Marginalism, Incrementalism

Marginalism

Marginalism generally includes the study of marginal theories and relationships within economics. The key focus of marginalism is how much extra use is gained from incremental increases in the quantity of goods created, sold, etc. and how these measures relate to consumer choice and demand.

Marginalism covers such topics as marginal utility, marginal gain, marginal rates of substitution, and opportunity costs, within the context of consumers making rational choices in a market with known prices. These areas can all be thought of as popular schools of thought surrounding financial and economic incentives.

The idea of marginalism and its use in establishing market prices, as well as supply and demand patterns, was popularized by British economist Alfred Marshall in a publication dating back to 1890.

Marginalism is sometimes criticized as one of the “fuzzier” areas of economics, as much of what is proposed is hard to accurately measure, such as an individual consumers’ marginal utility. Also, marginalism relies on the assumption of (near) perfect markets, which do not exist in the practical world. Still, the core ideas of marginalism are generally accepted by most economic schools of thought and are still used by businesses and consumers to make choices and substitute goods.

Modern marginalism approaches now include the effects of psychology or those areas that now encompass behavioral economics. Reconciling neoclassic economic principles and marginalism with the evolving body of behavioral economics is one of the exciting emerging areas of contemporary economics.

Incrementalism

Incrementalism is a method of working by adding to a project using many small incremental changes instead of a few (extensively planned) large jumps. Logical incrementalism implies that the steps in the process are sensible. Logical incrementalism focuses on “the Power-Behavioral Approach to planning rather than to the Formal Systems Planning Approach”. In public policy, incrementalism is the method of change by which many small policy changes are enacted over time in order to create a larger broad based policy change. This was the theoretical policy of rationality developed by Lindblom to be seen as a middle way between the rational actor model and bounded rationality, as both long term goal driven policy rationality and satisficing were not seen as adequate.

Most people use incrementalism without ever needing a name for it because it is the natural and intuitive way to tackle everyday problems, such as making coffee or getting dressed. These actions normally don’t require extensive planning and problems can be dealt with one at a time as they arise.

Even in processes that involve more extensive planning, incrementalism is often an important tactic for dealing reactively with small details. For example, one might plan a route for a driving trip on a map, but one would not typically plan in advance where to change lanes or how long to stop at each streetlight.

The political scientist Charles E. Lindblom developed Incrementalism in the mid 1950s. “The Science of Muddling Through” (1959), was an essay Lindblom wrote to help policymakers understand why they needed to consider a different approach when making policy changes. The goal for the new perspective of Incrementalism was for policy makers to avoid making changes before they really engaged and rationally thought through the issue.

Advantages of incrementalism

The advantages of incrementalism over other formal systems is that no time is wasted planning for outcomes which may not occur.

(i) Politically expedient

Since it does not involve any radical and complete changes, it is easily accepted and therefore the process is expedient.

(ii) Simplicity

It is very simple to understand. Compared to some of the other budgeting methods used in business, it is one of the easiest to put in practice one does not have to be an accountant or have much experience in business to use this form of budgeting.

(iii) Gradual change

A very stable budget exists from one period to the next and allows for gradual change within the company. Many managers are intimidated by large budget increases from one period to the next. This type of budget will not cause that problem because it is based on the previous period’s budget.

(iv) Flexibility

It is very flexible. Doing it from one month to the next allows one to see change very quickly when a new policy or budget is implemented.

(v) Avoiding conflict

Companies with many different departments often run into conflict between departments because of their different budgets. With this method of budgeting, it is easier to keep everyone on the same page and avoid conflicts between departments.