Is marginal utility diminishing indeed?


Since undergraduate courses in economics diminishing marginal utility law is a major paradigm. Indeed, quite of an intuitive concept: that is, “as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product” (FreeDictionary.com). Translated, consuming increasingly more of a given good provides the individual  with a gradually decreasing pleasure. Moreover, in the long run the utility given by consumption is zero and even negative. That is why, according to the marginalist theory, individuals differentiate their consumption among different goods (giving different levels of utility). The diminishing marginal utility law is based on practical and psychological assumptions. However, I’m wondering how and if this rule is actually determining human behaviours. One issue in economics is inequality of income, access to goods, services, etc.. Many times we read of or listened to economists and politicians reporting the huge gap between the richest and the poorest percentiles of the population. What’s the utility to a billionaire of having $1 million more? Close to zero, a marginalist, and I, would answer, yet I’m not so sure the billionaire would agree with us…what’s the economic failure – if this is the case – acting here? Is it an irrational impulse to greed, egoism, fear of loss, addiction to power? Then, how to correct this failure? Is redistribution the key tool? If so, why policy makers often escape from redistributive policies? Because of their ‘gratitude’ to the rich lobbies that have determined their political success, or of the expected future support? It seems to me that here collective and individual utilities are linked together and one’s utility determines the other’s. I don’t have any answer – maybe good questions? –  and I won’t be surprised when a real economists will easily disclose how trivial is my logic. I warmly welcome theoretical references.

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4 responses to “Is marginal utility diminishing indeed?

  1. Nice post Antonio!

    I think “The idea of justice” (Amartya Sen) and the classic Theory of Justice (John Rawls) develop very well the link between decreasing marginal utility and redistribution policy.

    Nevertheless, I wonder whether maximizing “aggregate” utility is a concern for policy makers, and hence we could justify redistribution policies on the latter objective.

    By the way, note that that the marginal utility is a concept historically linked with consumption (where it turns out more intuitive: the utility of a piece of bread is higher for the individual that has not eaten yet than for those who has already eaten ten pieces of bread-) rather than with income.

  2. These are deep waters, Antonio!
    I think that beyond the philosophical view, the marginal utility concept is useful for developing explanations (don’t want to say models!) of the real world. Having said that, of course, trying to think on the utility or satisfaction that one or two pieces of bread bring to me will not necessarily be related to a certain exact decreasing amount.
    Marginal utility may be useful for explaining certain issues, but not for others.

  3. Theory of diminishing marginal utility does not apply to the process of “Wealth making”

  4. Think of the many things you have/buy/consume in your daily life and you will rapidly see that marginal utility of the consumption of a specific good is very typically decreasing: for one ball of ice cream at an ice-cream stand you may be feeling to spend 2$, the second ball you may only add if it costs only 1$ more, and the third ball is only pure “luxury” for which you may agree to pay only some cents more or even refuse to eat. If a friend invites yo to a cinema once a month you very happily agree, once a week may be ok as well, but when he offers you the ticket every second day you’ll soon start refusing – “getting bored” from too much cinema corresponds to decreasing returns. The same holds for overall consumption: if it would increase your income from 500$/month to 5000$/month you’d probably accept a job that implies some small risk for your health. If you then, however, would get an offer with which you could increase your earnings from 5000$/month to 10000$/month, you would eventually refuse the offer if it implied a doubling of the probability of health problems due to the job: knowing that 5000$/month suffice to cover your basic needs makes your marginal “utility” from additional income lower.

    You ask why then “politicians often escape from redistributive policies”. This question makes sense, as it is true that given the decreasing returns, it would be best for aggregate welfare if an overall income would be distributed equally among people. The answer is disappointing in some sense: ‘unfortunately’ people seem to be willing to make efforts for producing services or products primarily if they expect to be allowed to keep the fruits from their efforts rather than distributing almost all of it among other people. Therefore redistributive policy is not redistributing ‘all’ income but only parts of it: if tax rates were 100%, only very altruistic people would eventually decide to work a lot – the famous argument often brought forward against communism. It may, however, well be that the negative effects of larger redistribution, i.e. higher taxes, on the willingness of people to work may often be assumed as larger than it really is. In the globalized world with mobile capital, firms and rich people, countries are however indeed increasingly exposed to international competition: if they try to increase “redistribution” and therefore tax rates, lots of the domestic capital/firms/rich persons may move to countries with lower taxes – therewith, tax havens (often small countries which can use low taxes to attract a lot of capital etc. relative their size) may be a very important reason why currently countries resp. their politicians can not afford to opt for very large redistribution.
    On the other hand, you’re probably right also that wealthy firms/people invest parts of their money for lobbying for less redistribution…

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