MARGINAL REVOLUTION AND THE SCARCITY
LOOKING back on the "marginal revolution" of the eighteen- seventies, one is now tempted to say that the application of the principle of marginal utility to the theory of prices was perhaps the least interesting of its results. This will not sound so paradoxical when we reflect how little the marginal utility theory helps us to explain the determination of prices in real life and what a great number of ordinary problems of "price-economics" may still be dealt with by the traditional demand and supply analysis without using the marginal apparatus (cf., for example, K. E. Boulding, Economic Analysis, Part I). If that is true, then the undoubtedly far-reaching significance of the marginal revolution should be sought elsewhere. It should be sought in the realm of welfare economics as distinct from price-economics.
From the point of view of welfare economics, the marginal revolution did two things: (i) It extended welfare analysis from the physical to the subjective level and substituted the principle of diminishing marginal utility in the place of the classical economists' first approximating assumption that quantities of consumers' satisfaction were proportional to quantities of physical products. Thus welfare propositions could now attain a second degree of approximation. (ii) Further, it offered an alternative to the labour-theory outlook: viz. the Scarcity approach to the economic problem.
Of these two results of the marginal revolution, the second was perhaps even more far-reaching than the first. For it was the scarcity approach to the economic problem, and not the marginal utility theory as such, which led to the new concept of "pure" economics as contrasted with the classical Political Economy. In particular, the scarcity concept shifted the focus of attention from the classical theory of Economic Expansion to the theory of the General Equilibrium within a given Static framework.