Utility TheoryUtility Theory

Presented by:Presented by:

Tiffani Ann MartinTiffani Ann MartinEnrique TarangoEnrique TarangoRyan Mae BejaranoRyan Mae BejaranoSean WilliamsonSean Williamson

Economics 101Economics 101Dr. Sasan FayazmaneshDr. Sasan FayazmaneshFall 2002Fall 2002

The Corpse of Jeremy Bentham (1748-1832)

Roots of Utility TheoryRoots of Utility Theory Neoclassical Definition of Utility: “The pleasure or Neoclassical Definition of Utility: “The pleasure or

satisfactionsatisfaction obtained from a good or service.” obtained from a good or service.” The Micro Economy The Micro Economy TodayToday, Schiller, p. 108., Schiller, p. 108.

NeoclassicalNeoclassical definition encompasses the essence of definition encompasses the essence of UtilitarianismUtilitarianism, founded by Jeremy Bentham., founded by Jeremy Bentham.

DifferencesDifferences between the neoclassical definition and the between the neoclassical definition and the definition provided by Bentham mainly deal with the utility definition provided by Bentham mainly deal with the utility of the of the individual individual (neoclassical) versus (neoclassical) versus aggregateaggregate utility utility (Bentham). (Bentham).

Another major difference was the concept of “Another major difference was the concept of “marginalmarginal” as ” as it applied to utility: Neoclassicals used the marginal it applied to utility: Neoclassicals used the marginal concept heavily in their theory and arguments, whereas concept heavily in their theory and arguments, whereas Bentham did not, he was more of a Bentham did not, he was more of a utilitarianutilitarian. .

Jeremy BenthamJeremy Bentham Born into a wealthy, Tory Born into a wealthy, Tory

(British) family(British) family

Studied law at Westminster Studied law at Westminster School and Queen’s College, School and Queen’s College, OxfordOxford

Bentham was known as a Bentham was known as a British gentleman, political British gentleman, political activist, legal scholar, social activist, legal scholar, social philosopher, linguist, and philosopher, linguist, and contemporary of Adam Smith.contemporary of Adam Smith.

Welcomed both the American Welcomed both the American and French Revolutions: He and French Revolutions: He was made an honorary citizen was made an honorary citizen of the French Republic in of the French Republic in 1792.1792.

Known as the father of Known as the father of UtilitarianismUtilitarianism

1748-1832

Bentham’s Approach Bentham’s Approach RefutedRefuted Smith’s principle of Smith’s principle of

utility which rests on utility which rests on self-interestself-interest and natural identity to improve and natural identity to improve one’s position via individual one’s position via individual attempts to acquire benefits and attempts to acquire benefits and avoid costs.avoid costs.

While Bentham agreed that While Bentham agreed that individuals are self-interested he individuals are self-interested he ““denied denied any natural harmony of any natural harmony of egoisms.”egoisms.”

Bentham reasoned that crime, for Bentham reasoned that crime, for example, is a self-motivated example, is a self-motivated behavior that violates public behavior that violates public interest, and therefore, provides interest, and therefore, provides proof that a state of natural proof that a state of natural harmony did not exist.harmony did not exist.

He asserted that statesmen must He asserted that statesmen must seek an “artificial harmony” of seek an “artificial harmony” of interests through proper interests through proper legislation. legislation.

A History of Economic Theory A History of Economic Theory and and Method (p. 126)Method (p. 126)

An Introduction to the An Introduction to the Principles of Morals and Principles of Morals and

Legislation Legislation 17811781 Bentham’s most famous writingBentham’s most famous writing

Widely established him as the founder of Widely established him as the founder of UtilitarianismUtilitarianism

Introduced his notion of utility:Introduced his notion of utility:

““Nature has placed mankind under the governance of Nature has placed mankind under the governance of two sovereign masters, two sovereign masters, pain pain and and pleasurepleasure. It is for . It is for them alone to point out what we ought to do, as well them alone to point out what we ought to do, as well as to determine what we shall do… By as to determine what we shall do… By utilityutility is meant is meant that property in any object, whereby it tends to that property in any object, whereby it tends to produceproduce benefit, advantage, pleasure, good or benefit, advantage, pleasure, good or happiness happiness or or to to preventprevent the happening of mischief, the happening of mischief, pain, evil, or unhappiness to the party whose interest pain, evil, or unhappiness to the party whose interest is considered.”is considered.”

