This is your one-article guide to understanding a core idea of economics. The law of diminishing marginal utility has surprising implications for every area of policy, including money, interest rates, and property rights. FULL ARTICLE by Thorsten Polleit
Source link: http://archive.mises.org/15644/what-can-the-law-of-diminishing-marginal-utility-teach-us/
What Can the Law of Diminishing Marginal Utility Teach Us?
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If a thirsty man could purchase a glass of water, and then another & another, at some point, he would instead buy a slice of pizza. Need anything more be said?
Doesn’t diminishing marginal utility depend on the utility of consuming additional units being independent of the consumption of earlier units? As an example, just from introspection I can attest that I get more utility from drinking my second beer than my first. We can think of many other similar examples. I get more utility from hitting my 10th ball on the driving range than from hitting my first. I get more utility from the 10th French fry I eat than the first. Take this hypothetical test yourself. You order fries at a restaurant and you are told, “We’re almost out. We only have one left.” Would you say “OK, give me that one,” or would you eat something else?
At the margin, of course, utility must decline relative to other alternatives, or you’d just keep buying beers, driving range balls, and French fries until your entire purchasing power was exhausted. But as you buy more of one good, that leaves you with less of everything else, so even the fact that you eventually stop buying that good and purchase other things doesn’t demonstrate diminishing marginal utility. It demonstrates a diminishing marginal rate of substitution of that good with other goods.
We might argue that the examples in my first paragraph illustrate only that I’ve inappropriately defined the units, and I should be talking about units being two beers, a bucket of driving range balls, and a serving of French fries. But this seems to call into question the notion of adjusting at the margin. I can, in fact, buy just one beer, even though if I were to buy one I’d also buy a second because it gives me more utility than the first.
Finally, I would say that the action axiom does not, in fact, demonstrate diminishing marginal utility as Professor Polleit says, because he’s considered only a part of the action. He has considered buying additional units of one good, but has not mentioned that that implies giving up units of something else. As more units of one good are purchased, the opportunity cost is that more units of something else have to be foregone, so the action is, in fact, weighing the benefit of consuming one good against the cost of giving up something else. It is not simply evaluating the utility of that good in isolation. The action axiom implies a diminishing marginal rate of substitution between goods, not diminishing marginal utility.
I think it’s pretty clear the law of diminishing marginal utility only applies to instrumental values, that serve another end rather than their accomplishment being an end in itself (terminal values). Terminal values, like the enjoyment of a beer, need not diminish.
Surely the 4th tire for a car is more valuable than the first 3 tires, since you couldn’t drive with only 3 tires. But this is a matter of applying common sense to the rule. One can generally find some particular to counter most any rule, but that doesn’t mean it poses a problem in application. For example, it is reasonable that when one drinks a cup of coffee from a pot, the next cup will have the same temperature. But one can argue that the cup was warmed up from its initial coffee, so the second cup of coffee will be warmer than the first cup. Or one could say that by the time he finished the first cup, the contents of the pot cooled down, so the second cup was colder than the first.
It is not helpful to seek general laws that take all considerations into account, but to simplify them to deal with most situations, and then worry about boundary problems.
But it holds true for the 5th tire, which has significantly less utility than the first four, and a sixth dramatically reduces in utility to the point it would have to nearly be free to justify the purchase of six tires for a two axle car.
And the cup of coffee utility isn’t entirely based on temperature. If I determine that the caffine content of more than 1 cup of coffee is harmful, the second cup has zero utility, even if the temperature and strength remains constant.
Marginal utility is entirely subjective, person to person, so no rules truly exist on how it works.
Yes it is true that the 4th tire gives you the ability to drive a car while tires 1-3 do not. However, in this situation you should not compare the marginal utility of the 4th tire to the third. You should comparing “4 tires which give you the ability to drive a car” to “3 tires that leave you stranded on the side of the road.” I think that these need to be looked at as different units entirely.
Thus, to look at this situation accurately, I think you need to analyze the benefit of the first set of 4 tires vs. the 2nd set of 4 tires.
Another example: Let’s say that you have 5 homogeneous boxes. With the first box you store your favorite Mises books. With the second, you put kitchen supplies. In the third you put sporting goods. The forth, old notebooks. The fifth, garbage. The marginal utility of each additional box decreases as it stores items that are not as high of a priority to store.
