17
WILLIAM STANLEY JEVONS (1835–1882)
The difference between “political economy” and “economics”
“If any single characteristic differentiates current, neoclassical economics from that of the classical period,” according to Margaret Schabas, “it is the use of mathematics.” Adam Smith’s Wealth of Nations (1776) was in large part a historical study of why some nations were rich and some poor. Simonde de Sismondi felt more comfortable deploying a compelling historical argument than he did an equation. The theories of David Ricardo and Thomas Malthus were that bit more abstract, but did not contain complex algebra. It is a very different story today. Most economics papers have a few pages of text, then lots of pages of equations and statistical tables (and there is a trend of publishing larger and larger appendices with even more equations and statistics). For turning “political economy” into “economics”, you have William Stanley Jevons to thank.
Alfred Marshall referred to the man as “the chief author… of abstract quantitative reasoning”. Jevons saw himself as revolutionising political economy–so much so, in fact, that he reckoned that it needed a new name. “I may mention the substitution for the name political economy of the single convenient term Economics,” he wrote in the preface to the second edition of his Theory of Political Economy in 1879. “I cannot help thinking that it would be well to discard, as quickly as possible, the old troublesome double-worded name of our Science.”1 Jevons, then, appeared to achieve an awful lot in his short life. Why is he not better known today?
Quantifying the world
Jevons was born in Liverpool in 1835, the ninth child of eleven in a Unitarian family. He was a smart boy who, in his youth, bore a remarkable resemblance to Eden Hazard, the star Belgian footballer. Because of his faith he was barred from attending Oxford or Cambridge universities (as was Mill). So instead he went to University College, founded by Jeremy Bentham, which admitted Nonconformists, from 1851. The utilitarianism of the place exerted great influence over him. He studied biology, chemistry and metallurgy. His scientific background was also to play a big role in the evolution of his economic thought.
Jevons was exposed to the harsh reality of capitalism at a young age. In 1848 his father’s iron-merchant business went to the wall. That ultimately forced Jevons to leave University College for Australia, where he earned money for his family working at the Royal Mint in Sydney. Jevons first got a taste for formal economics upon picking up a copy of Smith’s Wealth of Nations. But for perverse reasons. He found the arguments contained within it imprecise, and non-scientific, and reckoned that he could do better. He believed that maths was the answer.
Jevons set out trying to apply mathematics to economic questions. Before long his studies of the coal industry led him to a shocking discovery–one which would also make his name. His sums told him that Britain had around 100 billion tonnes of coal left. But the rate of extraction of that coal was rapidly growing. Borrowing some terminology and theory from Thomas Malthus, he feared for Britons’ prosperity once coal supplies ran out. Would the economy of the world’s richest nation turn to dust? The treatise On the Coal Question (1865) was the first detailed quantitative study of Britain’s coal reserves, and brought the young Jevons to national prominence.
His Malthusian take on Britain’s coal supply was, of course, shown to be too gloomy. “His main mistake”, says John Bellamy Foster, “was to underestimate the importance of coal substitutes such as petroleum and hydroelectric power.”2 In no way did Britain’s coal supply restrict economic growth over the 19th or 20th centuries.
But one bit of Jevons’s reasoning has survived the test of time. He proposed what came to be known as “the Jevons paradox”. Jevons wondered whether Britain could reduce its consumption of coal with a view to postponing the day when the stuff ran out altogether. He dismissed that idea out of hand. In fact, he thought that as energy efficiency improved, energy consumption would rise, rather than fall. As the cost dropped, the means of using energy would be brought within the reach of more people. As he put it, “to suppose that the economical use of fuel is equivalent to a diminished consumption… The very contrary is the truth.” Jevons’s paradox continues to inform environmental debates to this day. How else to explain the fact that in the 21st century emissions from cars continue to rise, even as they become more and more efficient?
Proud of the success of On the Coal Question, Jevons decided to dig deeper into the potential of maths as an analytical tool. His manifesto for mathematical economics appeared in 1871, published as The Theory of Political Economy, while he was a professor at Owens College in Manchester.3 He vigorously attacked the economic thinkers preceding him. According to Ellen Frankel Paul, Jevons charged Smith and the rest of the political economists “with having been bad mathematicians”. David Ricardo was an “able but wrong-headed man”, Jevons asserted. John Stuart Mill was an “equally able and wrong-headed admirer”. Quesnay “produced an entirely one-sided system of economics”, he wrote elsewhere. Continuing his attack in a letter to his brother, Jevons rather arrogantly remarked, “I cannot now read other books on the subject [ie, political economy] without indignation.”