Principles of Morals and Legislation (p. Principles of Morals and Legislation (p. 17)17)

Bentham’s Central Bentham’s Central Philosophy: UtilitarianismPhilosophy: Utilitarianism

Individual wants and interests Individual wants and interests mustmust be identified with the be identified with the general general interestinterest of the of the society society as a whole. as a whole.

Bentham’s principle of Bentham’s principle of utilitarianismutilitarianism asserts that “human asserts that “human conduct should be directed toward maximizing the conduct should be directed toward maximizing the happiness (surplus of pleasures over pain) of the greatest happiness (surplus of pleasures over pain) of the greatest number of people.” number of people.” A History of Economic Theory and MethodA History of Economic Theory and Method (p. 125)(p. 125)

““An action then may be said to be conformable to the An action then may be said to be conformable to the principle of principle of utilityutility (meaning with respect to the (meaning with respect to the community at large) when the tendency it has to augment community at large) when the tendency it has to augment the the happinesshappiness of the community is of the community is greatergreater than any which than any which it has to it has to diminishdiminish it.” it.”

Principles of Morals and Principles of Morals and Legislation (p. 18)Legislation (p. 18)

Contingencies of UtilitarianismContingencies of Utilitarianism(according to Bentham)(according to Bentham)

There needs to be There needs to be equal weightequal weight in the in the measurementmeasurement of general welfare: For example, “if something adds of general welfare: For example, “if something adds more to a peasant’s pleasure than it subtracts from more to a peasant’s pleasure than it subtracts from the happiness of an aristocrat, it is the happiness of an aristocrat, it is desirable desirable on on

utilitarianutilitarian grounds.” grounds.” A A History of Economic Theory and Method (p.126)History of Economic Theory and Method (p.126)

Government intervention is justified as long as it Government intervention is justified as long as it enhances the happiness of a community more than it enhances the happiness of a community more than it diminishes the happiness of a certain portion of it.diminishes the happiness of a certain portion of it.

Problems with Bentham’s Problems with Bentham’s TheoryTheory

““Interpersonal comparisons” of utility: one man’s Interpersonal comparisons” of utility: one man’s happiness may be another man’s pain. This makes happiness may be another man’s pain. This makes his theory subjective!his theory subjective!

Another problem involves the weighting of Another problem involves the weighting of qualitative pleasures. Should pleasures of the qualitative pleasures. Should pleasures of the mind receive more or less pleasures of the body? mind receive more or less pleasures of the body? Bentham did not know! Bentham did not know!

He resorts to money as a measure of pleasure and He resorts to money as a measure of pleasure and pain, and in doing so presupposes a sort of “moral pain, and in doing so presupposes a sort of “moral arithmetic” (it gets complicated). arithmetic” (it gets complicated).

He conceptualized diminishing marginal utility, He conceptualized diminishing marginal utility, but did not explore the issue as did later but did not explore the issue as did later economists & philosophers, notably William economists & philosophers, notably William Stanley Jevons (1835-1882).Stanley Jevons (1835-1882).

Weird But TrueWeird But True Bentham left his entire Bentham left his entire

estate to the University estate to the University of London with the of London with the provision that his provision that his remains remains be be presentpresent at at all the meetings of the all the meetings of the board. board.

The The bodybody is is stuffedstuffed and and clothed; the head on clothed; the head on the body is made of the body is made of wax, but his real wax, but his real headhead rests between his feet rests between his feet and is and is preserved preserved after after the manner of South the manner of South American head hunters!American head hunters!

