Marginalism

Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. The reason why the price of diamonds is higher than that of water, for example, owes to the greater additional satisfaction of the diamonds over the water. Thus, while the water has greater total utility, the diamond has greater marginal utility. The theory has been used in order explain the difference in wages among essential and non-essential services, such as why the wages of an air-conditioner repairman exceed those of a childcare worker.

The theory arose in the mid-to-late nineteenth century in response to the normative practice of classical economics and growing socialist debates about social and economic activity. Marginalism was an attempt to raise the discipline of economics to the level of objectivity and universalism so that it would not be beholden to normative critiques. The theory has since come under attack for its failure to understand the nature of the market and for its inability to account for new empirical data.

Although the central concept of marginalism is that of marginal utility, marginalists, following the lead of Alfred Marshall, drew upon the idea of marginal physical productivity in explanation of cost. The neoclassical tradition that emerged from British marginalism abandoned the concept of utility and gave marginal rates of substitution a more fundamental role in analysis. Marginalism is an integral part of mainstream economic theory.