Analysis of “The Limitations of Marginal Utility” by Thorstein Veblen

Marginal Utility by definition is the additional satisfaction a consumer gains from consuming one more unit of a good or service, which is usually positive, but can be negative. The concept implies that the utility or benefit to a consumer of an additional unit of a product is inversely related to the number of units of that product he already owns. The notion of marginal utility originated with attempts by 19th-century economists to examine and describe the economic validity of price. They believed price was partially determined by a commodity’s utility, which led to a paradox when applied to predominant price associations. This problem, commonly referred to as the paradox of value, was resolved with the concept of marginal utility. An example of this is between two goods like high value gold, and low value rice. Because gold is very scarce and its demand was great, the acquisition of additional gold was a great priority. Therefore, their marginal utility was higher, and consumers would be willing to pay a comparatively high price for them. Rice, on the contrary, is much less valuable only because it is much more abundant, and the purchasers of rice have enough to satisfy their needs for it. Additional purchases of rice beyond people’s appetite for it will be of decreasing benefit or utility and will eventually lose all utility beyond the point at which hunger is completely satisfied. (Britannica, 2014) This is similar to the paradox of diamonds and water, most commonly associated with Adam Smith. Marginal utility, according to Thorstein Veblen, is: “It is from first to last a doctrine of value, and in point of form and method it is a theory of valuation. The whole system, therefore, lies within the theoretical field of distribution, and it has but a secondary bearing on any other