William Stanley Jevons (1835-William Stanley Jevons (1835-1882)1882)

Born on September 1, Born on September 1, 18351835

Overcame adversityOvercame adversity A A UnitarianUnitarian (a liberal (a liberal

non-conformist)non-conformist) Attended University Attended University

College London (College London (UCLUCL)) Received a M.A. in Received a M.A. in

Logic, Philosophy, and Logic, Philosophy, and Political SciencePolitical Science

Helped launch the Helped launch the Marginal RevolutionMarginal Revolution that lead to that lead to neoclassicalsneoclassicals

Definition of TermsDefinition of Terms

Maximize pleasureMaximize pleasure

CommodityCommodity

UtilityUtility

Utility is Not an Intrinsic Utility is Not an Intrinsic QualityQuality

NoNo inherent quality inherent quality It is a It is a circumstancecircumstance of things of things Can never say some objects have Can never say some objects have

utilityutility and others do not i.e. food and others do not i.e. food Nor do all Nor do all portionsportions of the same of the same

commodity possess equal utility i.e. commodity possess equal utility i.e. water, bread, clotheswater, bread, clothes

Utility is Utility is not proportionalnot proportional to commodity to commodity

Law of the Variation of Law of the Variation of UtilityUtility

Utility measured by Utility measured by the addition to a the addition to a person happinessperson happiness

Subtract a 10Subtract a 10thth part part from dietfrom diet

Distribution of Commodity in Distribution of Commodity in Different UsesDifferent Uses

““The principle of utility may be The principle of utility may be illustrated by considering the mode illustrated by considering the mode in which we distribute a commodity in which we distribute a commodity when it is capable of several uses.”when it is capable of several uses.”

““Under peculiar circumstances great Under peculiar circumstances great changes may take place in the changes may take place in the consumption of a commodity.”consumption of a commodity.”

Alfred Marshall (1842-Alfred Marshall (1842-1924)1924)

Born on July 26Born on July 26thth, , 18421842

Son of bank cashierSon of bank cashier Strict fatherStrict father Refused scholarship Refused scholarship

at Oxfordat Oxford Instead, he attended Instead, he attended

Cambridge UniversityCambridge University Marriage- forced Marriage- forced

resignationresignation

Why Economics?Why Economics?

Studied ethics in college and realized Studied ethics in college and realized that it did not provide a good that it did not provide a good explanation of social classes (rich vs. explanation of social classes (rich vs. poor).poor).

Studied John Stuart Mill’s Studied John Stuart Mill’s Political Political EconomyEconomy

““Next, I resolved to make as thorough Next, I resolved to make as thorough a study as I could of a study as I could of Political Political EconomyEconomy.” (Pigou, .” (Pigou, MemorialsMemorials p. 10) p. 10)

Marshall’s WorksMarshall’s Works

Marshall had 82 works published, Marshall had 82 works published, including books, articles, lectures, including books, articles, lectures, conferences, and testimony (Ekelund).conferences, and testimony (Ekelund).

Marshall’s main exposition was titled Marshall’s main exposition was titled The Principles of EconomicsThe Principles of Economics, published , published in 1890.in 1890.

Marshall’s MethodMarshall’s Method

““Marshall viewed the science of Marshall viewed the science of economics in about 1890 as merely economics in about 1890 as merely an extension- really a an extension- really a continuationcontinuation- - of the ideas espoused by Adam of the ideas espoused by Adam Smith.” Smith.” (Ekelund, 342).(Ekelund, 342).

He used math to concisely answer He used math to concisely answer questions dealing with economic questions dealing with economic issues.issues.

Mankind’s Wants and NeedsMankind’s Wants and Needs Marshall believed that wants and needs Marshall believed that wants and needs

progressedprogressed because: because:

1.1. Wants and needs are Wants and needs are countlesscountless in number and in number and variousvarious in kind. But, none the less, capable of in kind. But, none the less, capable of being satisfied.being satisfied.