BUT THEN! You get a 6th box!!!
And now that you have 6 boxes, you have the amount you need to build a really cool fort! you couldn’t build that fort with 5 boxes, but you could with 6! So instead of storing stuff, you build this fort!
I wouldn’t argue that the 6th box had higher marginal utility than the fifth, even though the fort is REALLY cool. I would just argue that you are now looking at a different item – “6 boxes” – that allow you to build a fort. Those 6 boxes have a higher marginal utility than the next 6 boxes you acquire.
There is no Law of Diminishing Marginal Utility on the desire for more money and power over other humans. Christian theology calls it our “sin nature,” the primary observable truth of Christianity. Money and power is how our owners keep score in the game of life. Why else would a person with a billion in liquid assets need more money? Maybe all our owners are insane?
There is a marginal utility. To get more of something, it’s necessary to give up something else. Yes, in absence of effort, money has unlimited demand. But to get money, effort is required (unless you work for a union or get government subsidy). I may be able to get more money by putting out more effort, but there will reach a point that the additional effort is not worth the additional money simply because I can no longer use the money I have previously accumulated. Work is the cost of money.
The same goes with power. If power is earned through reputation and money, it requires significant effort in return. The necessary effort and other costs associated with power and money prove too great for most and they chose not to engage in it. Only when power becomes cheap (via government for example) will more be obtained because the marginal cost of obtaining power has just been reduced.
Mr. Polleit, I think that you did not express yourself correctly when you say “that the marginal utility of a larger-sized unit is greater than the marginal utility of a smaller-sized unit (and vice versa).”. As they are not homogeneous they can’t be considered as units of the same thing.
Anyway, I think it is an excellent article. I am saving it for future reference.
Two comments:
1) The Idea that the more of something that I have lowers the value of each one,then makes saving ludicrous.
2) The Idea that man will always choose that which makes him solely better off would mean there would be no society as we would all be at war individually.
1) Why?
2) Comparative advantage. Agents with different opportunity costs can have more by specializing and trading. While I won’t deny altruism is a good thing, it’s not strictly necessary to have a working market economy.
From the article
“By developing praxeology, Mises showed that economic theory is the formal logic of the irrefutably true axiom of human action. According to Mises, economic theory is not concerned with psychology, but with the implications of the axiom of human action.”
It takes psychology to realize working together helps both parties. without psychology the axiom leaves only to best suit myself this moment.
Jimmy s,
You don’t seem to have grasped the basic concept here… Mises did not say that there was no need for psychology, or for understanding, or for any other field. He only said that there was no place for those things in the study of economics.
The axiom of human actions assumes that humans act with purpose, and that people use their knowledge and their skills to take whatever steps they feel will best fulfill their desires. In a capitalist society the best way to fulfill your personal desires, whatever they may be, is to cooperate with other people. Altruism is nice, but in a capitalist system a person can gain what he desires only be providing other people with what they want.
hmmmm. So your telling me that though it takes psychology to work together. it has no part in making choices that require working together. I have a difficult time accepting that.
No, but psychology is a separate field of study from economics. A basic understanding of physics is needed for people to work together but that does not mean that physics is part of economics.
Having more of something does not lower the value of each of the things. Only the MARGINAL thing.
From the article
“(1) A rise in the money stock. A rise in the money stock must, for logical reasons, reduce the exchange value of a money unit. This is because the additional money unit can be used to satisfy an additional end that is necessarily less urgent than the satisfaction of the preceding end. A rise in the money stock will thus necessarily lead to a decrease in the marginal utility of the money unit (compared to the situation in which the money stock had remained unchanged).”
I realize this is referring to the money supply as a whole,yet if it is true it must be true regarding my savings. that is my money stock. is it not less painful if I have 10,000 to make a 100 dollar loan than if I have only 150 to begin with ? those 100 if they were my first 100 have lost their original value to me.
But you are not loaning your first $100, you are loaning your last $100. The first $100 (which you can only get to by spending the other $9900) need not be worth any less to you.
Your splitting hairs, but if you must it doesn’t matter if you loaned the first the last or an equal share of each your concern as to where those 100 dollars are has decreased. because you have suffered less to lose them because you value them less.
