Utility Theory

1
Utility Theory

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

The Corpse of Jeremy Bentham (1748-1832)
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 Queens
  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

1748-1832
4
Benthams Approach

• Refuted Smiths principle of utility which rests
  on self-interest and natural identity to improve
  ones 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

• Benthams 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
Benthams Central Philosophy Utilitarianism

• Individual wants and interests must be identified
  with the general interest of the society as a
  whole.
• Benthams 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 peasants 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 Benthams Theory

• Interpersonal comparisons of utility one
  mans happiness may be another mans 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 Mills Political Economy
• Next, I resolved to make as thorough a study as
  I could of Political Economy. (Pigou, Memorials
  p. 10)

17
Marshalls Works

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

18
Marshalls 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
Mankinds 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 Fishers 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.
• Marshalls 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
  Marshalls 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.