2.2. Man begins to want for the Man begins to want for the sakesake of of changechange..3.3. As food and drink become more various and As food and drink become more various and

costly, gratifying, for the sake of costly, gratifying, for the sake of indulgingindulging, , emerges.emerges.

4.4. LeisureLeisure occurs occurs lessless and less and an opportunity and less and an opportunity cost for wanting more and more, and needing to cost for wanting more and more, and needing to pay for such, arises.pay for such, arises.

Utility according to MarshallUtility according to Marshall ““Utility is taken to be Utility is taken to be correlativecorrelative to desire or want.” to desire or want.” ( (

www.mcmaster,cawww.mcmaster,ca))

These wants cannot be measured directly but instead only These wants cannot be measured directly but instead only indirectly by the indirectly by the amountamount someone is willing to pay to obtain the someone is willing to pay to obtain the good.good.

The The total utilitytotal utility that a man derives from a good increases with that a man derives from a good increases with each additional unit but at a each additional unit but at a decreasingdecreasing rate. rate.

Utility is different between rich and poor.Utility is different between rich and poor.

““Suppose, for instance, that tea of a certain quality is to be had at Suppose, for instance, that tea of a certain quality is to be had at 2$/lb. A person might be 2$/lb. A person might be willing willing to give 10$. For a single pound to give 10$. For a single pound once a year rather than go without it altogether, while if he could once a year rather than go without it altogether, while if he could have any amount of it for nothing he would perhaps have any amount of it for nothing he would perhaps notnot care to care to use use more than 30 lbs in the year. But at it is, he buys perhaps 10 more than 30 lbs in the year. But at it is, he buys perhaps 10 lbs in the year; that is to say, the lbs in the year; that is to say, the differencedifference between the between the satisfaction which he gets 9 lbs, and 10 lbs is enough for him to be satisfaction which he gets 9 lbs, and 10 lbs is enough for him to be willing to pay 2$.”willing to pay 2$.”

Utility ContinuedUtility Continued

“…“…We may say that the return of pleasure We may say that the return of pleasure which a person gets from each additional which a person gets from each additional dose of a commodity diminishes till at last a dose of a commodity diminishes till at last a margin is reached at which it is no longer margin is reached at which it is no longer worth his while to acquire any more of it.” worth his while to acquire any more of it.” Principles of EconomicsPrinciples of Economics

““On the other hand, diamonds being very On the other hand, diamonds being very scarce, have upon that account a great scarce, have upon that account a great value, though they are but little use.” value, though they are but little use.” Principles Principles of Economicsof Economics

Philip Mirowski Philip Mirowski Degrees: Degrees: B.A. Economics, B.A. Economics,

Michigan State Michigan State University, 1973University, 1973

M.A. Economics, M.A. Economics, University of Michigan, University of Michigan, 19761976

PhD Economics, PhD Economics, University of Michigan, University of Michigan, 19791979

Current Professor of Current Professor of Economics and the Economics and the History and Philosophy History and Philosophy of Science, (1990- of Science, (1990- current) University of current) University of Notre Dame.Notre Dame.

Jevons- Utility as a Jevons- Utility as a Gravitational ForceGravitational Force

““Utility only exists when Utility only exists when there is on the one side there is on the one side the person wanting, and the person wanting, and on the other the thing on the other the thing wanted… Just as the wanted… Just as the gravitating force of a gravitating force of a material body depends material body depends not alone on the mass of not alone on the mass of the body, but upon the the body, but upon the masses and relative masses and relative positions and distances positions and distances of the surrounding of the surrounding material bodies, so material bodies, so utility is an attraction utility is an attraction between a wanting between a wanting being and what is being and what is wantedwanted.” .” Jevons, 1981, VII, 80 Jevons, 1981, VII, 80

Francis Ysidro EdgeworthFrancis Ysidro Edgeworth

“… “… The particular The particular hypothesis adopted hypothesis adopted in these pages, in these pages, that Pleasure is the that Pleasure is the concomitant of concomitant of Energy.” Energy.”