I am not splitting hairs… the distinction is important but let that pass for now. You were perfectly correct to say that a person would value $100 out of $10000 less then that same person would value $100 if they only had $150. I am just not sure why/how you find that objectionable.
So, if you are at home by yourself and you are hungry, you order 1 pizza. You eat a slice and don’t feel satisfied. You eat a second, starting to feel better, then go for a third and by the time you barely finish this one off, you’re stuffed. What you’re saying is it’s absurd that consuming the fourth slice of pizza is a bad idea because the value of it to you at that moment is perfectly equal to the previous three. That the “value” is, for calculation simplicity, $2 a slice because the pie cost $16 and there are 8 slices. And if this pizza has 8 slices, why not just eat all of them? They’re all equally valuable, which is what you’re telling us.
Because you literally can’t fit them all in your stomach. Slices 4 through 8 have less value to you at that moment because you simply can’t use them all for their intended purpose in that moment. Their value to you may increase the following day when you get hungry again.
Now let’s suppose you order 10 pizzas. All 80 slices don’t have the same value because you can only handle, suppose, 6 per day. This is 14 days of pizza for two meals a day. By day 4, the remaining 62 slices are becoming stale, you don’t really want to eat them. By day 8, the remaining 38 slices are rock hard and can’t even be consumed. Do they still all have the same value?
you have made it painfully obvious that pizza is not money.
Money isn’t any different from pizza. You won’t ever continue to push for it into infinity because it requires work to obtain more and it’s counterbalanced by the desire to spend it. If money didn’t have a diminishing value, you’d work 24/7 and just sit on piles of it, never spending.
Money is different from pizza the only reason you didn’t want the remaining 38 slices was because they were stale. If they were dollars you might just save them till later.No ?
Also it is not true that if money did not have a diminishing value you would never spend it.even if it increased in value you would still spend it. unless you live completely off of the land in which case you would not likely find yourself having this conversation,particularly on a computer over the internet.
The only diminishing return I can really see happening is, say a part like a gear that actually wears out with use,and even then it could always function perfectly as a paper weight. Even the pizza utility does not diminish true to its form. It is just as useful as ever to the next guy who is hungry. it’s utility has not diminished only it’s value to me when I am full.
Mises was not advocating an interpersonal definition of utility… the “value” of the pizza to you is the pizza’s utility. Might your issue be one of a semantic misunderstanding? Your last post seems mostly consistent with Mises’ position, though he uses the word utility where you use the word value.
Marxists still cant understand marginal utility.
It is interesting to note in “The Fatal Conceit” Hayek (or Bartley) mentioned the fact that socialist Albert Einstein was completely ignorant of this very important concept of marginal utility.
This comment seems to be directed at me,and so let me say that I do not consider my self to be an anything-ist . all economic theories have their place, and points. I am merely pointing out the flaw in this reasoning.
Or, to keep an open mind, a flaw in your understanding?
True enough !
??
We can speculate on whether people will axiomatically always put goods to higher-valued uses before lower-valued uses, and it seems reasonable to assume they will. But go back to the action axiom on which this article bases its conclusions. We never observe just this in human action. We always observe people choosing one option, and simultaneously the opportunity cost of giving up something else. So what we actually observe, following the action axiom, is a diminishing marginal rate of substitution of one good for another, not diminishing marginal utility of a single good.
Substitution is a different effect. By substitution, I’m not talking in standard economic terms like hamburgers vs hotdogs, but buying something entirely different. This is a simplification, but the process goes on subconsciously in most individuals:
1. List everything you want to purchase.
2. Take each item and, for each incremental unit from the first through infinity, place a maximum price you’d be willing to pay for this item. Price isn’t necessarily you paying money. It can be time, barter, or even the cost of delayed use of savings. Cost is basically anything that you give up to take the action. For instance, I tend to boil everything down to time as I see that as the ultimate base level cost. No matter what I do, I can never get more time, so it’s the true expense. Other people may subconsciously view things differently. Even inaction and leisure fall into this list with costs associated.
