum also for this output. But in the point of its minimum, the average cost curve is intersected, from below, by the marginal cost curve. Therefore marginal and average costs are equal in this point and both are equal to price. It is true that in the Cambridge theory of the early 1930’s (R.F.Kahn, J.Robinson) average cost includes normal profit. But this schema applies only to situations of imperfect competition: only in imperfect competition can this normal profit contain anything besides returns to owned factors evaluated at the market prices of these factors. Hence pure profits are zero in perfect competition. 72 This may be unduly ‘abstract’ But there is nothing wrong with it in logic. APPENDIX TO CHAPTER 7 Note on the Theory of Utility IN THIS Note we shall survey, in the briefest possible compass, the whole career of the utility theory of value, both its earlier developments which we know already and its later developments down to its metamorphoses in our own epoch. Let us keep in mind throughout that, although we shall now deal with utility theory (and its successors) as a theory of consumers’ behavior, its importance extends far beyond this field into those of production and income formation as has been pointed out in the preceding chapter. 70 Explanation of numbers and sizes of firms offers no difficulty at all, even in the case of first- order homogeneity. I mention this here once more in order to draw atten tion to the surprising fact that, so far as general theory is concerned and always excepting Marshall, these problems of evident interest have been almost completely neglected or declared to be insoluble. 71 Space forbids our entering into these problems which have attracted some attention in our own period. A single reference will have to suffice: G.J.Stigler, ‘Note on Discontinuous Cost Curves,’ American Economic Review, December 1940. 72 There is hardly any justification for Professor Samuelson’s formulation of this theory on p. 83 of his Foundations; and none at all for his statement on p. 87 that ‘net revenue’—if this means ‘pure profits’—does not tend to be zero even in (perfect equilibrium of) pure competition. Equilibrium analysis 1019 [1. THE EARLIER DEVELOPMENTS] We know that, from Aristotelian roots, this theory was developed by the scholastic doctors whose analysis of value and price in terms of ‘utility and scarcity’ lacked nothing but the marginal apparatus. We also know that, alongside of scholastic teaching and presumably not entirely without its influence, the utility theory of value began to be taught by laymen—Davanzati being our star instance—and that it went on developing quite normally right into the times of A.Smith—Galiani’s work being the peak achievement of the epoch, though Genovesi should not go unmentioned. 1 Even the ‘paradox of value’—that comparatively ‘useless’ diamonds are more highly valued than is ‘useful’ water—had been explicitly posited and resolved by many writers, for example by John Law. And there was, though standing by itself on a side line, Daniel Bernoulli’s expression for the marginal utility of income (Part II, ch. 6, sec. 3b). But then this development came to a standstill: though many economists, particularly on the Continent and still more particularly in France and Italy, referred to the element of utility as a matter of course—and though Bentham formulated explicitly what was to be known as Gossen’s law of satiable wants—they failed entirely to exploit it any further. Some who tried to do so did it in so very infelicitous a way as to discredit rather than to spread its use. Condillac, for instance, who may be considered its most important sponsor in the last quarter of the eighteenth century, explained the utility of air and water by the effort involved in breathing the one and drinking the other. A.Smith and, following him, practically all the English ‘classics’ with the exception of Senior 2 evidently did not realize the possibilities of the utility approach to the phenomenon of economic value and were content to turn away from ‘value-in-use’ with a reference to the paradox of value that should not have been a paradox any more. Let me repeat that it is quite wrong to explain this attitude, especially in the case of Ricardo, by saying that, while seeing all there is to see about utility, they did not care to elaborate so obvious an aspect of things: it is quite clear—and can, for Ricardo, be proved from his correspondence—that they did not follow up the utility clue because they did not see their way to using it effectively. But Senior’s treatment does constitute a definite step in advance. In France and Italy the old tradition that favored the utility approach did not die out entirely. But neither did it bear fruit. J.B.Say, who made