Marginal Utility is a Highly Marginal Concept

In the twentieth century, which provided humanity with a number of false beliefs that, in spite of their falsehood, managed to gain widespread acceptance, the behaviourists claimed that all of human behaviour could be explained by the phenomenon of Pavlov’s salivating dog. That these kinds of associations between two unrelated things, such as the ringing of a bell and the dog’s salivation response in anticipation of being fed, occur in everyday life is undeniable. For example, certain songs or melodies have certain pleasant or nostalgic associations for many people, as do certain colours, words, or shapes. However, many of these associations are personal or limited, meaning that they do not exist in the brains of all people.

The great mistake made by behaviourists was in generalizing this phenomenon into a global principle that was believed to apply to all behaviours, both human and non-human. After it was given the important and objective-sounding name “operant conditioning,” many people gullibly accepted the behaviourists’ false claim about the determinants of their behaviour. This false belief led to numerous silly or ineffective treatments, such as the attempt to cure male homosexuals of what was considered to be their aberrant sexual preference by giving them an electric shock while they were presented with an image of a naked man. Of course, this treatment was a failure because the theory on which it was based was wrong.

Economists have their own version of Pavlov’s salivating dog, in the sense of a relatively minor real-world phenomenon that has been elevated by a bunch of theorizing fools to the status of a globally-valid principle, in the process bestowing on it far more importance than it deserves. The concept of marginal utility is to economics what Pavlov’s salivating dog is to behaviourism and psychology in general.

Before I justify my claim, let us first consider the origin of the economic concept of utility. This concept was derived from the moral theory of Utilitarianism, which was developed by Jeremy Bentham, who exerted a great influence on the views of John Stuart Mill and other economists in the early years of that dismal science. According to Utilitarianism, which was summed up succinctly as advocating “the greatest happiness for the greatest number,” the aim of society is to provide its members with, or enable them to achieve, the greatest amount of happiness for the greatest number of them. Economists later interpreted this theory to mean the maximization of each person’s happiness or, as they preferred to call it, each person’s utility, since happiness, being an emotional state, is not a measurable quantity, and therefore cannot be the proper object of mathematical quantification, calculation, manipulation, and generalization.

Later on, in the course of the nineteenth century, some economist made the observation that people’s utility declines the more they consume of the same object. A common example is food: the more one eats of something, then generally the less one enjoys each additional unit of consumption. And thus was born the concept of marginal utility, or the amount of utility provided by an additional unit of consumption, along with the important economic principle, which economists formulated as the Law of Diminishing Marginal Utility, that the marginal utility of a thing declines as one’s consumption of it increases.

One reason why the concept of marginal utility was widely accepted by economists is because it seemed to explain something called the paradox of value:[1] why is it that certain inessential things, such as diamonds, paintings, or jewellery, are sold at high prices, while essential things like bread, rice, and water are sold relatively cheaply? The economists believe this is because the marginal utility provided by an additional unit of essential things like bread or water is relatively low, since most people have a relative abundance of them, while the marginal utility provided by an additional diamond or painting is much higher, since most people have relatively few of them, thus accounting for the great difference in their prices. In situations where bread and water are scarce, such as during wartime or famine, or following a natural disaster, their prices can rise to very high levels, a phenomenon that seems to support the economists’ explanation. But this explanation is wrong.

This seeming paradox – that essential things like bread or water are sold relatively cheaply while useless things like diamonds are sold dearly – arises from considering only the unit price of these items, which is not at all the proper measure of comparison.[2] We do not need to buy diamonds every day, or even every month or year, in order to survive. Assuming they can afford to buy them at all, most people buy only one or a few diamonds during their lives, such as an engagement ring, or a diamond necklace or pair of diamond earrings for oneself or as a gift. On the other hand, one needs to buy water and bread, or whatever other dietary staple one eats regularly, on a daily or weekly basis. Hence, the proper measure of comparison between these different commodities is the total amount that one spends on them during one’s lifetime. If this is done, it will be found that the great majority of people spend much more on essential items like bread and water than they do on inessential items like diamonds, jewellery, and artworks, which is a more accurate measure of their relative importance in people’s lives. When we take this as the measure of comparison, rather than the per-unit cost, then the so-called paradox of value completely vanishes.

The problem when a general law is formulated from a certain category of observations or real-world phenomena is that it often renders those who believe in the law blind to the many exceptions to it that exist. In the case of the Law of Diminishing Marginal Utility, an example is the fact that animals, including humans, can develop a tolerance for some things, such as alcohol and drugs. When this happens, then the Law of Diminishing Marginal Utility does not apply, for the person who wants to get drunk, high, or, in the case of medicinal drugs, relief from the condition one suffers from, must take more and more of the substance in order to achieve the state one wants to achieve. In other words, the initial units of consumption provide one with little or no utility, until their cumulative effect is sufficient to produce the effect one desires. This means that, in their case, the supposedly declining marginal utility curve is inverted.

Another broad category of behavioural exceptions to the belief that marginal utility always declines with increased consumption are instances of obsession and addiction. People who become obsessed with something, such as gambling, watching television, or playing video games, do not experience declining utility, or pleasure, the longer they perform the activity. For if they did, then they would stop performing the activity instead of continuing it obsessively. In their case, there is a levelling of the utility curve at a level above zero, so that additional consumption continues to provide roughly the same amount of utility to them.

