Origin of the Idea

The first writings on utility can be traced back to the Englishman Jeremy Bentham (1748-1832). Like many classical economists, Bentham did not begin his academic career studying economics. At age 4 he studied Latin, by age 12 he was enrolled at Queen’s College, where he completed his degree at age 15. Bentham then turned to the study of law, but after a short career in the legal profession, devoted his life to the study of philosophy and economics.

Bentham held a keen interest in the advancement of scientific knowledge. Prevailing attitudes toward death discourage people of the time from donating their bodies for anatomical research. In an effort to change this, Bentham had his body dissected. That, however, was not the end of Jeremy Bentham. He left his entire estate to University College, London, on condition that he be present at all board meetings. Even today Bentham can be found sitting at University College, his skeleton padded and dressed, with a wax head atop his body (his real head, preserved using South American headhunting techniques, is locked safely away in a college vault).

Bentham’s philosophy is referred to today as "utilitarianism." Derived from the Greek philosophy of Hedonism, the fundamental principle is that people seek to maximize pleasure and minimize pain. As Bentham expressed it in An Introduction to the Principles of Morals and Legislation in 1780:

"Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do. On the one hand the standard of right and wrong, on the other the chain of causes and effects, are fastened to their throne. They govern us in all we do, in all we say, in all we think: every effort we make to throw off our subjection, will serve but to demonstrate and confirm it. In words a many may pretend to abjure their empire: but in reality he will remain subject to it all the while.⁽¹⁾"

For Bentham, utilitarianism was not merely an explanation of cause and effect in human behavior, it was an ethical standard, a justification for self-interested behavior.

As an ethical standard, Bentham argued that governments should pursue that which promotes the greatest happiness for the greatest number of people. In so doing, however, the government should maximize the community’s happiness by promoting individual happiness.

The community is a fictitious body, composed of the individual persons who are considered as constituting as it were its members. The interest of the community then is, what? -- the sum of the interests of the several members who compose it.

It is vain to talk of the interest of the community, without understanding what is the interest of the individual. A thing is said to promote the interest ... of an individual, when it tends to add to the sum total of his pleasures; or, what comes to the same thing, to diminish the sum total of his pains.⁽²⁾

The premise that people attempt to maximize pleasure (utility) and minimize pain (disutility) is as important to understanding economic behavior today as it was in Bentham’s time.

1. Jeremy Bentham, An Introduction to the Principles of Morals and Legislation, (New York: Hafner, 1948), p. 1. [Originally published in 1780].
2. Jeremy Bentham, An Introduction to the Principles of Morals and Legislation, (New York: Hafner, 1948), p. 2. [Originally published in 1780.]

Friedrich von Wieser (1851-1926) first articulated the notion of "opportunity cost" (also referred to as the "alternative-cost" concept) in 1914. Wieser, who born and studied in Vienna, Austria, belonged to a group of economists known as the "Austrian Trio," who built on the growing tradition of marginal analysis. Friedrich von Wieser claimed that:

"Whenever the business man speaks of incurring costs, he has in mind the quantity of productive means required to achieve a certain end; but the associated idea of a sacrifice which his efforts demand is also aroused. In what does this sacrifice consist? What, for example, is the cost to the producer of devoting certain quantities of iron from his supply to the manufacture of some specific product? The sacrifice consists in the exclusion or limitation of possibilities by which other products might have been turned out, had the material not been devoted to one particular product. Our definition in an earlier connection made clear that cost-productive-means are productive agents which are widely scattered and have manifold uses.

As such they promise a profitable yield in many directions. But the realization of one of these necessarily involves a loss of all the others. It is this sacrifice that is predicated in the concept of costs: the costs of production or the quantities of cost-productive-means required for a given product and thus withheld from other uses."⁽¹⁾

Friedrich von Wieser did not invent opportunity costs, he merely formalized the concept for us. Every decision involves an assessment of the opportunity costs involved, and most people make that assessment without ever knowing the term or formal concept.

1. Friedrich von Wieser, Social Economics, trans. A. Ford Hinrichs (New York: Adelphi, 1927), 99-100. [Originally published in 1914.]

While Classical economists such as Adam Smith are famous for their economic philosophy of laissez-faire, the term originated with a group of French economists known as Physiocrats. The full phrase, "laissez-faire, laissez-passer," is credited to Vincent de Gournay, and in modern translation means "let people do as they please without government interference." More literally translated from the French, "laissez-faire" means "to allow to do" or "non-interference," while laissez-passer means "to permit."

The laissez-faire principle of freedom in economic affairs became part of Classical economics as a result of Adam Smith’s study of the Physiocrats and his close association with the Physiocrats Francois Quesnay (1694-1774) and Anne Robert Jacques Turgot (1727-1781).

Source: Cassell’s French Dictionary (London: Cassell & Company Ltd., 1962) p. 444.

Origins of the circular flow diagram can be traced to Francois Quesnay (1694-1774). Quesnay belonged to a group of economists known as the Physiocrats, so named because Quesnay was himself the court physician for Louis XIV in France. As a physician, Quesnay likened economic activity to the functioning of the human body. Money and goods were to the economy what blood was to the body.

The original circular flow diagram was Quesnay’s Tableau Economique, drawn for the king in 1758 and revised in 1766. It demonstrated how inputs, revenue and goods were exchanged between farmers, landlords and merchants.

The circular flow diagram appearing in the text traces most directly back to economist Francis Knight and his "wheel of wealth" that he constructed in the 1930s.