Edgeworth 1881, 9, 12.Edgeworth 1881, 9, 12.

Irving Fisher’s Table Irving Fisher’s Table

-The table presents Fisher's comparison of -The table presents Fisher's comparison of analogies between energetics andanalogies between energetics andeconomics models.economics models.

Fisher was more faithful to the energetics Fisher was more faithful to the energetics model than his predecessors andmodel than his predecessors andhis version continues to be used long after his version continues to be used long after other marginalists have had theirsother marginalists have had theirsrefuted or severely altered.refuted or severely altered.

Alfred MarshallAlfred Marshall ““Alfred Marshall, for one, certainly discussed some aspects Alfred Marshall, for one, certainly discussed some aspects

of the adoption of physical metaphors (Marshall 1898); and of the adoption of physical metaphors (Marshall 1898); and he clearly had some reservations. However, the case of he clearly had some reservations. However, the case of Marshall is actually illuminated by an understanding of Marshall is actually illuminated by an understanding of energetics.” energetics.” Physics and the Marginal Revolution,Physics and the Marginal Revolution,1984, Mirowski.1984, Mirowski.

Marshall’s place in the history of economics thought: “Since Marshall’s place in the history of economics thought: “Since much of what appears in introductory and intermediate much of what appears in introductory and intermediate microeconomics texts as the theory of supply and demand microeconomics texts as the theory of supply and demand is, in fact, the handiwork or Marshall, there is a grain of is, in fact, the handiwork or Marshall, there is a grain of truth in his claim.” He may have deserved “discoverer” truth in his claim.” He may have deserved “discoverer” status, “However, once the actual sequence of events is status, “However, once the actual sequence of events is uncovered, it appears that Marshall’s major service in the uncovered, it appears that Marshall’s major service in the marginalist revolution was as a popularizer, and like other marginalist revolution was as a popularizer, and like other popularizers, he altered the material which he promoted.” popularizers, he altered the material which he promoted.” Physics and the Marginal RevolutionPhysics and the Marginal Revolution, 1984, Mirowski., 1984, Mirowski.

ConclusionConclusion Neoclassicals treated utility as fundamental Neoclassicals treated utility as fundamental

exogenous data to which market transactions exogenous data to which market transactions adjusted, and not as a derived phenomenon. adjusted, and not as a derived phenomenon.

However, the conservation of energy principle does However, the conservation of energy principle does not translate into marginalist theory directly. The not translate into marginalist theory directly. The sum of income and utility is not conserved, thus the sum of income and utility is not conserved, thus the system does not retain its analytical identity or system does not retain its analytical identity or determinancy.determinancy.

Utility was conserved in neoclassical models by Utility was conserved in neoclassical models by assumption. According to neoclassicals, it was assumption. According to neoclassicals, it was unaltered by the trading or consuming process.unaltered by the trading or consuming process.

Physics and The Marginalist Revolution Physics and The Marginalist Revolution 1984, 1984,

MirowskiMirowski

ReferencesReferences Bentham, JeremyBentham, Jeremy. Principles of Morals and . Principles of Morals and

Legislation. Legislation. 1781.1781. Ekelund, R. & Hebert, R. Ekelund, R. & Hebert, R. A History of Economic A History of Economic

Theory and MethodTheory and Method. 1997.. 1997. Jevons, William Stanley. Jevons, William Stanley. The Theory of Political The Theory of Political

Economy. Economy. 1871.1871. Marshall, Alfred. Marshall, Alfred. The Principles of EconomicsThe Principles of Economics. 1890.. 1890. Mirowski, Philip. Mirowski, Philip. More Heat Than LightMore Heat Than Light. 1989.. 1989.