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All posts by Dan Whalen,
Providence, RI (resume)

Thursday, June 9, 2011

Utility

                A man on a hunger strike doesn’t need food.  A compulsive collector feels something much more compelling than want when he views a rare antique.  An insulin injection may be harmful to me, but vital to the survival of a diabetic.   A Christian Scientist doesn’t want medicine, although their doctor might insist that they need some. 

The differences between needs and wants are ultimately subjective.  That’s why in economics we don’t distinguish between the two, but instead deal exclusively with a concept called “utility.”  Utility can be thought as the satisfaction an acquisition gives to an individual, and, conversely, the dissatisfaction they would suffer if they lost it. 

What’s important to keep in mind though, is that the amount of utility something gives an individual is unique to that individual.  Every human being has their own unique profile of tastes and preferences.  To lose or gain something has different effects on different people, even when that something is absolutely identical across the cases. 

And because our needs, wants, desires, etc. are completely subjective, there are no units for utility, it’s a purely conceptual measurement.  To say giving me a sandwich right now would provide me with 48 units of utility would be like saying a certain painting has 36 units of beauty.  Its just one of those things we are unable to measure in any tangible way.

Thant’s not to say we can’t compare relative amounts of utility.  A sandwich will always give me more utility than a kick in the pants, and most of the world’s paintings are more beautiful than a pile of garbage.  It’s the quantifying precisely how much more or less that gets us into trouble.

Utility typically obeys the same rules of marginality I’ve mentioned before.  So, let’s say I have a truck full of bananas.  You’re a friend of mine, and I like to share, so I offer you some bananas.  Its lunch time and you’re starving so you accept.

The first banana, you devour.  You’re very hungry, and your reptilian brain has snapped into feeding mode.  The first banana is very satisfying to you, or in economics speak: your utility rises greatly with that first unit of consumption.

After I watch you scarf that first one down, I offer you a second.  You’re still a bit hungry so you accept, but this one is not enjoyed as desperately as the last.  So your utility increases again, but not by as much as before. 

Any more bananas I give you will give you more and more utility, but your utility will be increasing at a decreasing rate. 

Ok, yes, eventually you’ll get full and physically no longer be able to eat.  At that point, marginal utility of bananas will start to decrease (become negative), as you eat yourself sick.  Eating more would cause you to actually lose utility.  That point where utility starts to fall is referred to as a satiation point.


  



Why are our utility profiles important?  Because they are the pricipal reason we have an economy!  Trade systems develop only because individuals' utility profiles are rarely the same.  And even if you could find two people with totally identical utility profiles, they could never be so for long.  What gives us utility - and what would cause us to lose it - constantly fluctuates along with changes in things like fashions, information, personal goals, health or the even the weather!

Even as a young child, you took active part in an exchange economy driven entire by utility profiles.  Remember it? 

Every kid knows that when his mom packed sweets for them in their lunch, it gave them the power to enter into the complex desert swapping economy of the elementary school cafeteria.  Cookies for a Fruit Roll-up.  A Ho-Ho for your Gummies.  Apples aren’t worth much in this trade system, but a slightly more uncommon fruit, like a pear or tangerines could get you some traction.

If Johnny exchanges his chocolate bar for Meg’s orange slices, we know that: oranges have less utility for Meg than chocolates (ie, she’s willing to get rid of the fruit to get the chocolate) and at the same time we know that Johnny gets more utility from orange slices than he does for his chocolate bar.

Our analysis gets even deeper if we know something about their trade alternatives.  If Johnny would give up a whole chocolate bar for an orange, but only half a chocolate bar for a peach, it suggests to us that he gets twice the utility from the orange as he does from the peach.

Of course, we don’t always know why these individual’s have these preferences.  Maybe Johnny likes the taste the orange.  Or maybe Johnny just likes the color of oranges.  Maybe he needs the oranges to facilitate a planned second trade with Katie for her pudding cup.  Maybe Johnny actually loves chocolate bars, but he has six of them today, and he’s not trading to get for fruit per se, but instead is trading for just a little variety.

Or maybe Johnny has no idea why he wants those orange slices, and maybe no one will ever know.  He could be acting on the command of his subconscious, or on a complete whim.  That's what makes utility so attractive.  If we consider only utility - and how much utility Johnny and Meg feel they stand to lose or gain as a result of the trade – it gives us the conceptual framework of discussing their exchange without having to know the motivations behind it.

Kids are never taught to trade lunch items, toys or baseball cards, but they do it anyway, it seems to come to them naturally.  I think that really speaks to the power of utility and taste, our drive to constantly be satisfying our preferences, to be “maximizing our utility,”  It is a very basic, very primal part of being human.

If the founding fathers had taken microeconomics 101, they may have chosen not to phrase it as “the right to the pursuit of happiness,” but rather the broader, more generalized “the right to continuously maximize one’s utility.” 

It’s a little less poetic, but hey, who knows?  Maybe we could get a little more utility out of it.  

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