The book had an instant impact. As Schabas shows, “it received notices or reviews in virtually all of the prominent English periodicals.” Jevons himself noted in 1875, with no hint of modesty, “I think that a considerable change of opinion is taking place in England.” He benefited in particular from an impassioned argument in favour of mathematical economics by George Darwin, son of Charles, which appeared in the same year. As Terence Hutchison argues, “in the space of a few years in the late 1860s and early 1870s, the classical structure of ‘theory’ underwent a remarkably sudden and rapid collapse of credibility and confidence, considering how long and authoritative had been its dominance”. Herbert Foxwell, an economics professor at Cambridge, noted that with Jevons’s work finished “there is no doubt Mill is dead in this country”.
No holds barred
In a nutshell, Jevons’s argument was that the writings of the political economists (excluding, perhaps, Cantillon4) were too imprecise. Talking about a theory at great length, as Ricardo did most notoriously, is much less efficient than writing it out in a neat equation or drawing it out in a graph. Imagine trying to write down an explanation of a supply-and-demand curve, for instance, and then compare that with how easy it is to sketch. And Jevons also worried that without maths, it was quite possible that confused arguments and logical fallacies could slip in.
His mission, therefore, was, in his words, “to fling aside, once and for ever, the mazy and preposterous assumptions of the Ricardian school”. Schabas argues that while Jevons was not the first person ever to incorporate maths into economics–that honour may go to William Whewell (1794–1866) or Auguste Cournot (1801–77)–he “was the first to insist that economics must necessarily be treated mathematically”.5 If economics “is to be a science at all,” said Jevons, “[it] must be a mathematical science.”
At this stage it is worth asking: why did the political economists not use much maths? The famous American economist Frank Knight argued in the 1930s that “the classical writers [were] ignorant of mathematical concepts”. I am not sure that is right. Gavin Kennedy, an Adam Smith expert, argues that the Scot was an accomplished mathematician. Robert Simson (1687–1768), a mathematician at Glasgow, “encouraged Smith’s extra-curricular studies and his fellow student, Matthew Stewart (1718–87), later professor of mathematics at Edinburgh University (1747–85), remarked to Professor Dugald Stewart [Smith’s first biographer] about Smith’s mathematical abilities in solving a ‘geometrical problem of considerable difficulty’”.6 John Stuart Mill knew loads of maths, as did David Ricardo.
The avoidance of maths, then, probably had a deeper justification. Unfortunately it is never easy to work out why people didn’t do something. I confess that I have not come up with a really compelling reason why the political economists barely used mathematics. Nor have I read one in the literature. But it is possible to speculate.
The words of Jean-Baptiste Say (1767–1832) may point to one reason. In 1803–shortly after Smith, around the same time as Malthus and Ricardo, and shortly before Mill was born–Say referred to “our always being misled in political economy, whenever we have subjected its phenomena to mathematical calculation”. The thinking goes that people are too unpredictable and unreliable for their actions to be reduced to simple equations. Political economy, in Say’s words, is “subject to the influence of the faculties, the wants and the desires of mankind” and therefore is “not susceptible of any rigorous appreciation, and cannot, therefore, furnish any data for absolute calculations”.
The question, of course, is how representative were Say’s views.7 John Elliott Cairnes, a contemporary of Jevons who was a paid-up political economist, rather than an economist, reckoned that many of the data necessary to the mathematical solution of economic problems were too unreliable. Cairnes also worried that mathematics could not be applied to the development of economic truth, “unless it can be shown, either that mental feelings admit of being expressed in precise quantitative forms, or, on the other hand, that economic phenomena do not depend upon mental feelings”. In other words, you cannot quantify feelings like hunger, desire or love.
But Jevons came to economics with a different philosophical background. For one thing he was a science nerd. He constructed a “logic piano”, a sort of proto-computer, which enabled people to make logical deductions. He was naturally inclined to try to put stuff into mathematical language whenever possible. And anyway, when Jevons was writing, more and more statistical datasets were being published–and they were getting more and more reliable.
