Utility Theory

1. Utility Theory Presented by: Tiffani Ann Martin Enrique Tarango Ryan Mae Bejarano Sean Williamson Economics 101 Dr. Sasan Fayazmanesh Fall 2002

2. Roots of Utility Theory Neoclassical Definition of Utility: �The pleasure or satisfaction obtained from a good or service.� The Micro Economy Today, Schiller, p. 108. Neoclassical definition encompasses the essence of Utilitarianism, founded by Jeremy Bentham. Differences between the neoclassical definition and the definition provided by Bentham mainly deal with the utility of the individual (neoclassical) versus aggregate utility (Bentham). Another major difference was the concept of �marginal� as it applied to utility: Neoclassicals used the marginal concept heavily in their theory and arguments, whereas Bentham did not, he was more of a utilitarian.

3. Jeremy Bentham Born into a wealthy, Tory (British) family Studied law at Westminster School and Queen�s College, Oxford Bentham was known as a British gentleman, political activist, legal scholar, social philosopher, linguist, and contemporary of Adam Smith. Welcomed both the American and French Revolutions: He was made an honorary citizen of the French Republic in 1792. Known as the father of Utilitarianism

4. Bentham�s Approach  Refuted Smith�s principle of utility which rests on self-interest and natural identity to improve one�s position via individual attempts to acquire benefits and avoid costs. While Bentham agreed that individuals are self-interested he �denied any natural harmony of egoisms.� Bentham reasoned that crime, for example, is a self-motivated behavior that violates public interest, and therefore, provides proof that a state of natural harmony did not exist. He asserted that statesmen must seek an �artificial harmony� of interests through proper legislation. A History of Economic Theory and Method (p. 126)

5. An Introduction to the Principles of Morals and Legislation 1781 Bentham�s most famous writing Widely established him as the founder of Utilitarianism Introduced his notion of utility: �Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do� By utility is meant that property in any object, whereby it tends to produce benefit, advantage, pleasure, good or happiness or to prevent the happening of mischief, pain, evil, or unhappiness to the party whose interest is considered.� Principles of Morals and Legislation (p. 17)

6. Bentham�s Central Philosophy: Utilitarianism Individual wants and interests must be identified with the general interest of the society as a whole. Bentham�s principle of utilitarianism asserts that �human conduct should be directed toward maximizing the happiness (surplus of pleasures over pain) of the greatest number of people.� A History of Economic Theory and Method (p. 125) �An action then may be said to be conformable to the principle of utility (meaning with respect to the community at large) when the tendency it has to augment the happiness of the community is greater than any which it has to diminish it.� Principles of Morals and Legislation (p. 18)

7. Contingencies of Utilitarianism(according to Bentham) There needs to be equal weight in the measurement of general welfare: For example, �if something adds more to a peasant�s pleasure than it subtracts from the happiness of an aristocrat, it is desirable on utilitarian grounds.� A History of Economic Theory and Method (p.126) Government intervention is justified as long as it enhances the happiness of a community more than it diminishes the happiness of a certain portion of it.

8. Problems with Bentham�s Theory �Interpersonal comparisons� of utility: one man�s happiness may be another man�s pain. This makes his theory subjective! Another problem involves the weighting of qualitative pleasures. Should pleasures of the mind receive more or less pleasures of the body? Bentham did not know! He resorts to money as a measure of pleasure and pain, and in doing so presupposes a sort of �moral arithmetic� (it gets complicated). He conceptualized diminishing marginal utility, but did not explore the issue as did later economists & philosophers, notably William Stanley Jevons (1835-1882).

9. Weird But True Bentham left his entire estate to the University of London with the provision that his remains be present at all the meetings of the board. The body is stuffed and clothed; the head on the body is made of wax, but his real head rests between his feet and is preserved after the manner of South American head hunters!

10. William Stanley Jevons (1835-1882) Born on September 1, 1835 Overcame adversity A Unitarian (a liberal non-conformist) Attended University College London (UCL) Received a M.A. in Logic, Philosophy, and Political Science Helped launch the Marginal Revolution that lead to neoclassicals

11. Definition of Terms Maximize pleasure Commodity Utility

12. Utility is Not an Intrinsic Quality No inherent quality It is a circumstance of things Can never say some objects have utility and others do not i.e. food Nor do all portions of the same commodity possess equal utility i.e. water, bread, clothes Utility is not proportional to commodity

13. Law of the Variation of Utility Utility measured by the addition to a person happiness Subtract a 10th part from diet

14. Distribution of Commodity in Different Uses �The principle of utility may be illustrated by considering the mode in which we distribute a commodity when it is capable of several uses.� �Under peculiar circumstances great changes may take place in the consumption of a commodity.�

