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- Philip Wicksteed
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The Common Sense of Political Economy is an excellent example of a rediscovered classic — a book of profound importance in its time that came to be lost in the shuffle. It is as mighty and significant as Adam Smith’s Wealth of Nations or Ludwig von Mises’ Human Action, and like these books, it is not just a dusty old tome, but one that speaks directly to the great issues of our time.
Laissez Faire Books is the publisher of this new edition, the first modern edition with American spellings, correct graph placements, cleaned up citations, and perfect navigation. Our edition also includes an great introduction by Professor Peter Boettke of George Mason University, who puts the book in the context of the history of ideas and explains its modern relevance.
The author is Philip Wicksteed (1844–1927), and his enthusiasm, even love, for the topic itself is obvious on every page. He is like a tour guide in a great castle who turns on lights in room after room and proceeds to explain everything in the room with precision and excitement. The reader can detect this in his prose. Why does he put the phrase common sense in the title? There are two meanings. He sought to bring a certain unity to the opinions and debates within economics at the time. The principle of marginal utility had been written about and taught for several decades.
It was the great discovery within economic theory of the last half of the 19th century but was only now becoming the full consensus of the science itself. Wicksteed sought to make the marginalist way of thinking the “common” way. The second way he uses the term is to capture the effect of marginalist thinking on the human mind. Once you get the principle, the functioning of the world becomes clearer to you. What was previously mysterious now seems rather obvious. What had previously baffled you now seems perfectly clear.
The marginalist way of thinking becomes, in the most colloquial use of the phrase, “common sense.” Wicksteed writes with the passion of a hobbyist (he was actually a Unitarian minister in “real life”) but with a precision that exceeded all the professional economists of his time. It still stands as the most elaborate, detailed, and extensive exposition of the idea ever written. If you stick with his argument from the beginning to the end, your thinking will be permanently affected. You will see marginal utility all around, in every economic action. It will provide new ways of thinking of prices and resources and human behavior. You will have an impenetrable edifice against the fallacy of thinking of the value of whole classes of goods and services and instead see value as exclusively attached to the incremental choice of the acting person.
What is marginalism? It was the discovery that economic value extends from the incremental choice one unit at a time. The classic puzzle that marginal utility sought to solve was this: Why are diamonds so much more valuable in the market than water, even though water is obviously more necessary for life? Just on the face of it, shouldn’t it be the reverse? Marginalism solves the issue. The choice for one or the other is made on the incremental unit, not on anyone’s opinion on the value of the whole class of goods. From the point of view of human choice, water is usually far more plentiful and available than diamonds, whereas diamonds are much less so and therefore have a much higher value per unit. The situation could reverse itself in a different social context. A man dying of thirst in the desert will pay far more for water than diamonds.
This is how prices come to be: the choice at the moment of decision making for or against the increment of what is available right now. Marginal-utility theory solves many other seeming mysteries. Why are movies that cost tens of millions to make available for download for only a few bucks or even for free, while video games that might cost only a few thousand to make priced at $50 and $100? The answer is that the user is not making judgments based on the cost of production but only on the use value of one unit to him or her at the point of decision making.
Marginalism helps explain wage puzzles too. Why do plumbers make so much more money than baby sitters, even though baby sitters are guarding and protecting human life and plumbers are only unstopping drains? The baby sitter might indeed have great total utility to society, the market makes judgments on the margin. Their services are much easier to come by, whereas plumbing services are relatively scarcer. Consumers do not care about total utility; they care about obtaining the service in the one instance in which they need it. That decision is what determines the price. This insight further addresses wage issues that would otherwise mystify people. Why does a basketball star, who would seem to provide nothing necessary to human life, make so much more money than a reading teacher, who is teaching a crucial skill?
Again, it is not the total utility of the task that matters for economics, but the utility of the incremental choice of the acting person. Why are restaurants open on holidays whereas banks are closed, when surely banking provides a more unique service to society and anyone can cook stuff at home anytime? The answer is that restaurants make higher profits on the margin on holidays, when people want to go out to eat, whereas the banks have discovered that their profit margins are best served by opening when people tend to do their banking, which is not on holidays.
Marginalism helps illuminate many other economic concepts, such as opportunity cost (the real cost of anything is the thing you give up to get it), subjective value (economic value resides in the human mind, not the physical good), diminishing marginal utility (the more of each additional unit you buy, the less you are willing to pay for it), and the relationship of cost and price (the cost of a good never dictates its market prices; indeed, the reverse is true). It provides insight in nearly every aspect of human behavior.
Once you begin to think about the margin, the scales truly do fall from your eyes. You will notice that the book is gigantic. But it is also a joy to read because Wicksteed’s own enthusiasm is infectious. Maybe you will be like me and truly come to admire and genuinely like the man behind the prose. I appreciate his spirit of discovery and exposition. It’s absolutely marvelous that he can speak to us again, fully a century and two years after his masterpiece first came out. It’s a big but worthy task to go on this tour of economic reality with him. Marginalism will become your “common-sense” way to view the world when you’ve finished.