Instances of tolerance and obsession are by no means the only exceptions to the economists’ assumption of invariably declining marginal utility. Although it may be true in the case of things that can cause surfeit or disgust, such as food, drink, and sex, it is not true of things, such as clothes, shoes, books, money, living space, and collectible items such as paintings, cards, coins, stamps, wines, and antiques, that do not produce the sensation of surfeit or disgust. If the principle of declining marginal utility were as generally valid as the economists claim, then the human world would be much more egalitarian than it actually is. For instance, if each additional unit of living space provided less and less utility or satisfaction to its owners, then there would be a natural limit to the size of dwellings; or if each additional thousand dollars, or whatever unit of currency one is familiar with, provided one with diminishing amounts of utility, then there would again be a natural limit to the amount of money that a single individual would want to possess,[3] just as there are natural limits to how much a person can eat or drink. But clearly, the real world does not conform to this supposedly universal economic principle, on which the very silly economists have founded an entire theoretical edifice to account for our behaviours. For what we find is that there is no practical limit to how large an individual’s dwelling can be, or how much money or material possessions a single individual owns. In the case of money and luxury items like large houses or additional residences, there is often a competition among the rich to outdo each another, and so additional units of living space or money, whether measured in millions or billions of currency units, provide a steady or, in some cases, an increasing amount of satisfaction, if it enables one to surpass other rich people.

These rather important real-world exceptions to the economists’ spurious Law of Diminishing Marginal Utility are sufficient to show that, first of all, it is not a globally-valid law; and second, marginal utility is not a very useful concept in helping us to understand human behaviour, since, like the concept of operant conditioning, there are a great many behaviours that it cannot explain. I suspect the reason for this obtuseness on the part of economists is that they were able to quantify the belief that marginal utility always declines with increasing consumption by a simple inverse formula – 1/x, or some more complex version – which started them on the road to mathematical confusion and perdition.

To illustrate just how careless the economists have been in formulating their so-called Law of Diminishing Marginal Utility, it is as if meteorologists were to formulate something they called the Law of Sunny Summer Days, or sociologists the Law of Friendly People. But as we all know from experience, not all summer days are sunny, and not all people are friendly, even if many of them are. Similarly, as we have seen, there are many instances in which marginal utility does not diminish with increased consumption or ownership, and these instances invalidate the Law of Diminishing Marginal Utility.

When one considers the bumbling, unsystematic, and unscientific manner in which economists have behaved in regard to the concept of marginal utility – first, by inventing a concept called “utility” which they believe can be measured, then by declaring from a limited number of confirming examples that it always declines with increased consumption, while overlooking the many exceptions to this belief, and then by making this principle a fundamental building block of their theory of human behaviour – one should harbour a strong distrust of economists’ credibility and reliability in general.

In a sense, the concept of declining marginal utility applies primarily to children, who, through inexperience, may continue eating or drinking something until they make themselves sick, or young people who, when they first consume alcohol, make the mistake of thinking that they can consume it like other liquids such as water, juice, or soda, and hence, don’t realize that if they drink too much of it too quickly, they will become ill and vomit. Most people learn from these unpleasant experiences and moderate their consumption of these and other things, so that they stop consuming them before they reach the point when they no longer derive any pleasure from it, or they space out pleasurable events, such as parties, fancy dinners, vacations, trips, outings, and economics lectures, so they enjoy them more. But economists have not realized this fact, and so, instead of recognizing the very limited utility of the concept of marginal utility, like the immature, imitating, unscientific, philosophical creatures that they are, they have made much ado about very little, by making it one of the cornerstones of their dismal pseudoscience.

[1] A discussion of this apparent paradox is contained in Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations.

[2] Of course, there are other important determinants of this price difference, such as the fact that the supply of bread and water is many times larger than the supply of diamonds. There are many kinds of stones that are much more abundant than diamonds, and, not surprisingly, they are neither as expensive nor as highly valued as diamonds. Moreover, apart from their rarity, diamonds possess certain characteristics, such as extreme hardness, brilliance, and chemical inertness, that render them unchanging, at least on the scale of human lifetimes and experiences (since diamonds can be destroyed by being heated to high temperatures), a quality that, because it carries intimations of immortality, makes them valued by us mortal, ever-changing, and ultimately decaying human beings.

[3] Although the economist would argue that this comparison is invalid since money can be exchanged for a wide variety of products and services that can provide one with utility, clearly there are many other things that one can do with one’s time besides working in order to make more money, including going for walks, sleeping, playing games, reading books, watching movies or television programs, listening to music, or spending time with one’s family or friends, and so forth.

There are many super-wealthy people today who, rather than spend their fortunes, use it primarily to amass even more wealth. In other words, for them, this wealth is an end in itself, rather than a means to procuring other things with it. However, this fairly common practice clearly makes no sense if the marginal utility provided by each additional quantity of money actually decreased, as this so-called law declares it should. Furthermore, unlike with food and drink, measures of wealth are primarily relative, rather than absolute, meaning that people’s sense of how wealthy they are depends on how much wealth other people possess, which is much less true in the case of the feeling of satiety that arises from eating and drinking. Whereas before, many people dreamed of becoming millionaires, this goal no longer has the same cachet or status as it formerly had, due to the commonness of millionaires in today’s world.