Marginalism

“Marginalism” is the essence of good economics.

“Marginalism” is the essence of good economics.

But until the 1870s, economists, even very great ones like the Blessed Adam Smith, and certainly his follower Karl Marx, didn’t understand it. Marx, and his followers such as Mariana Mazzucato, who advises Lula on innovation, never did get it.

Marginalism says that in making a decision today about the future we should look forward. Pretty obvious, eh? Think about deciding today how many engineers to work on artificial intelligence in your innovative factory in São Paulo. Obviously, the correct way to decide is to imagine what would be the contribution of the next engineer you hire, in addition to what you already do and know. It’s called her “marginal product.” Then compare it with her wage. If the marginal product is greater than her wage, hire her. Then do the same for the next one, and the next. Stop when another would be stupid. That way you hire in the correct, efficient amount—by looking forward “marginally,” step by step.

It’s common sense, right? It’s like your decision in consuming beer. Does the next beer give you more “marginal utility” than its cost you in money? If so, buy. Keep doing it until you’re full. . . or are so drunk you can’t find your wallet.

Before the 1870s, the economists would say, to the contrary, that to decide how many engineers to hire or how many beers to buy, you should look backwards, at the past, and ask about total product or total utility so far accumulated. The gain from having engineers in your factory, Marx thought, is the whole product. Without any engineers, you couldn’t function. In fact, you couldn’t without roads supplied by the government, or elementary schools that taught the engineers arithmetic, or the sun’s rays, or the presence of oxygen in the atmosphere, or the existence of the universe. Uh oh. These aren’t paid by you, no more than you pay for the past inventions in beermaking back to the Neolithic drunkards. Craziness arrives.

President Obama, who I wish was still president but is not an economist, said once of a road outside a factory, “You didn’t build that.” He meant that the past of roadbuilding, or the past of society, or of the universe, has provided roads, knowledge, stuff, educations, making possible the total output of your factory. His idea was to justify the state taxing you in your factory for the whole accumulation in society so far, back to Adam and Eve. You can see that such thinking has no limit. It’s crazily bad economics.

Mazzucato never imprinted the discovery of the 1870s on her heart, as a real economist does. So she says things like “prices of innovative products do not reflect the collective contribution to the products concerned.”

Of course they don’t, and should not. “The collective contribution” is the whole society, the past, the sun. The past is the past. It’s given, the place from which your decision in your factory should begin. Not finish. Yes, roads should be built and education should happen. Some of it should be paid for by taxes on you and me.

But not by crazy economics.

Weekly column in Folha de São Paulo, Brazil
Translated into Portuguese for the newspaper.