Utility
Utility, in economics, is the capacity of a good to remove felt uneasiness. In praxeology the term means the importance an acting person attaches to a thing on account of the belief that it can remove felt uneasiness.[1] Alongside this subjective sense there is a technological notion of objective utility, meaning simply a thing's capacity to bring about a certain effect; the two must not be confused, and it is the subjective sense that economics employs.
Subjective value
The Austrian treatment begins from Carl Menger's solution to the classical value paradox. Classical economists, seeking the source of value in the cost or labour embodied in a good, could not explain why water is indispensable and cheap while diamonds are useless and dear. Menger's answer was that people never value "water" or "diamonds" as such. They value particular units available for particular purposes, and they value them according to the end that the specific unit in question serves.[2]
The law of marginal utility
Because the acting person satisfies the most urgently felt want first, each additional unit of a homogeneous supply is devoted to an end less urgent than the last. The importance attached to a unit therefore falls as the supply increases. This is the law of marginal utility, and in the Austrian formulation it is not an empirical regularity about psychology or physiology but a deduction from the structure of action itself: it follows from the fact that a person who ranks ends acts on the higher ranked one first.
The unit whose loss the actor would regard as least damaging is the marginal unit, and it is this margin, not the total supply, that governs valuation. Water is cheap because the relevant margin serves an unimportant end, not because water in general is unimportant.
Ordinal, not measurable
Austrians hold that utility is ranked but not measured. A person can prefer A to B; there is no operation by which he can report that A yields 2.7 times the satisfaction of B, because there exists no unit of satisfaction. Value scales are therefore ordinal, and the arithmetic performed on utility in much of neoclassical economics is held to have no referent.
Two consequences follow, and both are characteristically Austrian:
- No interpersonal comparison. If utility is not measurable within one person, it cannot be summed across persons. The Austrian objection to utilitarian policy arguments, and to welfare economics generally, rests on this rather than on any indifference to welfare.
- Demonstrated preference. Murray N. Rothbard argued that preference is knowable only through choice actually made. A scale of values is meaningful as revealed in action, not as introspected or surveyed, so economics may draw on what a person did and not on what he says he would do.[3]
Relation to indifference
Because valuation is demonstrated in choice, Austrians treat indifference as something that cannot be exhibited in action: a person who acts has by that act ranked one option above another. Indifference curves, which take indifference as observable data, are consequently rejected as a foundation for demand theory, and demand is derived instead from ordinal preference rankings.
See also
References
- ↑ Ludwig von Mises. VII. Action Within The World, 1. The Law of Marginal Utility, Human Action.
- ↑ Carl Menger. Principles of Economics (1871).
- ↑ Murray N. Rothbard. 5. Further Implications: A. Ends and Values, Man, Economy, and State.