3. Order your list from the highest priced item to the lowest priced item.
4. Starting with #1, if the actual price of engaging in the transaction is below the cost you’d be willing to pay for it, the activity is undertaken (ostensibly breathing always ends up at #1 and the cost is nearly infinitesimal so it always goes through). If your ordered work at X dollars for a specific hour of labor (lets say 10th hour) and the pay is less, you don’t engage in the transaction. As you go down the list, you subtract the cost from the available pool for each subsequent transaction that exceeds the appropriate value you’ve attached to the item or activity. Activity stops when you run out of that particular resource required to “pay” for the item.
There are no true substitutes. Everything competes with everything on this list. Nothing is segregated out in the ultimate scheme and the infinite ordering of each and every item is listed on a single, universal, heterogeneous cost list.
It can be axiomatically said that no individual will ever engage in a transaction that they view to be more “expensive” than their marginal limit. Referencing force isn’t a rebuttal to this one as the price of engaging in the transaction can be viewed to be lesser to not engaging in the transaction, which involves physical violence. There can be instances where the cost of engaging in the transaction is more “expensive” than the alternative of being physically accosted (such as an example of if you’d be willing to murder a child to avoid a beating, many individuals would suffer the beating than pay the cost of murder). This price list is infinitely being adjusted and reordered by the instant as new information reaches the individual. And since information is always incomplete and imperfect, this list will never find itself remaining static.
Professor Polleit may be justified on other grounds in presenting his applications. However, his implication of a connection these applications and Mises’s notion of marginal utility is, I am afraid, completely wrong.
Marginal utility has to do with individual preference, not scarcity of means. Because of its limited meaning, Mises does not try to explain the Cantillon effect, the effects of a fall in the market interest rate, or property rights as applications of marginal utility. Nor could he justify doing so. All of his uses of the concept of marginal utility refer to the choices of the individual.
Try doing a search of Human Action for “marginal utility.” Doing a search is a smart way to check any implications about Mises.
http://www.econlib.org/library/Mises/HmA/msHmA.html
I have dashed this note off regarding some points made and to perhaps offer an alternative or suggestion or get clarification?
First, I would like to thank you Thorsten. You have managed to put the following paragraphs in a form that I finally began to see what did not sit right with me with other articles–but could not put my finger on it till now. Thanks.
Instead of using Immanuel Kant why not use Ayn Rand’s contribution to logic and objectivity (a method of using logic as “observed” by humans to purposefully apprehend reality)? I see more connections with Ludwig Von Mises with Ayn Rand than Immanuel Kant.
Perhaps this is more important than my comments below and might be taken up by another.
I was reading “What Can the Law of Diminishing Marginal Utility Teach Us?
Mises Daily: Friday, February 11, 2011 by you (Thorsten Polleit)
http://mises.org/daily/5014/What-Can-the-Law-of-Diminishing-Marginal-Utility-Teach-Us ”
I am referring to the following paragraphs in my comments below: “The axiom of human action is of a special nature: It represents a synthetic a priori proposition, to use the terminology of Immanuel Kant (1724–1804). A synthetic a priori proposition is knowledge that (1) cannot be denied without running into an intellectual contradiction, and (2) is derived from reflection rather than observation.
The axiom of human action cannot be denied without running into an insoluble contradiction. This is because denying the axiom of human action implies human action — that is the human act of denying. Arguing that humans cannot act is thus a contradiction in itself, an absurdity.
Further, the axiom of action is derived from human reflection: it is independent of experience. This is because one cannot observe humans making an action per se. In order to know what “action” means, one has to know what action is — which implies that knowledge about action exists prior to action.
That said, the axiom of human action fulfills both of Immanuel Kant’s requirements for qualifying as an a priori synthetic proposition: it is self-evidently true, and it is derived from reflection. That said, logical deductions from the axiom of human action must be also absolutely, or apodictically, true as well”.
—–
My comment: Would it not make more sense to point out that logic (the art of non-contradictory identification) makes it possible for and by humans to “observe” AND “reflect” and apprehend that something has an identity and acts in accordance with that identity? Furthermore that nature to be commanded must be understood. That there are economic laws that are “observed” to be immutable–axioms–and that there are factors that change and can be “observed” to have effects unseen at first to be later identified integrated verified etc…and that action can be purposefully forestalled or amended or adapted.
