Lately, however, the doctrine seems to have changed its nationality and become wholly American. The American professors J. B. Clark, Patten, Irving Fisher, Carver, Fetter, etc., are assiduous students of marginal utility, applying the conception not only to problems of capital and interest, but also to the question of distribution.
[1109] To escape the confusion which would result from employing the same term in two such very different senses—a confusion that is inevitable however one may try to avoid it—Pareto has substituted the word “ophelimity,” and Gide in his Principles (1883) “desirability.”
[1110] “The idea of final utility is the ‘open sesame,’ the key to the most complicated phenomena of economic life, affording a solution of its most difficult problems.” (Böhm-Bawerk, The Austrian Economists, in Annals of the American Academy of Political and Social Science, 1891.)
[1111] Condillac had already drawn attention to this fact (see [p. 48]), and Buffon had noted it even before that. “The poor man’s coin which goes to pay for the necessaries of life and the last coin that goes to fill the financier’s purse are in the opinion of the mathematician two units of the same order, but to the moralist the one is worth a louis, the other not a cent.” (Essai d’Arithmétique morale.)
The connection between quantity and demand is best expressed by means of a curve either of utility or of demand (see [p. 532]). Along the horizontal line let the figures 1, 2, 3, 4 denote the quantities consumed, and from each of these points draw a vertical line to denote the intensity of demand for each of these quantities. The height of the ordinate decreases more or less rapidly as the quantity increases, until at last it falls to zero.
[1112] It is in cases of this kind that figures become handy. If we take two curves, an ascending one to represent the utility of each handful of salt parted with, and a descending one to represent the utility of each handful of rice acquired, the two curves must necessarily intersect, seeing that one is just the inverse of the other. The point of intersection marks the place where the utilities of the two exchanged handfuls are exactly equal.
We must be careful not to confuse matters, however. It is not suggested that the final utilities in the case of the two co-exchangers are equal. There is no common measure by which the desires of different persons can be compared, and no bridge from one to the other. What is implied is that the final utility of both commodities for the same person are the same. The balance lies between two preferences of the same individual. The actual market exchange is just the resultant of all these virtual exchanges.
The Austrian school in its explanation makes use of a hypothesis known as the double limit, which does not seem to be absolutely indispensable, seeing that other economists of the same school—Walras, for example—appear to get on well enough without it. They seem to think of buyers and sellers drawn up in two rows facing one another. Every one of the sellers attributes to the object which he possesses and which he wants to sell a certain utility different from his neighbour’s. Each buyer in the same way attributes to that object which he desires to buy a degree of utility which is different from that which his neighbour puts upon it. The first exchange, which will probably have the effect of fixing the price for all the other buyers and sellers, will take place between the buyer who attributes the greatest utility to the commodity he has to sell, and who is therefore least compelled to sell, and the buyer who attributes the least utility to the commodity he wishes to buy and who is therefore least tempted to buy. At first sight it seems impossible that the party as a whole should be bound by the action of the two individuals who show the least inclination to come to terms. It would be more natural to expect the first move to take place between the seller who is forced to sell and because of his urgency is content with a price of 10s. per bushel, say, and the buyer who feels the strongest desire to buy and who rather than go without would be willing to give 30s. for it. But upon consideration it will be found that the price is indeterminate just because these two are ready to treat at any price. The most impatient individual will surely wait to see what terms the least pressed will be able to make, and it is only natural that those who are nearest one another should be the first to come together. These two co-exchangists who control the market are known as the “limiting couple.”
[1113] It was Stanley Jevons who gave it this expressive name. It is meant to imply that if two objects which fulfil very different needs, perhaps, can be interchanged, they cannot have very different values.
[1114] The law of substitution applies not merely to different objects which satisfy the same need, but also to objects which supply different needs, provided those needs are to any extent interchangeable—to tea as a substitute for wines, to coffee as a substitute for both, to travel as a substitute for the life of a country gentleman.