How reliable or accurate is marginal analysis?

Marginal analysis is designed to show how economic reasoning allows actors to accomplish more by understanding limits on what can be accomplished. The focus of marginal analysis is on possible incremental adjustments in resource allocation. As the underlying technique in cost-benefit analysis, marginal analysis is accurate so far as human knowledge and reasoning allows.

Marginal analysis derives from the economic theory of marginalism – the idea that human actors make decisions on the margin. Underlying marginalism is another concept: the subjective theory of value.

Since marginalism implies subjectivity in valuation, economic actors make marginal decisions based on how valuable they are in the ex ante sense. This means marginal decisions might later be deemed regrettable or mistaken ex post.

This can be demonstrated in a cost-benefit scenario. A company might make the decision to build a new plant because it anticipates, ex ante, the future revenues provided by the new plant to exceed the costs of building it. If the company later discovers that the plant operates at a loss, then it mistakenly calculated the cost-benefit analysis.

However, these inaccurate calculations reflect inaccuracies in cost-benefit assumptions and measurements. Predictive marginal analysis is limited to human understanding and reason. When marginal analysis is applied reflectively, it is always reliable and accurate.

Consider the oft-expressed argument that "something is wrong with the economy when professional football players are paid so much more than vital workers such as teachers or nurses."

This seemingly plausible sentiment is flawed because it ignores marginal analysis. Marginalism shows that any price (wage is a price) is the amount individuals will pay for one additional unit.

If Peyton Manning is paid $14 million while an average teacher makes $35,000, for example, it does not mean that society values all quarterbacks 400 times more than all teachers.

Rather, it means that the market value of one additional quarterback of Peyton Manning's ability is that much more than one additional average teacher. On the aggregate level, society almost certainly values all teachers and nurses more than all quarterbacks.