Jevons then went about showing that mathematics and economics could indeed fit together. He compiled reams of economic statistics, with a view to assuaging the concerns of those who said that there would never be enough data to make meaningful calculations. Jevons accepted that you could not measure hunger or love–to a point. As a follower of Jevons put it in 1875, “[i]t would be utterly hopeless to attempt expressing hunger and thirst in numbers. But this fact does not make it impossible to say precisely how many barrels of flour the inhabitants of a city have consumed in a given period, nor how many they are likely to consume.” In other words, we can measure how people act on those preferences.
And what of the argument, put forward by those such as Say, that human action was just too unpredictable to boil down into an equation? Jevons turned Say on his head. He pointed out that the natural sciences were also unpredictable. But that does not mean that the hard sciences should dispense with maths as well.
As well as making the case for the use of maths in economics, Jevons was also one of the first thinkers to rely heavily on graphs to illustrate his point. In the words of Keith Clavin, a historian, “Jevons endorses his diagrams as analogies for complicated mathematics that can permit amateur economists ‘to see’ the outcomes of mathematic processes.” When Keynes identified Alfred Marshall as the founder of “diagrammatic economics” (see Chapter 20), he was not entirely historically accurate.
Not that again
Jevons’s scientific view of the world led him towards his most famous economic theory. It concerns that old chestnut, value, which has come up time and again in this book. Most economic theorists preceding Jevons had, in effect, ignored the question of price when discussing the value of something. Almost all the political economists had relied on variants of the labour theory, according to which the value of something was determined by the amount of labour time that had gone into it. It is not surprising that the classical economists had tried to seek out such an “objective” theory of value. At the time inflation was highly volatile. The maximum annual rate of inflation Adam Smith experienced during his lifetime was 28%; the minimum–14%. During much of the 18th and 19th centuries there was also a general scepticism shown by political economists towards empirical data. How reliable was it? And could observations about the real world ever be enough to formulate universal laws?
Therefore, the thinking went that due to inexplicable market fluctuations, prices fluctuated around some “natural” or “absolute” value. That value is seen as objectively determined. You can safely ignore the price because it is not really reflective of anything. Jevons rejects this approach entirely: “among the most unquestionable rules of scientific method is that first law that whatever phenomenon is, is,” he argues. In other words: don’t just pretend that prices aren’t there, but explain the price. As Jevons says, “if a phenomenon does exist, it demands some kind of explanation”. For him, relative prices and value are the same thing.
It followed that Jevons had no time for the labour theory of value. “Industry is essentially prospective, not retrospective,” he argues, “and seldom does the result of any undertaking exactly coincide with the first intentions of its producers.” In other words, a business cannot simply assert, at the beginning of the production process, that a good is worth £10, on the basis of how much labour time has gone into it. It only knows what the good is worth when it actually goes into the market and tries to sell it. And people might only want to pay £8 for it.
How, then, to explain price? As Jevons put it, “[w]e only have to trace out carefully the natural laws of the variation of utility… in order to arrive at a satisfactory theory of exchange.” So utility is what counts for price or value–nothing else matters.
Jevons plumped for utility for a good reason. Recall that he went to University College, the spiritual father of which was Jeremy Bentham. Ellen Frankel Paul argues that Benthamite utilitarianism, which she describes as “the doctrine that the effect upon human happiness is the sole criterion of what is right and wrong”, was “explicitly subscribed to by Jevons”. “The object of economics”, Jevons says, “is to maximise happiness by purchasing pleasure… at the lowest cost of pain.” For Margaret Schabas, “all economic actions stemmed from an imbalance, within any particular mind, of pleasure and pain”. Jevons’s arguments also sound similar to the proto-utilitarian ones of Francis Hutcheson, Adam Smith’s teacher. In sum, Jevons was, in the words of one commentator, “the first significant writer consciously to blend English utilitarianism with the theories of abstract economics”.
Yet in Jevons’s hands, utilitarian economics is a tiny bit more complex than that. It introduces in a fully developed form the concept of “diminishing marginal utility”. This was something that Bentham had appeared to recognise, but without developing it in much detail. But it was to be crucial for Jevons’s understanding of value.