That being the case–all factors being considered including the possibility that there is a risk of missing some change in the environ and that I have made pre-decision to act on what is a premise and not on an emotion and not just on observation–although with respect for that emotion such as love of innovation, trade, imagination, logic and respect for the risk of observing the event but missing the actual cause –and to adapt or pause or pay the price and move on. (As an individual I do have my own division of labor as it pertains to intellect, emotions, premises, why, how, when or what to act, personal moral code).
However given–with forethought, foresight, “experience”–that some unseen or unobserved factor might have changed, the action (cause, effect, means and end) might appear and or manifest differently. Is this not “observed” and worst case risk assessed? Is it possible that something “observed” such as two planes apparently causing three buildings to pancake into their own foot prints “means” that the two planes caused the buildings to collapse? Not necessarily.
Another way of coming at this. Some general notes:
1. A Dictionary defines “Per se” as: with respect to its inherent nature
2. “action” as action–imples the law (axiom) of identity and causality (the law (axiom) of identity in action) is “observed” and it is “experienced” and logically verified at least so I have worked this thru whilst standing on the shoulders of Rand and Lew Rockwell and a division of labor society (remnant) and I see and “observe” no contradictions.
3. Information becomes knowledge via “observation” AND logic. They are not obstacles to each other nor does one necessarily contradict the other but if they appear to contradict, there is reason to re-”observe” AND re-”reflect” given ones “experience” and understanding of an axiom and what underlies or what factor of the premise has possibly changed.
And it is this observation–seeing with understanding–that makes it possible to collect information including “reflection” of the past and reconcile it to the present and context and knowledge so that new/old information can be integrated, refined, improved, deduced and induce conclusions that are supported logically or not.
Marginal utility as a concept is false and stems from false belief. This is why the Austrian School of Neoclassical Economics is little better than any other school of neo-classical economics since all such schools rely on the bogus concept of marginal utility.
Either a thing is useful or it is not. Words that end in ~ful mean having the quality of being perfect, being entire.
The word utility enters into English during the late 14th century meaning the “fact of being useful,” and derives from the Old French word ‘utilite’ meaning “usefulness”. The word marginal enters into English in the 1570s meaning “written on the margin,” and derives from the Middle Latin word marginalis, in turn from the Latin margo meaning “edge”. The first use of the meaning of “little effect or importance” happened in 1887.
Claiming that something has marginal utility is claiming that a thing has little usefulness. This is contradictory. Claiming a thing has utility is a claim that it is fully usable, that is fully satisfies, that is useful.
During any moment, a useful thing must fully satisfy the doing, otherwise such a thing is not useful and lacks utility. No thing can be partially useful. Either that thing is useful or it is not.
Claiming that Laws of Marginal Utility exist is a bogus claim. As stated by Polleit, the Law of Diminishing Marginal Utility says that the little usefulness of a thing decreases as one has more units of that thing. Yet, it has been shown already that a thing must be fully useful or not. It cannot exist in a state of little usefulness, ever.
A can opener is fully useful. Never is a can opener not fully useful. A broke can opener would be useless (“unuseful”). If a man were to gain a second can opener, each can opener would be fully useful, regardless of that man only having one pair of hands to hold only one can opener to open one can at a time.
Also, as stated by Polleit, the Law of Increasing Total Utility says that the little usefulness of a larger-sized unit is greater than the little usefulness of a smaller-sized unit. Again, no thing can be partially useful. Either a thing is useful or it is not.
Also, there’s no such thing as a larger-sized unit relative to a smaller-sized one. A unit is the standard of measure. One inch is one inch. Never does there exist one inch that is longer than another measured one inch.
Claims of utility in economics arise because of Jeremy Bentham, the English social reforming meddler who pushed a doctrine of welfarism based on utilitarianism. It is through Bentham that neo-classical economist J.S. Mill picks up on the concept. Utility has nothing to do with psychology as Thorsten Polleit claims, falsely.
Bentham pushed utilitarianism, which is living by the belief that the moral worth of an action is determined solely by its usefulness in delivering pleasure and minimizing pain. Social reformers picked up on this claiming that the right acts or policy are those that which would cause “the greatest good for the greatest number of people.”
To justify such meddling into the lives of individuals, social reformers conjured the bogus concept of marginal utility, which holds that an individual gets satiated by oh so much of a thing, beyond which each additional consumed unit gives less pleasure and could even harm the individual. Thus, as social reformers would claim they could dole out the exact amounts of things to everyone in an effort to protect individuals from harming themselves while preventing them from becoming selfish hoarders.
