62
THE LAST WORKER
IN CONTEXT
FOCUS
Markets and firms
KEY THINKER
Anne-Robert-Jacques
Turgot (1727–81)
BEFORE
1759 French economist
François Quesnay publishes
Economic Table—a model that
demonstrates the physiocrats’
economic theories.
1760s French physiocrat
Guerneau de Saint-Péravy’s
essay on the principles of
taxation argues that the ratio
of outputs to inputs is fixed.
AFTER
1871 Austrian Carl Menger
argues in Principles of
Economics that price is
determined at the margin.
1956 In A Contribution to the
Theory of Economic Growth,
US economist Robert Solow
applies the idea of diminishing
marginal returns to the growth
prospects of countries.
ADDS LESS TO
OUTPUT THAN
THE FIRST
DIMINISHING RETURNS
F
renchman Anne-Robert-
Jacques Turgot (p.65) was
one of a small group of
thinkers known as the physiocrats,
who believed that national wealth
was created from agriculture.
Turgot’s twin interests in tax and
the output of land led him to develop
a theory that explains how the
output of each extra worker changes
as successive workers are added to
the production process. A fellow
physiocrat, Guerneau de Saint-
The earth’s fertility
resembles a spring that is
being pressed downward…
the effect of additional weights
will gradually diminish.
A R J Turgot
See also: The circular flow of the economy 40–45 ■ Demographics and
economics 68–69 ■ Economic growth theories 224–25
Péravy, had said that for each extra
worker on the land, the amount of
additional output is constant; in
other words each extra worker adds
the same to production as the last.
But in 1767, Turgot pointed out that
unprepared soil produces very little
when sowed. If the soil is plowed
once, output increases; plowed
twice, it might quadruple. Eventually,
however, the extra work begins to
increase output less and less, until
additional workers add nothing
further to production, because the
fertility of the soil is exhausted.
The role of technology
Turgot’s idea is that adding more of
a variable factor (workers) to a fixed
factor (land) will lead to the last
worker adding less to output than
the first. This has become known
as “diminishing marginal returns,”
and it is one of the most important
pillars of modern economic theory.
It explains not only why it costs
more to produce more, but also why
countries struggle to get richer if
their population expands without
improvements in technology. ■
 THE AGE OF REASON 63

WHY DO DIAMONDS
COST MORE THAN
WATER?
THE PARADOX OF VALUE

IN CONTEXT
FOCUS
Theories of value
KEY THINKER
Adam Smith (1723–90)
BEFORE
1691 English philosopher
John Locke connects a
commodity’s value to its utility
(the satisfaction it affords).
1737 Swiss mathematician
Daniel Bernoulli poses the
“St Petersburg Paradox,”
examining how players can
evaluate options involving
chance. The paradox is
resolved by applying the
concept of marginal utility.
AFTER
1889 Austrian economist
Eugen von Böhm-Bawerk
develops the subjective
theory of value (the value
of an object depends on a
person’s needs rather than
the object itself), using the
idea of marginal utilities.
I
n 1769, Anne-Robert-Jacques
Turgot (p.65) noted that
despite its necessity, water
is not seen as a precious thing
in a well-watered country. Seven
years later Adam Smith (p.61)
took this idea further, noting that
although nothing is more useful
than water, hardly anything can
be exchanged for it. Although a
diamond has very little value in
terms of use, “a very great quantity
of other goods may frequently be
had in exchange for it.” In other
words, there is an apparent
contradiction between the prices
of certain commodities and their
importance to people.
Marginal utility
This paradox can be explained
with the help of a concept known
as marginal utility: the amount of
pleasure gained from the last unit
of the commodity consumed. In
1889, the Austrian economist
Eugen von Böhm-Bawerk explained
it through the example of a farmer
with five bags of wheat. The
farmer’s use of the wheat ranges
See also: The labor theory of value 106–07
from important—feeding himself—
to trivial—feeding birds. If he loses
a bag of wheat, he will merely stop
feeding the birds. Even though the
farmer needs wheat to feed himself,
the price he is willing to pay to
replace the fifth bag of wheat is low,
because it only generates a small
amount of pleasure (feeding birds).
Water is abundant, but diamonds
are scarce. One extra diamond has
a high marginal utility and so
commands a much higher price
than an extra cup of water. ■
Diamonds are worth more than
water because each one is extremely
valuable no matter how many you have,
while water becomes less valuable, per
unit, as quantities increase.
■ Utility and satisfaction 114–15 ■

Opportunity cost 133