When discussing the concept of utility I am afraid I will need to cover it in more than one post as it is a topic that needs clarification. The champions of neoliberal free market economics are persistently telling us that there is no alternative to their economic model and its policy proposals. I have been critical of such an approach and have labelled it the beginnings of a totalitarian approach, arguing that if there really is no alternative to the free market model then it must by definition be true. Therefore, we should examine on what basis the neoliberals make such a claim and where they get their confidence from to make such a claim. The answer lies within the concept of utility. The question of what determines the price of goods, as opposed to what determined their value, was an important issue for classical economists such as Adam Smith. In The Wealth of Nations Book 1 ch. 1V Smith distinguishes two forms of value, what he calls ‘value in use’ and ‘value in exchange,’ and goes on to note;
“The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water, but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.” (Smith was of course writing before diamonds were used in industry).
The solution to this dilemma, how to explain the price of something when its value would suggest that it should be something different, was the great contribution of the neoclassical economists. Why does the value in exchange fail to reflect the value in use and vice versa? The answer given by neoclassical theory is found in the concept of ‘utility’. Utility is usefulness, it is defined as the satisfaction that you get from any good, product or service, and economists say that you will buy something because it yields you utility, or satisfaction. Thus, if something gives you pleasure, satisfaction, or a sense of well-being it is said to give you utility. For example, if I drink a cup of tea first thing in the morning, it will give me a high level of utility, but if I drink a cup of coffee, whilst it will give me a certain amount of utility, it will not be nearly as high as a cup of tea will give me because I enjoy tea far more than coffee, especially in the morning. I therefore place a greater value on tea than on coffee, it gives me greater satisfaction, greater utility. So, how does that relate to the price of tea and the price of coffee? What is apparent from that discussion is that utility is a psychological concept. Many people reading this will be able to reverse my thinking on tea and coffee, in that coffee will give them a far greater utility than tea, it is all a matter of personal taste. As a result, economists freely admit that utility cannot be measured; it is psychological and different for each individual, it is a subjective evaluation, a generalisation. However, economists get around this inconvenient fact by introducing what they term, 'the law of diminishing marginal utility.'
This economic concept argues that the source of value is found to be in ‘marginal’ as opposed to ‘total’ utility. So, what does that mean? Marginal utility is defined as the extra satisfaction gained from consuming one extra unit of a good within a given time period. The key to understanding this concept is the reference to ‘extra’. Whilst your total utility will continue to increase with each unit consumed, your marginal utility is with reference to each extra unit. What is significant about this concept is that marginal utility decreases with every extra unit consumed (economists say that it ‘diminishes’). For example, if I drink ten cups of tea in a day, each cup I consume will yield me slightly less satisfaction (or utility) than the one before it, that is, the utility from each additional (or extra) cup will be slightly less. As a result, whilst my total utility will increase, my marginal utility will decrease. So, as I progress throughout the day, if I keep on consuming cups of tea beyond my normal consumption of ten a day, I will reach a point where they will no longer give me any satisfaction, in other words, for the last extra cup consumed utility will be zero. As Marshall describes in Ch.3 of his Principles of Economics, “the marginal utility of a thing to anyone diminishes with every increase in the amount of it he already has”. Samuelson tells us in response to the water versus diamonds paradox raised by Adam Smith, (Economics 15th Edit. 1995 p.82-83) that “The utility of water as a whole does not determine its price or demand. Rather, water’s price is determined by its marginal utility, by the usefulness of the last glass of water. Because there is so much water, the last glass sells for very little. Even though the first few drops are worth life itself, the last few are needed only for watering the lawn or washing the car. We thus find that an immensely valuable commodity like water sells for next to nothing because its last drop is worth next to nothing”.
The importance of this is because in the hands of economists, this concept of diminishing marginal utility is transformed from a subjective, but valid, generalisation into a ‘law’, and economics textbooks refer to it as ‘the law of diminishing marginal utility’. For example “The law of diminishing marginal utility states that ‘other things being constant, as more and more units of a commodity are consumed the additional satisfaction, or utility, derived from the consumption of each successive unit will decrease’ ” (Beardshaw et al, Economics a Student’s Guide, 4th ed. 1998 P57). Indeed, according to Samuelson, utility is transformed into a ‘scientific construct’ (Economics 1995 p.73). However, Alfred Marshall in his Principles of Economics (1920) cautions us on the description of economic concepts as laws. Marshall is quite clear that when an economist uses the term law, he/she is simply referring to what he calls, general tendencies, telling us that “the term ‘law’ means nothing more than a general proposition or statement of tendencies, more or less certain, more or less definite”. The term law is ‘a statement that a certain course of action may be expected under certain conditions by members of a social group’. So, how can a statement of general tendencies develop into a scientific construct? We have already seen that utility cannot be measured, however, economists get around this problem by simply inventing a method for measuring marginal utility and designating this process as lawlike; thus (as Samuelson assures us) investing it with the authority of a scientific process and enabling them to build mathematical models that purport to explain human economic behaviour by the scientific method. They did this by inventing a unit of measurement they call a ‘util’. Alfred Marshall argued that it was possible to measure utility in cardinal numbers because he tells us that economic laws relate to tendencies that can be measured by a money price. For example, an economist will establish a demand curve by hypothesising that I get ten utils of utility from consuming the first unit of a commodity, 8 utils from the second, 6 from the third and so on. As a result, just as the concept of utility is psychological, so is the law of diminishing marginal utility; it exists only in the imagination of economists.
