In my view your essay missed the mark. In its simplest form, marginalism assumes that arbitrage is sufficiently strong to prevent price discrimination in the market. Where price discrimination is possible, the concept of the margin still applies, but there are multiple markets. Also, don't confuse marginal cost, a more subjective concept, with variable cost, a more engineering-type concept.
It is not really so hard to make judgments about the productivity of members of a team. You can add or drop team members and see what difference it makes. You can establish measurements that, as you have stressed, will eventually be gamed, but still beat a manager's gut feeling. Also, the market provides a rough way to gauge the value added by a team and its individual members: would it be cheaper to pay outsiders to produce this part / take care of the payroll / clean the premises / etc.?
This is a fine note about the overhead costs are more important to many businesses and are greater than the academic status currently given them -- with too much focus on MC.
However, for most businesses, like food, the pricing problem is not so big. Look at the competition, price about the same, get sales feedback that the price is too high (not enough sales) or too low (selling faster than expected; sometimes sold out).
Tho this ignores the quality aspect.
A major business decision involves the introduction of a new product, or investment in R&D, or salary increases. Such decisions with limited org funds always requires not spending money on some thing the org would like to spend money on. The investment marginal project not taken because of lack of funds. This is important because, if there is a Tax Cut shock, and more funds, these companies can often immediately do the marginal investment, which immediately increases economic production. A reason tax cuts do far more to stimulate the economy than similar monetary added spending.
"Neoclassical economists said that your wage as a worker will be set equal to the marginal revenue of what you produce."
"So how does the firm decide how much to pay you? It tries to pay you just enough to keep you from quitting (or from “quiet quitting”), but not much more than that."
Much like the two somewhat conflicting conditions in quote, pretty much everything you describe is true some of the time but far from all of the time. Pretty much everything is so dependent on initial assumptions that it is as likely to be wrong as right when applied in practice. It's everything you complain about regarding academic economists.
I have a suggestion for how to make it more real world. In most cases the initial assumptions in question are minimums and maximums. Usually one or the other controls but not both. Incorporating this aspect addresses most of the limitations in applicability.
In a business with large annual sales variations (like farming with variable rain), the overheads are of two types with huge differences. You have cash flow overheads like loans, taxes, etc., and non-cash overheads like depreciation.
In some types of variable businesses, you need to minimize the cash flow overhead to maximize your long-term economic survival. However, this strategy means no borrowing, even with an excellent marginal product, when everything is going as planned.
I was in such an area and ended up making a living in it (recycle aquaculture—producing live aquatic products with all recycled water), where most people went bankrupt in the US over the last half-century. I calculated my lifetime Gini coefficient of 0.71 with my annual income from negative to the top 1%.
Oh, I don't know about "marginal analysis" being dead. I spent more than 20 years in the private sector and did many capital budgets where we argued about projects on the margin. I've also heard many conversations in family and social circles between sales folks and operating folks concerning deals that shouldn't be made because they won't make money.
AK’s point is of course spot on in terms of *pricing*.
And re: everything else, well, my take is that *on the margin* (😏) marginal thinking is less relevant than a) it used to be, and surely b) than the primacy it is given in economics education.
Still a good essay. Too many economists have never worked in a real business, and so still know only the models of early 20th century manufacturing, as well as models from other people who have never spent time working in a business.
In my view your essay missed the mark. In its simplest form, marginalism assumes that arbitrage is sufficiently strong to prevent price discrimination in the market. Where price discrimination is possible, the concept of the margin still applies, but there are multiple markets. Also, don't confuse marginal cost, a more subjective concept, with variable cost, a more engineering-type concept.
It is not really so hard to make judgments about the productivity of members of a team. You can add or drop team members and see what difference it makes. You can establish measurements that, as you have stressed, will eventually be gamed, but still beat a manager's gut feeling. Also, the market provides a rough way to gauge the value added by a team and its individual members: would it be cheaper to pay outsiders to produce this part / take care of the payroll / clean the premises / etc.?
This is a fine note about the overhead costs are more important to many businesses and are greater than the academic status currently given them -- with too much focus on MC.
However, for most businesses, like food, the pricing problem is not so big. Look at the competition, price about the same, get sales feedback that the price is too high (not enough sales) or too low (selling faster than expected; sometimes sold out).
Tho this ignores the quality aspect.
A major business decision involves the introduction of a new product, or investment in R&D, or salary increases. Such decisions with limited org funds always requires not spending money on some thing the org would like to spend money on. The investment marginal project not taken because of lack of funds. This is important because, if there is a Tax Cut shock, and more funds, these companies can often immediately do the marginal investment, which immediately increases economic production. A reason tax cuts do far more to stimulate the economy than similar monetary added spending.
"Neoclassical economists said that your wage as a worker will be set equal to the marginal revenue of what you produce."
"So how does the firm decide how much to pay you? It tries to pay you just enough to keep you from quitting (or from “quiet quitting”), but not much more than that."
Much like the two somewhat conflicting conditions in quote, pretty much everything you describe is true some of the time but far from all of the time. Pretty much everything is so dependent on initial assumptions that it is as likely to be wrong as right when applied in practice. It's everything you complain about regarding academic economists.
I have a suggestion for how to make it more real world. In most cases the initial assumptions in question are minimums and maximums. Usually one or the other controls but not both. Incorporating this aspect addresses most of the limitations in applicability.
In a business with large annual sales variations (like farming with variable rain), the overheads are of two types with huge differences. You have cash flow overheads like loans, taxes, etc., and non-cash overheads like depreciation.
In some types of variable businesses, you need to minimize the cash flow overhead to maximize your long-term economic survival. However, this strategy means no borrowing, even with an excellent marginal product, when everything is going as planned.
I was in such an area and ended up making a living in it (recycle aquaculture—producing live aquatic products with all recycled water), where most people went bankrupt in the US over the last half-century. I calculated my lifetime Gini coefficient of 0.71 with my annual income from negative to the top 1%.
Oh, I don't know about "marginal analysis" being dead. I spent more than 20 years in the private sector and did many capital budgets where we argued about projects on the margin. I've also heard many conversations in family and social circles between sales folks and operating folks concerning deals that shouldn't be made because they won't make money.
You are of course correct there.
AK’s point is of course spot on in terms of *pricing*.
And re: everything else, well, my take is that *on the margin* (😏) marginal thinking is less relevant than a) it used to be, and surely b) than the primacy it is given in economics education.
Still a good essay. Too many economists have never worked in a real business, and so still know only the models of early 20th century manufacturing, as well as models from other people who have never spent time working in a business.
You are correct. Economists fascination with the margin is overwrought.