Charlie and the Chocolate Factory provides a good story that exemplifies when the utilitarian way does not get followed — all of the wicked kids meet their demise because of overconsumption, that is, because of the bogus claim of diminishing marginal utility.
It’s time that those who seek a true Science (knowing) of Economics dispense with the silly false belief of marginal utility and all that goes with it.
Smack,
Do you enjoy the tenth hamburger you eat at one sitting less then the first hamburger?
Why would you say that is?
Whether I enjoy eating a 10th hamburger or the first hamburger has nothing to do with economics. Enjoyment of food falls within the realm of Behavioral neuroscience, also known as Biological Psychology.
Economics deals with all matters of man regarding his wealth. Wealth arises only when things take on the quality of exchangeability.
So unless we’re talking about the Science of Wealth, which deals with wealth, rights (property), credit and money, goods, swaps, demand, worth (value), price; the Science of Profit, which deals with entrepreneurs, products, profit, income (rent, interest, annuity, wages), labor, capital, debt; or Economy, which deals with inflation, deflation, currency, commercial banking, central banking and cycles; then we’re not talking about economics.
Marginal utility has nothing to do with Economics (all matters of man regarding his wealth) or the Science of Economics (the proper, recorded knowing of all matters of man regarding his wealth).
Smack,
Your argument fails to make even a little bit of sense, yet you say everything with such certainty.
First of all, your lack of enjoyment when you eat the tenth hamburger influences your purchasing decisions. It therefore falls in the realm of economics. This is why stores ofter offer discounts when you make bulk purchases… they know you will enjoy the extra portion less then the original so they discount the price to encourage you to buy more. Are you really saying that this has nothing to do with economics? Does it not effect the store owner’s “wealth”?
Second, you talked above about can openers. If each can opener is equally useful to you then why don’t you buy 20? or 1000? Is it, perhaps, because of decreasing marginal utility?
Finally, your assertion that there is no such thing as degrees of usefulness is one of the silliest things I have heard all day (yes, I am implying that there can be varying degrees of silliness). Are you saying that anything that can open a can is equally useful as a can opener? I can open a can with a rock, or a gun, or a screwdriver… do these all “fully satisfy”? Do I therefore have no need for a can opener? Since you seem to have a thing for looking up the origins of terms and such, you should look up the “line drawing fallacy”. I can’t think of any other explanation for you bizarre claims (including your “whining” claim below).
And here I thought the article was prolix…
Or, to state “Smack”‘s point in a more concise and less whiny fashion, the doctrine of marginal utility implies that we create value whenever we redistribute wealth from richer persons to poorer persons.
As I’ve observed before, most Misesians are confused Bolsheviks.
No, sorry
WB already tackled this. I’d link it but f that
You can however observe the law of diminishing marginal utility as the posters around here ignore your posts more and more
Firstly, interpersonal utility comparisons aren’t allowed in the Austrian model, for very general reasons. Attack this if you wish (I don’t fully agree with it myself) but don’t pretend it’s something austrians don’t have an answer for.
Secondly, you ignore the destructive effects of incentive distortion caused by redistribution, which Austrians have written about to great length.
Finally, you won’t find many strict utilitarians around here. Redistribution is unjustified even if it does increase overall utility.
Expression can be whiny or not. There’s no such thing as “less whiny.”
However, by your mere mention of want to express yourself as “less whiny”, you reveal that you express in a whiny way.
The claim that “Misesians are confused Bolsheviks” seems silly. However, by accepting marginal utility, Misesians accept a kind of implied positivist welfare economics.
Robert,
Have you ever heard anyone here say that “we” should take money from one group and give it to another? Have you even heard anyone here say that it is even possible to make interpersonal comparisons of utility?
You are pathetic.
+1 Internet Points for Anthony. Argument closed.
For those arguing about the marginal utilities of the 3rd and 4th tire, the key words are – homogeneous units, where each unit satisfies a separate end. In this case, the appropriate unit is 4 tires. Rothbard said more on that.
What exactly do we mean by “homogeneous units”? And why do the units have to satisfy separate ends? In the hamburger example, aren’t the hamburgers satisfying the same end (ie eliminating your hunger)? And doesn’t all action ultimately aim at satisfying the same ultimate end (ie “happiness”)?