In Jevons’s scientific studies, he had come across the Weber–Fechner law, a hypothesis in the field of psychophysics. That law states that the response to a stimulus gets smaller and smaller with each repetition. Put that into plain English. Once you have something, having another of the same thing is somewhat less useful. If you’re hungry, you may want a sandwich. Getting one small sandwich is really nice; having two small sandwiches is probably even nicer. But there is a higher quantity of “additional niceness” between having none and one, as between having one and two. The extra benefit of having a third sandwich, meanwhile, is pretty small, and of the fourth sandwich practically nothing (it might even be negative, because you have to spend effort looking for somewhere to store or discard the unwanted sandwich). Jevons also uses a food-related example to make his point: “The decrease of enjoyment between the beginning and end of the meal may be taken as an example.”
For Jevons, the price/value of something is determined by its marginal utility for the people consuming it. It is a complicated idea so we shall take it slowly. First of all, it puts the idea of utility centre-stage, where what matters are the opinions of individuals: it is a subjective theory of value. So a kilogram of strawberries is worth more than a kilogram of apples because strawberries are more useful, or tastier, than apples. As Ludwig Lachmann puts it, “the first step in the direction of subjectivism was taken when it was realised that value, so far from being inherent in goods, constitutes a relationship between an appraising mind and the object of its appraisal”.
The theory, however, goes one level deeper. This is the “marginal” bit. In plain English, the price is set at a level where people are indifferent between having that good, and not having that good. They consider themselves to be just as well off if they buy the good, versus not buying the good and keeping the money. In Jevons’s words: “He would derive equal pleasure from the possession of a small quantity more as he would from the money price of it.”
Why is this the case? If for some reason the price of a good is forced below its “true” market price, more and more people will consume it, pushing up its price until it is just equal to the point at which they are indifferent between consuming it, on the one hand, and keeping the money, on the other. The reverse is true if, somehow, the price is forced above its “true” market price. Fewer people will buy it. The really crucial point is that Jevons is relying on the idea of consuming an additional unit of a good–hence it is a “marginal” theory. Let’s go back to the example of sandwiches. If a sandwich costs £2, then Jevons concludes that the swing consumer is indifferent between buying the sandwich and keeping the £2.
Jevons’s theory also purports to provide an answer to that enduring conundrum in economic thought: the diamond–water paradox. Adam Smith was exercised by the question of why water is so much cheaper than diamonds, despite the fact that it is so much more useful. As we saw in Chapter 10, Smith reckoned that the paradox showed how useless questions of utility were in determining value.
Jevons has another answer. He accepts that water is more useful than diamonds. But then the marginal stuff comes back in. The Jevons theory says that the marginal utility of water is far lower than the marginal utility of diamonds. As Ellen Frankel Paul says, “[w]hile water has great utility, it is so abundant that final increments of it, which is all that one is concerned about in the normal market situation, are worth little or nothing to people already in possession of all they need.” An extra diamond, by contrast, offers massive extra utility to someone. But imagine if there was a drought. Then, the marginal utility of water would be very high–people would be willing to trade diamonds for a glass of water, since it would stave off death for a few more hours.
Bringing it out into the open
In proposing these theories, Jevons was part of what economists today called the “marginal revolution” in economics. Two other economists, Léon Walras and Carl Menger, working in Switzerland and Austria respectively, are seen as the two other fathers of the marginal revolution. Some historians of economic thought reckon that it is misleading to think of a Jevons–Walras–Menger marginal revolution, and that one can find marginalist notions much earlier in the writings of Antoine Augustin Cournot and Jules Dupuit. David Ricardo’s theory of rent also relies on marginal concepts (see Chapter 9). Mark Blaug argues that it is best to view the contributions of the Jevons–Walras–Menger triumvirate as part of “a slow half-century uphill struggle to convert the economics profession to marginalism in general and marginal utility in particular”.8
Jevons’s utility theory of value was a comprehensive rebuttal of the labour theory of value held by the classical economists since Smith. It posed a particularly big problem for Marxist theory, which was at the time enjoying intellectual prominence. Recall that the Marxist labour theory of value shows that exploitation is part and parcel of capitalism. Workers produce more than they get to take home; capitalists appropriate the “surplus value”.
Jevons rejects this entirely. As we saw in the chapter on Marx, once the labour theory of value is safely disposed of, it is harder to sustain the notion that capitalism is inherently exploitative. Jevons’s theory, indeed, implies that some workers are paid a higher wage than they would need to be in order to get up and go to work–not that they were being paid less than they should be. Philip Wicksteed, a socialist who was a disciple of Jevons, offered a “Jevonian” critique of Capital in 1884, in which he accused “the great logician [of having] fallen into formal (if not, as I believe to be the case, into substantial) error”.9 “A Roman Catholic impugning the infallibility of the Pope could have created no greater scandal,” wrote George Bernard Shaw the following year. Marx, unfortunately, failed to engage with the critiques of the “marginalists”.10
Smith, Ricardo, Mill… but not Jevons?