So, whilst constructing models to enable them to understand economic behaviour, economists take the crucial step to maintaining that when you wish to buy a cup of coffee, the only thing you are thinking of is whether you will enjoy it or not. They thus rule out all other alternatives. That is the only thing that you are thinking of and that is the only consideration motivating your decision whether or not to buy a cup of coffee. Now, that may well be true, but you have no way of knowing that unless you actually ask everyone who is buying coffee. What the economist does is make an assumption, which may very well be a valid assumption and useful for general purposes of speculating about human behaviour, but what has happened is that in the course of their theorising, they move from assumptions to certainties and designate their assumptions (which may or may not be valid) as scientific constructs, and, as we saw earlier, as ‘true’. We must also note that this model of economics is the result of the neo-classical economic model which is the dominant theoretical model taught in Western universities. Indeed, in many universities, particularly in Britain, it is the only model taught. Now, you must admire the modern economist who can establish a scientific analysis of human behaviour and then continually tell everyone that there is no alternative to its conclusions and its policy options on the basis that you freely admit that you cannot measure something, simply ignore that it cannot be measured, and then conveniently invent a measure by which the unmeasurable can be measured so accurately that you can claim that it is a scientific and mathematical model that provides a true and accurate reflection of human economic behaviour. That is indeed clever! Now, I have to concede that my criticisms of this process do not make this concept redundant or useless as it can be a valid generalisation of economic behaviour, and, indeed, the theory of diminishing marginal utility does actually provide a very useful contribution towards explaining human economic behaviour as long as it is kept in mind that it is merely a theoretical construct, a valid generalisation, an aid that is measuring a general tendency, and is, however valuable, limited in its explanatory ability, being subject to the principle of caterus parabus ( other things being constant’). In addition, whilst marginal utility is a useful construct, we must ask, is it accurate enough to invest it with the accolade of ‘scientific’? Is it really true that my utility will diminish with each extra cup of tea during any given period? Is it not possible that the cup of tea I drink after my evening meal, which may perhaps be the seventh or eighth cup that I have consumed that day, will actually give me more utility than the tea I have already consumed? Thus, whilst it is a useful generalisation, and can give us an insight into economic behaviour, we translate such a generalisation into a ‘scientific law’ at our peril! If I may give a mundane personal example; regardless of how much tea I drink in a day, there is no cup of tea that gives me as much pleasure as the cup I drink after having eaten chips (French fries). That is when my ‘tea utility’ is at its highest. Each individual will have similar experiences with all sorts of consumption where they find that their utility, rather than diminishing during a period of time, actually increases and diminishes in a quite random fashion. Another example that diminishes the explanatory ability of the law of diminishing marginal utility is that it is erected on the assumption that the human being is a rational consumer, a concept that readers of this blog will know I firmly reject. As I noted earlier, neoclassical economics is the dominant economic model taught in British schools and universities and has spawned the dominant political and economic model we call neoliberalism whose adherents persistently preach to us that there is no alternative. It is such assumptions that underpin all government economic and social policy in the UK, and, it is my assertion that it is these same assumptions that have caused the economic crisis, the war on benefits, the demonization of the unemployed, the disabled and the disadvantaged, the appalling inequality we see in modern Britain and real and genuine poverty. In themselves the concepts we are discussing are not particularly controversial and have contributed to a great deal of understanding of human economic behaviour, in short they are useful. However, there is a rather large difference between being useful and being scientific, and, in the hands of neoclassical economists, assumptions have been invested with the status of scientific knowledge and are today presented as ‘laws’ of economic behaviour in a quite different manner to which Alfred Marshall meant by a law. This is because, as I said above, by introducing the notion of the util, diminishing marginal utility assumed a mathematical status, and mathematical models were devised to explain the workings of the market economy. The conclusions established using such models are then presented to us by ideologically motivated politicians as ‘proofs’ of market behaviour and ‘the truth’ for which there is no alternative, and they are supported in this deception by economists who have been academically trained in neoclassical economics and who probably believe what they are saying given that their knowledge is limited to the discipline of neoclassical economics. If they had any grounding in other social sciences, particularly sociology, or even if they had a grounding in other economic models such as Keynesian or Marxist, it is doubtful if they would make such basic errors, thus highlighting the principal difference between economics and political economy. Of course there is no alternative to the truth; if anything poses as an alternative to something that is true and has been proven, it is by definition wrong, and this is the massive confidence trick that forms the basis of modern economics, that assumptions are magically converted into unassailable truths. I apologise for the length of this post, and will continue with the concept of utility next time.
Your Servant
Doktor Kommirat
No comments:
Post a Comment