Marginal Utility Is Not Rocket Science
Why do individuals pay much higher prices for some goods versus other goods? The common reply to this is the law of supply and demand. But what is behind this law? To provide an answer to this question economists refer to the law of diminishing marginal utility. The concept of marginal utility is the essential building block of a sound theory of human action as it applies in the science of economics. But too often, the mainstream theory is misleading. So I offer this Austrian attempt to demystify the idea. FULL ARTICLE
Comments (7)
Wonderful article. I attained my b.a. in economics, concentrating in public policy, and never did my professors explain the austrian viewpoint of marginal utility. On a different note, simple economic principles should be taught to children by parents at an early age. Half of all my friends, whom are in the mid-20's to early 30's, and college educated can't see the correlation between their actions in our marketplace, and the economic principle they are exhibiting. It's as if the economy is some kind of scary 'rocket science' that only the elitely educated are capable of understanding and otherwise a bore all together. I try to explain to them the reason why I studied it in college is b/c it's commen sense defined.
Published: June 5, 2007 9:53 AM
Again Mr. Shostak writes a great article. My only comment is on the way that diminishing marginal utility is taught in today's graduate school. In an utility maximization problem, the utility function has to be concave for there to be a solution (this is especially important in choice problems using more than one variable, but usually they just assume it is concave anyway). The law of diminishing marginal utility is stated as a concave utility function. In the mathematical view, the derivative of marginal utility could be non-negative as long as the total utility function is still concave. While they teach the law of diminishing marginal utility, their theory technically does not say that there is one. I think most people ignore this in the undergraduate courses because they don't realize the subtle differences in the definition of concavity when moving to more complicated functions.
Published: June 6, 2007 12:30 AM
"In the mainstream way of thinking it is not individuals but a given hard-wired valuation scale in their minds that decides what is good for them... This framework depicts human robots rather than human beings."
It also depicts decision-making by functionaries in [large] organizations, who are requested to "follow the rules" in going about their "tasks".
A question: does mainstream analyse rest on the (ultimately collectivist) view that all individual persons have "a position in society" from which they should make their contributions to the "social goals" by following the legal rules prescribed for their position?
Published: June 6, 2007 2:46 AM
"In the mainstream way of thinking it is not individuals but a given hard-wired valuation scale in their minds that decides what is good for them... This framework depicts human robots rather than human beings."
It also depicts decision-making by functionaries in [large] organizations, who are requested to "follow the rules" in going about their "tasks".
A question: does mainstream analysis rest on the (ultimately collectivist) view that all individual persons have "a position in society" from which they should make their contributions to the "social goals" by following the legal rules prescribed for their position?
Published: June 6, 2007 2:50 AM
I still don't think there's anything wrong or even wasteful about drawing and thinking about supply and demand curves. They can be "seen" in history and in that sense approach a sort of reality.
But much analysis, including the mainstream's, overlooks the fact that, especially in prospect, supply and demand curves are in fact a set of highly ephemeral, hypothetical scenarios that changes in just about ANYTHING can produce changes to.
Perhaps the analogy of electrons might help - electrons "move" so dynamically that as yet I do not believe a sound description of their motion has yet been agreed upon. We know they exist, and that they circulate around the nucleus of their atom, but little beyond that.
And, wonder of wonders, we USE electrons and their motion every day in thousands of ways!
Published: June 6, 2007 2:11 PM
Parc Greene:
It is not happenstance (or uninstructive) to note that your course of instruction did not include the Austrian "view" because it is only by omitting a proper treatment of the discovery of the subjectivity of value and the consequent
development of marginal analysis that the important departures from theory can be ignored--in order to establish the mainstream "view."
Any (even superficial) comparison must show that the Austrian "view" was and IS the logically consistent and necessary development of original (and never shown faulty or inconsistent) theory. Austrians may indeed be marginalized; it is clear that their "views" do not lend themselves to the purposes for which mainstream instruction has been established.
If you would really like to understand these matters, my recommendation would be that you read Mises' THEORY AND HISTORY (but, of course, only after HUMAN ACTION).
Published: June 12, 2007 6:04 AM
Someone please explain this theory with respect to clean air. Asthmatics should be pleased to buy oxygen in cylinders while the rest of us are pleased to pollute?
Published: June 12, 2007 11:52 AM