Jevons’s influence is undeniable. Lots of recent Nobel-prize-winners in economics are, in effect, mathematicians. Today the theory of utility is far more respectable than the labour theory–the concept of “marginal utility” is at the centre of modern economics. Without theories of marginality in your head, you cannot create such basic things as a supply-and-demand curve.
So why is Jevons not better known? Joseph Schumpeter notes that he “never made a mark that was at all commensurate to the importance of his achievement”. One explanation is that he was not around for long enough. As Brett Clark and John Bellamy Foster put it, “Jevons’s intellectual career bloomed for a mere 20 years due to a late start and an early death.” Perhaps because of overwork, he retired in 1880, while only in his forties. Shortly afterwards, while on holiday in Hastings, he went swimming in the sea, got caught up in a wave, and drowned. Since Jevons did not teach at one of the most important universities, he left behind no pupils who could continue his work for him.
A more convincing reason for Jevons’s relative obscurity is that he appeared to get confused by his own theory of value. He started off guns blazing, calling Ricardo, Smith and Mill morons and promising an entirely new way of doing things. His subjective, marginal-utility theory of value was elegant in its simplicity, and provided a real challenge to those who subscribed to objective, labour-theory-of-value dogma. It appeared fundamentally different from what had come before. However, that was not the end of the story.
Go back to the diamond–water paradox. The extent to which something has utility in the market, according to Jevons, is to some degree shaped by how many of those things there are. Diamonds are valuable in part because there are few of them. Jevons admits that the “[c]ost of production determines supply”, which does sound like a fair enough argument: getting diamonds out of the ground is really difficult. Confusingly, Jevons then ends up concluding that, in the long run, value is determined by the cost of production after all. This sounds sort of similar to what Ricardo had argued. Ellen Frankel Paul states that “Jevons seems to have smuggled the old cost of production element [something central to Ricardo’s thought] back into the theory of value.”
More and more people came to believe that Jevons’s theories about the economy were not totally thought through. Margaret Schabas bluntly states that “Jevons was clearly not a philosopher of the first rank.”11 Keynes, meanwhile, called Jevons’s Theory a “brilliant, but hasty, inaccurate and incomplete brochure, as far removed as possible from the painstaking, complete, ultra-conscientious, ultra-unsensational methods of Marshall”.
As well as the confusions that surround Jevons’s theory of value, it is worth asking: outside of the ivory tower, how influential really were they? The new theory sounds as though it will be the intellectual bedrock for an ultra-free-market approach to the economy. If the market succeeds in maximising utilities, and Jevons seems to believe that it does, then what rationale can there ever be for any sort of government intervention? The government can at best keep total utility the same, but it is more likely to reduce it. In addition, Jevons focused on how individuals got greater or lesser amounts of utility for themselves. That is a different question from trying to measure overall utility in society–and he was sceptical of the notion of comparing utilities between people. That appears to rule out the idea of “social good”, which in turn seems to suggest that government intervention is almost certainly a bad idea.
Yet in his political writings Jevons considers loads of instances where government intervention is entirely appropriate. He wanted the government to compel businesses to provide information about their operations because that made it easier for efficient markets to form. He was also in favour of government regulation of workplaces, including limits on hours worked and implementation of safety measures. He saw no problem with such intervention “if it could be clearly shown that the existing customs are injurious to health and there is no other probable remedy”. As far as policy recommendations are concerned, Jevons sounds pretty much exactly like Mill–generally predisposed towards free markets but more than willing to set aside purism for the greater good.
So for the man on the street, what difference did marginal utility really make? Jevons may have revolutionised Ricardian–Millian economic theory through his final utility theory of value. Schumpeter calls Jevons “one of the most genuinely original economists who ever lived”. Yet as Ellen Frankel Paul points out, “this dramatic and fundamental reorientation on the theoretical level did not carry over into a theory of governmental intervention in the economy radically different from that advocated by Mill”. It would be for Alfred Marshall to finish off the formulation of “economics”, and to develop a coherent approach to social reform.