an attempt on this line, spoiled his chance by his handling of the matter that was still more clumsy than it was superficial and led nowhere. A number of ‘forerunners’ began to emerge, however, though none of them received any recognition at the time. The two who achieved the largest measure of posthumous fame have been mentioned already, H.H.Gossen and J.Dupuit. There were several others, but it will suffice to mention three: 1 [These men and their work are discussed in Part II.] 2 Malthus should not, I think, be listed as another exception, though his criticism of Ricardo’s theory of value does point in the direction of a utility theory. History of economic analysis 1020 Walras, the father of Léon; Lloyd, who published three years later; and Jennings. 3 The three performances are closely similar in nature and results. In particular, the marginal utility concept (Walras’ rareté and Lloyd’s special utility) 4 is clearly present with all three authors and so are those general arguments about how wants and utility are related to value that became so familiar half a century later. [2. BEGINNINGS OF THE MODERN DEVELOPMENT] Léon Walras tells us that he started from his father’s teaching. But Jevons and Menger undoubtedly rediscovered the theory for themselves. In so doing, all three of them improved and amplified it, but their historical achievement consists in the theoretical structure they erected upon it and not in these improvements. As we have already seen, they all restated Gossen’s or Bentham’s or Bernoulli’s Law of Satiable Wants; in so doing they all treated utility (or the satisfaction of wants) as a psychological fact that is known to us from introspection, and as the ‘cause’ of value; they felt little or no compunction about its measurability; 1 and they all made the utility of every commod- 3 A.A.Walras, De la Nature de la richesse et de l’origine de la valeur (1831). His Théorie de la richesse sociale (1849) adds nothing to the theory of value, so far as I can see, but contains several other points that are of interest, e.g. the definition of capital as every good that serves more than once. W.F.Lloyd—‘student’ of Christ Church (this admirable title which might be considered the only one fit for a scholar is at present Mr. Harrod’s) and Professor of Political Economy in the University of Oxford, ‘A Lecture on the Notion of Value…’ delivered before the University of Oxford in 1833 (1834). It is strange that an Oxford professor of economics should have needed rediscovering. Nevertheless, such was the case. The merit of having rescued Lloyd’s name from oblivion belongs to the late Professor Seligman (‘On Some Neglected British Economists,’ in Essays in Economics, pp. 87 et seq., the work to which reference has repeatedly been made already). Our text shows, however, that Professor Seligman was in error when he allocated to Lloyd the ‘proud position of having been the first thinker in any country to advance what is known today as the marginal theory of value, and to explain the dependence of value on marginal utility’ (op. cit. p. 95). [J.A.S. did not complete this note. On Richard Jennings (Natural Elements of Political Economy, 1855), see the article in Palgrave’s Dictionary and Jevons’ Theory of Political Economy (2nd ed., ch. 3).] 4 As everybody knows, Léon Walras retained the term rareté; Gossen had spoken of ‘utility of the last atom’; Jevons introduced final utility and final degree of utility; the phrase marginal utility (Grenznutzen) is von Wieser’s; Wicksteed suggested fractional utility, J.B.Clark specific utility, Pareto ophélimité élémentaire. 1 Walras indeed eventually convinced himself or was convinced by J.Henri Poincaré, the great mathematician, that utility, though a quantity, was unmeasurable. But this did not induce him to delete, from the text of his Éléments, statements and implications to the contrary. See, e.g., p. 103 of the édition définitive (1926), where he defines his rareté (marginal utility) as the derivative of total utility with respect to quantity possessed, borrowing his father’s analogy to velocity—the derivative of displacement with respect to time. Equilibrium analysis 1021 . economies. 55 Partly influenced by Sraffa and partly by way of developing Marshallian teaching, Professor Pigou, in his Analysis of Supply’ (Economic Journal, June 1928, inserted in the third ed. of Economics. exception, though his criticism of Ricardo’s theory of value does point in the direction of a utility theory. History of economic analysis 1020 Walras, the father of Léon; Lloyd, who published. the Co- ordination of the Laws of Distribution (1894), raised a problem of co-ordination of the theories of production and of cost that did not exist before. The old theory of production, such