The full significance of the concept of marginal utility can be better appreciated by examining the historical evolution of notions of value and utility. Early economic theorists, who looked to Newton's physics as a model of successful science, tended to regard value and utility as intrinsic in physical objects and often sought to quantify these notions in such a way that mathematical methods such as calculus could be applied to them. For example, the mercantilists of the seventeenth and eighteenth centuries believed that value originated in gold or silver, and that other goods were valuable primarily because they could be traded for these precious metals. The Physiocrats of the eighteenth century, on the other hand, saw value as rooted in land, so that agriculture was the basis of a prosperous economy.

Economics took a major step forward in the theorists of the classical school (ca. 1776-1870), who offered valuable contributions that will be noted later in this course. Nevertheless, the theory of value in classical economics was fundamentally flawed. The value of a good, these theorists argued, could not be related to its utility. For example, diamonds are prized far more highly than bread, even though the former are a mere luxury and the latter is the staff of life. Before advancing to the next page, can you spot the fallacy in this argument?