Utility Theory - History of Economic Thought - Lecture Slides, Slides of Economics

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Utility Theory The Corpse of Jeremy Bentham (1748-1832) docsity.com 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. docsity.com 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) docsity.com 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) docsity.com 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. docsity.com 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 docsity.com Definition of Terms ¢ Maximize pleasure * Commodity an Ohana docsity.com 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 docsity.com 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 docsity.com 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) docsity.com 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. docsity.com 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$.” docsity.com 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 docsity.com 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. docsity.com Irving Fisher’s Table • -The table presents Fisher's comparison of analogies between energetics and economics models. • Fisher was more faithful to the energetics model than his predecessors and his version continues to be used long after other marginalists have had theirs refuted or severely altered. docsity.com 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. docsity.com 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 docsity.com