Utility doesn’t exist

Somebody called Mr House has posted on twitter about the law of diminishing marginal utility citing Mises:

I think this post is wrong. There are no units of satisfaction. Any decision can and should be discussed without any reference at all to such units, except for the purpose of refuting ideas that refer to those units.

In Part One, Chapter VII, Section 1 of Human Action Mises writes:

Acting man values things as means for the removal of his uneasiness. From the point of view of the natural sciences the various events which result in satisfying human needs appear as very different. Acting man sees in these events only a more or a less of the same kind. In valuing very different states of satisfaction and the means for their attainment, man arranges all things in one scale and sees in them only their relevance for an increase in his own satisfaction. The satisfaction derived from food and that derived from the enjoyment of a work of art are, in acting man’s judgment, a more urgent or a less urgent need; valuation and action place them in one scale of what is more intensively desired and what is less. For acting man there exists primarily nothing but various degrees of relevance and urgency with regard to his own well-being.

This paragraph makes it sound like there might be units of satisfaction that you could attach to goods. Mises contradicts this idea in the next paragraph:

Quantity and quality are categories of the external world. Only indirectly do they acquire importance and meaning for action. Because every thing can only produce a limited effect, some things are consider scarce and treated as means. Because the effects which things are able to produce are different, acting man distinguishes various classes of things. Because means of the same quantity and quality are apt always to produce the same quantity of an effect of the same quality, action does not differentiate between concrete definite quantities of homogeneous means. But this does not imply that it attaches the same value to the various portions of a supply of homogeneous means. Each portion is valued separately. To each portion its own rank in the scale of value is assigned. But these orders of rank can be ad libitum interchanged among the various portions of the same magnitude.

In later paragraphs he clarifies further:

The assignment of orders of rank through valuation is done only in acting and through acting. How great the portions are to which a single order of rank is assigned depends on the individual and unique conditions under which man acts in every case. Action does not deal with physical or metaphysical units which it values in an abstract academic way; it is always faced with alternatives between which it chooses. The choice must always be made between definite quantities of means. It is permissible to call the smallest quantity which can be the object of such a decision a unit. But one must guard oneself against the error of assuming that the valuation of the sum of such units is derived from the valuation of the units, or that it represents the sum of the valuations attached to these units.

A man owns five units of commodity a and three units of commodity b. He attaches to the units of a the rank-orders 1, 2, 4, 7, and 8, to the units of b the rank-orders 3, 5, and 6. This means: If he must choose between two units of a and two units of b, he will prefer to lose two units of a rather than two units of b. But if he must choose between three units of a and two units of b, he will prefer to lose two units of b rather than three units of a. What counts always and alone in valuing a compound of several units is the utility of this compound as a whole–i.e., the increment in well-being dependent upon it or, what is the same, the impairment of well-being which its loss must bring about. There are no arithmetical processes involved, neither adding nor multiplying; there is a valuation of the utility dependent upon the having of the portion, compound, or supply in question.

I think a clearer account of the law of marginal utility would go like this. One unit of a particular good will allow you to solve problem 1. The second unit will allow you to solve problem 2. There is some particular reason why you prefer solving problem 1 to problem 2. For example, suppose that you’re considering how much electricity to buy. The next unit of electricity allows you to heat your house so you don’t freeze to death. The unit after that will allow you to read a book. Since you can’t read a book if you’re dead you prefer to use the next unit to heat your house rather than devote it to reading. It’s not the case that your use of electricity is explained by the existence of some set of units in which not freezing to death is two units and reading is only one unit or anything like that.

Thinking about goods in terms of units of utility does serious harm in many discussions. People often make arguments saying the rich should pay more taxes on their higher income than on their lower income because the higher income less. This is wrong because the rich person doesn’t count the value of his income in terms of units and assign fewer units to later income. He just chooses to solve an additional set of problems with higher income and he has some reason for choosing to solve the those additional problems after solving other problems. No units of utility are involved.

Another problem with this focus on units of utility is that it gives the illusion that some outside observer can assign more units of utility to giving the rich man’s last $1 million to poor people in the form of, say, 1000 grants of $1000 each. This overlooks the following fact. The poor person chooses to spend his income, time  and attention on solving some particular set of problems for some particular set of reasons. This may include the poor person choosing to give the rich person money in the form of paying for cold and flu lemon drinks with paracetamol in them, say.  The poor person prefers to give somebody money to solve that problem rather than keep the money and spend it on something else. A politician taxing the rich person and giving the cost of the cold and flu drink back to the poor person is overriding the poor person’s preference that the company making the drink should have that money and the poor person should get the drink in exchange.

The idea of units of utility is a misrepresentation of actual decision making and it can and should be eliminated from any correct economic argument.

About conjecturesandrefutations
My name is Alan Forrester. I am interested in science and philosophy: especially David Deutsch, Ayn Rand, Karl Popper and William Godwin.

2 Responses to Utility doesn’t exist

  1. This is an application of https://yesornophilosophy.com

    Also from Mises:

    > A man owns five units of commodity a and three units of commodity b. He attaches to the units of a the rank-orders 1, 2, 4, 7, and 8, to the units of b the rank-orders 3, 5, and 6. This means: If he must choose between two units of a and two units of b, he will prefer to lose two units of a rather than two units of b. But if he must choose between three units of a and two units of b, he will prefer to lose two units of b rather than three units of a.

    The quote doesn’t say whether high or low numbers are better. That’d be good context to insert in brackets.

    And do you know how the comparison is being made between 3 a or 2 b? What math is he doing or what’s the formula? I find it unclear.

    • I think the idea is that the good at rank order 1 is preferable to the goods at 2,3… So listing the units in preference order would give us:
      a a b a b b a a

      So if he chooses between two units of a and two units of b he chops the two a’s off the end and that’s okay. If he has to choose between three units of a and two of b then the third unit of a is at a higher place in the rank order than both units of b, so he prefers to give up the two units of b.

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