Marginalism

The marginal theory of value was first broached in the 1870s, and it revolutionised economics. Previously it had been believed that the value of an item was a reflection of the work and resources devoted to making it, or the cost-of-production theory of value. Many classical economists believed this, including the labor theory of value.

Neo-classical economists accepted the marginal utility explanation for value and grafted this insight on to classical economics. The Austrian School used marginal utility as a starting point in breaking away from the stress that other economic schools put on analysis of economic data. The Austrian economist Eugen von Böhm-Bawerk gave probably the most memorable description of the marginal theory of value, one often used by economics textbooks. Loosely translated it is:

A pioneer farmer had five sacks of grain, with no way of selling them or buying more. He had five possible uses - as basic feed for himself, food to build strength, food for his chickens for dietary variation, an ingredient for making whisky and feed for his parrots to amuse him. Then the farmer lost one sack of grain. Instead of reducing every activity by a fifth, the farmer simply starved the parrots as they were of less utility than the other four uses, in other words they were on the margin. And it is on the margin, and not with a view to the big picture, that we make economic decisions.

Karl Marx however died before marginalism revolution was finally accepted as orthodoxy, and so was not able to rework this fundamental challenge to his schema. This is why most orthodox marxists still hold to the labor theory of value.