15. Alfred Marshall (1842-1924) Born on July 26th, 1842 Son of bank cashier Strict father Refused scholarship at Oxford Instead, he attended Cambridge University Marriage- forced resignation

16. Why Economics? Studied ethics in college and realized that it did not provide a good explanation of social classes (rich vs. poor). Studied John Stuart Mill�s Political Economy �Next, I resolved to make as thorough a study as I could of Political Economy.� (Pigou, Memorials p. 10)

17. Marshall�s Works Marshall had 82 works published, including books, articles, lectures, conferences, and testimony (Ekelund). Marshall�s main exposition was titled The Principles of Economics, published in 1890.

18. Marshall�s Method �Marshall viewed the science of economics in about 1890 as merely an extension- really a continuation- of the ideas espoused by Adam Smith.� (Ekelund, 342). He used math to concisely answer questions dealing with economic issues.

19. Mankind�s Wants and Needs Marshall believed that wants and needs progressed because: Wants and needs are countless in number and various in kind. But, none the less, capable of being satisfied. Man begins to want for the sake of change. As food and drink become more various and costly, gratifying, for the sake of indulging, emerges. Leisure occurs less and less and an opportunity cost for wanting more and more, and needing to pay for such, arises.

20. Utility according to Marshall �Utility is taken to be correlative to desire or want.� (www.mcmaster,ca) These wants cannot be measured directly but instead only indirectly by the amount someone is willing to pay to obtain the good. The total utility that a man derives from a good increases with each additional unit but at a decreasing rate. Utility is different between rich and poor. �Suppose, for instance, that tea of a certain quality is to be had at 2$/lb. A person might be willing to give 10$. For a single pound once a year rather than go without it altogether, while if he could have any amount of it for nothing he would perhaps not care to use more than 30 lbs in the year. But at it is, he buys perhaps 10 lbs in the year; that is to say, the difference between the satisfaction which he gets 9 lbs, and 10 lbs is enough for him to be willing to pay 2$.�

21. Utility Continued ��We may say that the return of pleasure which a person gets from each additional dose of a commodity diminishes till at last a margin is reached at which it is no longer worth his while to acquire any more of it.� Principles of Economics �On the other hand, diamonds being very scarce, have upon that account a great value, though they are but little use.� Principles of Economics

22. Philip Mirowski Degrees: B.A. Economics, Michigan State University, 1973 M.A. Economics, University of Michigan, 1976 PhD Economics, University of Michigan, 1979 Current Professor of Economics and the History and Philosophy of Science, (1990- current) University of Notre Dame.

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

24. Francis Ysidro Edgeworth �� The particular hypothesis adopted in these pages, that Pleasure is the concomitant of Energy.� Edgeworth 1881, 9, 12.

25. Irving Fisher�s Table -The table presents Fisher's comparison of analogies between energetics andeconomics models. Fisher was more faithful to the energetics model than his predecessors andhis version continues to be used long after other marginalists have had theirsrefuted or severely altered.

26. Alfred Marshall �Alfred Marshall, for one, certainly discussed some aspects of the adoption of physical metaphors (Marshall 1898); and he clearly had some reservations. However, the case of Marshall is actually illuminated by an understanding of energetics.� Physics and the Marginal Revolution,1984, Mirowski. Marshall�s place in the history of economics thought: �Since much of what appears in introductory and intermediate microeconomics texts as the theory of supply and demand is, in fact, the handiwork or Marshall, there is a grain of truth in his claim.� He may have deserved �discoverer� status, �However, once the actual sequence of events is uncovered, it appears that Marshall�s major service in the marginalist revolution was as a popularizer, and like other popularizers, he altered the material which he promoted.� Physics and the Marginal Revolution, 1984, Mirowski.

27. Conclusion Neoclassicals treated utility as fundamental exogenous data to which market transactions adjusted, and not as a derived phenomenon. However, the conservation of energy principle does not translate into marginalist theory directly. The sum of income and utility is not conserved, thus the system does not retain its analytical identity or determinancy. Utility was conserved in neoclassical models by assumption. According to neoclassicals, it was unaltered by the trading or consuming process. Physics and The Marginalist Revolution 1984, Mirowski

28. References Bentham, Jeremy. Principles of Morals and Legislation. 1781. Ekelund, R. & Hebert, R. A History of Economic Theory and Method. 1997. Jevons, William Stanley. The Theory of Political Economy. 1871. Marshall, Alfred. The Principles of Economics. 1890. Mirowski, Philip. More Heat Than Light. 1989.