The marginalists who confronted land

American Journal of Economics and Sociology, The,  Jan, 2008  by Fred E. Foldvary

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Differing from the English partial-equilibrium tradition of Marshall and Pigou, Pareto built his theory of economic growth on Walrasian general equilibrium. For Pareto, the cost of production does not determine the price of a good, but neither does the price of the good determine the cost. These figures are simply related by the conditions of equilibrium.

This contrasts with Austrian theory, in which the factor prices are imputed from the value of the goods they produce. In a competitive industry, prices do tend to equal costs of production, but only because if the subjective value of the good is too low, the factors will not be employed at all. If the price of a good yields an economic profit, more factors will be attracted, increasing the supply, reducing the marginal utility and price, and thus making the price equal to the marginal costs of production.

Pareto (1906, quoted in Boncoeur and Thouement 2000: 51) adds:

   It is good to note that the strength of the opinion according to
   which there must be one cause for value is so big that even Leon
   Walras could not avoid it.... Walras expresses contradictory
   notions. On the one hand he says that "all the unknowns of the
   economic problem depend on all the equations of economic
   equilibrium," which is a good theory, and on the other hand he says
   that it "is true that marginal utility (ophelimite) is the cause of
   the value of exchange," and this is reminiscent of past theories
   that do not correspond with reality. Nevertheless in his texts he
   points out that the merchandise is "scarce" for the desires to be
   satisfied as a consequence of the obstacles that should be faced to
   obtain it. In this context, that is to say having in mind the
   obstacles, the notion that "scarcity is the cause of the value of
   exchange" is less inaccurate.

Pareto was thus more of a general equilibriumist than Walras.

An economist of the Austrian School would point out here that costs are also subjective, the economic cost being in reality the foregone opportunity, what is given up in doing something. Thus, the opportunity cost of labor is the foregone leisure, and the amount of labor one supplies depends on the relative subjective values, and marginal utilities, of more goods versus more leisure. Land has no opportunity cost, so its market price is unrelated to any social cost, but is based on the marginal utility of extra land or the imputed value of the goods produced at that site.

Henry George's (1897: 252-253) view of the relationship between prices and subjective values is much like that of the Austrians. To George, value is:

   a feeling, and so long as it remains merely a feeling, it can be
   known only to and can be measured only by the one who feels it. It
   must come out in some way into the objective through action before
   anyone else can appreciate or in any way measure it.... Thus it is
   that there is no measure of value among men save competition or the
   haggling of the market, a matter that might be worth the
   consideration of those amiable reformers who so lightly propose to
   abolish competition.