William Jevons was one of three men to simultaneously advance the so-called marginal revolution. Working in complete independence of one another—Jevons in Manchester, England; leon walras in Lausanne, Switzerland; and carl menger in Vienna—each scholar developed the theory of marginal utility to understand and explain consumer behavior. The theory held that the utility (value) of each additional unit of a commodity—the marginal utility—is less and less to the consumer. When you are thirsty, for example, you get great utility from a glass of water. Once your thirst is quenched, the second and third glasses are less and less appealing. Feeling waterlogged, you will eventually refuse water altogether. “Value,” said Jevons, “depends entirely upon utility.”
This statement marked a significant departure from the classical theory of value, which stated that value derived from the labor used to produce a product or from the cost of production more generally. Thus began the neoclassical school, which is still the dominant one in economics today.
Jevons went on to define the “equation of exchange,” which shows that for a consumer to be maximizing his or her utility, the ratio of the marginal utility of each item consumed to its price must be equal. If it is not, then he or she can, with a given income, reallocate consumption and get more utility.
Take, for example, a consumer whose marginal utility from oranges is 10 “utils,” and from cookies 4 utils, when oranges and cookies are both priced at $.50 each. The consumer’s ratio of marginal utility to price for oranges is 10/$.50, or 20, and for cookies is 4/$.50, or 8. Jevons would have said (and modern economists would agree) that this does not satisfy the equation of exchange, and therefore the consumer will change purchases. Specifically, the consumer could increase utility by spending $.50 less on cookies and using the money to buy oranges. He would lose 4 utils on the cookies, but gain 10 on the oranges, for a net gain of 6 utils. He will have this incentive to reallocate purchases until the equation of exchange holds (i.e., until the marginal utility of oranges falls and the marginal utility of cookies rises to a point where, as a ratio to their prices, they are equal).
Of course, as is true with most new developments in economic theory, one can always find earlier writers who said some of the same things. Jevons’s role in the marginal revolution is no exception. Much of what he said had been said earlier by Hermann Gossen in Germany, Jules Dupuit and Antoine Cournot in France, and Samuel Longfield in Britain. Yet historians of economic thought are sure that Jevons had never read them.
Jevons put much less thought into the production side of economics. It is ironic, therefore, that he became famous in Britain for his book The Coal Question, in which he wrote that Britain’s industrial vitality depended on coal and, therefore, would decline as that resource was exhausted. As coal reserves ran out, he wrote, the price of coal would rise. This would make it feasible for producers to extract coal from poorer or deeper seams. He also argued that America would rise to become an industrial superpower. Although his forecast was right for both Britain and America, and he was right about the incentive to mine more costly seams, he was almost surely wrong that the main factor was the cost of coal. Jevons failed to appreciate the fact that as the price of an energy source rises, entrepreneurs have a strong incentive to invent, develop, and produce alternate sources. In particular, he did not anticipate oil or natural gas. Also, he did not take account of the incentive, as the price of coal rose, to use it more efficiently or to develop technology that brought down the cost of discovering and mining (see natural resources).
Born in Liverpool, England, Jevons studied chemistry and botany at University College, London. Because of the bankruptcy of his father’s business in 1847, Jevons left school to take up the position of assayer at the Mint in Sydney, Australia. He remained there five years, resuming his studies at University College on his return to England. He was later appointed to the post of chair in political economy at his alma mater and retired from there in 1880. Two years later, with a number of unfinished books in process, Jevons drowned while swimming. He was forty-six.
1863. A Serious Fall in the Value of Gold Ascertained, and Its Social Effects Set Forth. 1863. Reprinted in Jevons, Investigations in Currency and Finance. London: Macmillan, 1884.
1865. The Coal Question. 1st ed. London: Macmillan.
1866. The Coal Question. 2d ed. London: Macmillan. Available online at: http://www.econlib.org/library/YPDBooks/Jevons/jvnCQ.html.
1871. The Theory of Political Economy. Reprint. Edited by R. D. Collison Black. Harmondsworth: Penguin Books, 1970.
1875. Money and the Mechanism of Exchange. London: C. Kegan Paul. Available online at: http://www.econlib.org/library/YPDBooks/Jevons/jvnMME.html.
1875. “The Solar Period and the Price of Corn.” First published in Jevons, Investigations in Currency and Finance. London: Macmillan, 1884. Pp. 194–205.
1881. “Richard Cantillon and the Nationality of Political Economy.” First published in the Contemporary Review. Available online at: http://www.econlib.org/library/NPDBooks/Cantillon/cntNT8.html.
1888. The Theory of Political Economy. 3d ed. Available online at: http://www.econlib.org/library/YPDBooks/Jevons/jvnPE.html.
1894. Investigations in Currency and Finance. Edited and with an introduction by H. S. Foxwell. London: Macmillan.
1906. The Coal Question. 3d ed. Revised and edited by A. W. Flux. London: Macmillan.
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The quote "Value depends entirely upon utility" is from The Theory of Political Economy, Ch. I, par. 2, by William Stanley Jevons.