What Does Marginality Mean?

What does it mean to act "on the margin" or to think in terms of "marginality?" Economists use the term often. The Mises Circle in interwar Vienna even had songs with refrains that included the words "marginal utility."

On the very first day of my principles courses, I teach my students that people make decisions "on the margin". Of course, this pronouncement is greeted primarily with looks of resigned boredom and/or helplessness. I try to clarify by saying that if we look at a piece of paper, the margin is just the edge, not the entire sheet. This explanation also does little good. The fact is, economists are so used to marginal thinking that they have a hard time explaining it to someone who's never heard of it before. And so what I do is jump quickly into some examples.

The Water-Diamond Paradox

The most famous application of marginalism is the solution to the so-called water-diamond paradox, which seemed to stump Adam Smith in his Wealth of Nations.1 The problem is this: Why do diamonds have a higher exchange value than water, when diamonds are a mere frippery while water is essential to life? Shouldn't people be willing to offer more in exchange for a unit of water than for a unit of diamonds?

The solution, of course, is that no individual is ever in the position of choosing between all of the diamonds in the world and all of the water in the world. A given choice is made on the margin. If offered a choice between a cup of water and a handful of diamonds, most people would pick the latter because the marginal utility of those particular diamonds is higher than the marginal utility of that particular cup of water.

Some economists would describe this situation by saying that diamonds are scarcer than water because the demand for diamonds relative to their supply is so much higher. Yes, water is more important for human welfare than diamonds, but there is so much water to go around that even if 10 trillion gallons were to disappear, no one would care. On the other hand, if only a few pounds of diamonds were to vanish, some people would be very upset.

Teachers versus Athletes

The classical confusion overuse and exchange value resurfaces in modern times whenever someone laments: "Teachers make only a fraction of what professional athletes make! Doesn't this country care about education more than sports?!?"

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