As far as tires are concerned, how can we say that the individual tires are not homogeneous? Physically they are homogeneous. Do you mean that they are not homogeneous in the mind of the actor? If this is the case then the very conclusion of the law of diminishing marginal utility invalidates the presumption of homogeneity. Since, according to the law, additional units are less useful then they are not being perceived the same by the actor and therefore not homogeneous therefore the law does not apply. The implications of the law are therefore that the necessary conditions for it’s application can never in reality exist which makes for a rather useless tautology. Obviously this must not be what we mean by homogeneous.
And what’s this about relevant units? Who gets to decide what units are relevant and where in the law is this indicated? If the law is only applicable when “relevant” units are specified, aren’t we saying that the law is applicable only in cases where common sense would dictate that the law should be applicable? This doesn’t make for much of a law since how am I supposed to know what the relevant unit is? It may seem obvious in the tire example. But what about the beer example highlighted above? Why should two beers be more relevant than one or three or four or five? We’re basically saying the law is applicable unless it’s not applicable in which case it is not applicable. In any case where the law obviously doesn’t apply we can simply throw up our hands and claim that the units weren’t relevant!
I think I’ll try this excuse next time I get a speeding ticket… (“but officer, I haven’t even driven for 10minutes, how could I have possibly been going 90 miles per hour??”)
Can some one please point out what I’m missing in my logic?
Alain,
You make good points… I would say agree that the law can not apply to every unit of every good.
Would you still object if it were merely stated with any good one could eventually reach a quantity at which a additional unit of that good would be less valuable to you than the unit before it?
Economics is not the study of wealth or money or profit or any other such nonsense.
People choose from limited means to achieve ends.
They act.
This leads to exchange between individuals.
This human action, making exchanges to reach ends, is the wellspring of the global economy.
Thus economics is, as Mises posited in his magnus opus, the study of human action.
As for this notion that there is no such thing as marginal utility, it is absolutely wrong. The only way there could be no such thing as marginal utility would be in a universe without scarcity. There first would have to be unlimited resources of every kind. Time would also need be unlimited, we would have to be able to live forever. There would also need be an absence of constraint on space, it would need to be possible to be two or more places at once.
It is precisely because scarcity is real that the law of marginal utility exists.
And it happens to be called the ‘law’ of … for good reason.
It has withstood the most rigorous of scientific, philosophical testing.
It is better than theory for we know it to be universally true.
Should we argue the validity of Newton’s laws of motion or the universal law of gravity?
Uf, thanks, finaly someone who pointed in the right direction: the inner workings of time (and resource) scarcity as the objective limit of the human existence and perception. Most of the commenters above are using psychological comparisons in their explanations – there would never be any economic law possible from that perpective.
It would be fine to have some voting mechanism here on these discussion pages to upvote the favorite questions. Something like http://math.stackexchange.com/ for people interested in math or like http://stackoverflow.com for software developers. I’m going to ask the webmaster.
“(1) A rise in the money stock. A rise in the money stock must, for logical reasons, reduce the exchange value of a money unit. “
Temporarily perhaps. Imagine a company that uses it’s common stock as money. The stock holders vote to issue new stock (money) to buy new assets, let’s say some new rides for its amusement park. Because of the new rides, the exchange value of the common stock money goes up and should eventually overcome the dilution effect of the new stock issue.
So the above is an example of a completely ethical increase of a money supply with beneficial longer term effects for all money holders.
You’re cheating. The company is evolving over time, and hence the stock itself is changing over time.
Over the short term, when the company has not changed perceptibly, the dilution of stock has the claimed effect of reducing the purchasing power of the stock.
More importantly, it’s not really money if it is not the “most widely traded commodity” in the market. Whoever uses stock certificates as money?
Over the short term, when the company has not changed perceptibly, the dilution of stock has the claimed effect of reducing the purchasing power of the stock. B. Feared
A point I have conceded as a possibility. However, the exchange value of the stock might well go up even in the short run in anticipation of the new rides. But in any case, it is to be expected that in the longer term the stock price (money value) will go up.
More importantly, it’s not really money if it is not the “most widely traded commodity” in the market. B. Feared
A foolish definition. A commodity money if used as money is not a commodity and if used as a commodity is not money.
Whoever uses stock certificates as money? B. Feared
Why should corporations share their wealth via new common stock issue when they might steal it via loans from the government backed counterfeiting cartel, the banking system?
F. Beard,
Your comments about companies issuing more stock actually increasing exchange values in the long run sounds reasonable to me.
On the other hand, I sincerely doubt that stock would ever be widely accepted as money… That said, if there is ever a time when people have the freedom to make their own choices I would certainly not object to its use (by other people, at least, I am not sure I would accept it).
Anthony,
All we should insist on is a true free market in private money creation. That would allow PMs, common stock, store coupons, futures contracts and even completely private fractional reserve lending to compete equally wrt government. And IF we ever had such a free market then I suspect that PMs, fractional reserves and even usury itself would be shown to be mostly obsolete.
Tires.
All tires of a standard size are homogeneous goods. An unmounted tire on the shelf at wal mart is a different good than the same tire mounted on a rim off the car. Just the same, the tire on the rim is different than the same tire on a car. Changing conditions lead to changing value scales.
Al has a brand new car with brand new tires.
His value scale would look something like this…
new laptop
big screen tv
Groceries
Fifth tire
Sixth tire
Barbie just got a flat tire
Fourth tire
Big screen tv
Computer
Party money for the weekend
Groceries
Fifth tire
Sixth tire
Cain had all 4 of his tires slashed.
Tow truck
First tire
Second tire
Third tire
Fourth tire
gun
Bullets
Lawyer
Fifth tire
Sixth tire
Everyone reaches some point that adding another tire becomes less important than possesing some other good. A limit is approached. As in calculus as one approaches this limit the value ‘becomes zero.’ But this does not imply the value to the individual actor can be mathematically calculated and then compared to anything. I am trying to illustrate the concept. The more of any thing a person has the lower they value the next unit.
No matter the good, man always eventually faces some limit that makes the next unit less valuable than the first unit of some other good.
Humans act.
Satisfaction is the desired end of all action.
The means available are always limited.
The ends desired are unlimited and constantly changing.
Limits require men to choose among alternatives.
These choices are made ‘at the margin.’
Author writes:
“The axiom of human action cannot be denied without running into an insoluble contradiction. This is because denying the axiom of human action implies human action — that is the human act of denying.”
This is pure tautology – denying the action is an action? Action in a commonly accepted sense implies an objective change in the material world outside one’s mind – when one dreams, one does NOT act! And besides, “action” here must be used in a broader, all-inclusive, exhaustive sense, including ALL possible actions, and not just the “action of denying the action”… This is plain circular logic, and not a proof!
This warrants a question of does one really need an axiom to convey a trivial notion of that humans do something, that is act? Does it not seem a little as if it is coming from the Department of Redundancies?
Moreover, personally, I DO NOT SEE ANY connection between the fact that humans can act and the diminishing marginal utility. It would have made more sense to claim that since humans have a limited capacity for consumption of certain goods or services, their demand for a particular good or service tends to reach a varying satiation maximum value…
This is trivial observation of nature, it is akin to claiming that all humans have needs, and build a whole economic theory around it… Absurd!
Also, author writes:
“The law says, first, that the marginal utility of each (homogenous) unit decreases as the supply of units increases (and vice versa); second, that the marginal utility of a larger-sized unit is greater than the marginal utility of a smaller-sized unit (and vice versa). The first law denotes the law of diminishing marginal utility, the second law the law of increasing total utility.”
Two problems with the above definitions:
1. It can be shown that the marginal utility decrease in respect to the increase in its units’ supply is NOT always monotonous.
2. The large-sized units possessing more utility claim does not always hold true, such as in the cases of discrete consumables. For example, if you can get 4 tires or 6 tires at the same price, one may not always choose 6 tires dependent on how much garage storage room one has, and what needs to be sacrificed in order to consume the extra units…
Marginal benefit refers to what people are willing to give up in order to obtain one more unit of a good, while marginal cost refers to the value of what is given up in order to produce that additional unit. Additional units of a good should be produced as long as marginal benefit exceeds marginal cost. It would be inefficient to produce goods when the marginal benefit is less than the marginal cost. Therefore an efficient level of product is achieved when marginal benefit is equal to marginal cost.
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