Marginal utility of money

The quote, "The marginal utility of a larger-sized unit is greater than the marginal utility of a smaller-sized unit," is in fact the way the law of increasing total utility is stated. Just as a simplified statement of the Law of diminishing utility is, "
the marginal utility of each (homogenous) unit decreases as the supply of units increases." Of course that applies to goods and services. After all, how many steaks can be presented at a meal such that the 3rd is as satisfying as the first? Do not confuse the issue with the marginal utility of money.

Because as George Reisman said on page 51 of his book, "Capitalism: A Treatise,"Page 51, Mises once said in a discussion with the present author (Reisman), "the marginal unit is whatever is the amount under consideration."

Reisman went on to say, "As people grow richer, the size of the marginal unit tends to increase." "Not only do they deal with things like automobiles instead of oxcarts, but the richer people deal with Cadillac- or Mercedes- level automobiles rather than Chevrolet or Toyota- level automobiles."

Reisman also says, "...it becomes clear that it is a great mistake to assume that as wealth increases, the utility of the marginal units actually dealt with diminishes. On the contrary, the utility of these units actually increases! Unit for unit, a Cadillac has a higher marginal utility than a Chevrolet; a large, luxurious house has a higher marginal utility than a small modest house; and so on."

"Furthermore," as Reisman says, " the fact that the utility of a marginal unit of wealth of a given size diminishes as the quantity of wealth available to us increases is actually an important aspect of the desirability of increasing our wealth. What we rationally want is to be in a position in which the marginal utility of a unit of wealth of any given size more and more approaches zero, while what we deal with more and more is progressively larger-sized units of wealth."

It is really simple, the man who earns $10K per year may bet increased marginal utility with a raise of a marginal unit of $1,000; whereas a man who makes $100K per year would necessarily consider a marginal unit of a larger size, maybe $10K added to his $100K income.

 

Isn't that a form of special pleading. How much "marginal utility" does a "dragon" get from hoarding money?

 

That's what I said. And again, that a unit of a larger size has more utility than a unit of a smaller size has absolutely no bearing on the size of a unit. The law of increasing total utility has nothing to do with the size of a unit. It deals with the quantity of units, larger quantities being worth more than smaller quantities.

Reisman did not argue that the law of diminishing utility does not apply to money. I read that entire passage, and he never stated such once. Again, you are just misreading him. You are confusing money with wealth.

Also, Reisman's analysis seems odd as well. You are right, the marginal unit is whatever is under consideration. But comparing the marginal utility of different goods makes no sense. That assumes there is something objective about it. To quote Rothbard again:

What if one pound of butter was considered by the actor as of better quality than another pound of butter? In that case, the two "butters" are really different goods from the point of view of the actor and will be evaluated differently. The two pounds of butter are now two different goods and are no longer two units of a supply of one good.​

The same is true of automobiles. In addition, Reisman seems to be making very odd value judgment. How can one determine the subjective marginal utility of one good (such as one type of automobile) compared to another? How can you say a Cadillac has more marginal utility than an old ford? You can't. Maybe the wealthy person actually prefers the ford. Maybe the ford has an extra seat, and the rich person cares more about the ability to transport his whole family than the look of the car. Maybe he likes to collect fords. Who knows? It doesn't matter. Marginal utility applies to single goods. Comparing the marginal utility of various goods is fallacious.

Regardless, the diminishing marginal utility of money was never refuted by Reisman. Even if money was to mean wealth, Reisman goes on to say this on the very same page you are quoting from:

Furthermore, the fact that the utility of a marginal unit of wealth of a given size diminishes as the quantity of wealth available to us increases is actually an important aspect of the desirability of increasing our wealth.​

That right there is the law of diminishing marginal utility..

 

Its not difficult. If the subjective variable cannot be used within an empirical analysis the results would show it. We'd have empirical bias, failure in robustness checks and of course insignificance in independent variables. Of course we don't have that. Instead we have results which consistently show that diminishing marginal utility of income holds

 

Do you have a good time trolling for bites?

 

I guess you missed the analogy; why am I not surprised.

 

The only way one can accurately say the marginal utility of money diminishes is to use a marginal unit which is too small to be satisfying; but if as George Reisman says, "the marginal unit necessarily increases in size as wealth increases," then the marginal utility of money can rise.

 

Why should we not believe the same of any form of Capitalism with any Institution of money based markets.

We are referring to marginal utility and "marginalizing" some utility of money through concentration of wealth which results in less circulation than could be the case with full employment of resources in the market for labor.

 

Nonsense. We can quite happily use happiness measures. Of course its also confirmed through experimental economics

 

The marginal increase of $20,000 of income (whether from work or the Govt or whatever source) to a man who has nothing means he can have food, shelter, clothing, water, basic transportation, some health care.

The marginal increase of $20,000 of income (from whatever source) to the man who has a billion means very little. He has another $20k to put in his offshore account or to add to some other account he has. But it isn't providing him with basic needs; he already has that well covered.

The fact that the marginal utility of that $20k to a man with nothing is far greater to him than the marginal value to the billionaire.

Or put in the context of taxation -- If the guy with $20k has to pay a 20% tax, that means he is cutting back on basic necessities. If the buy making a billion has to pay a 40% tax instead of 20% tax, it maybe means he has to get a little smaller mega-yacht.

The greater marginal utility to the poorest seems objectively self evident to me.

 

Happiness "measures" are subjective at best, and totally unreliable as a bonafide measurement.

Those us us who understand marginal utility and the laws governing marginal utility and total utility understand that as wealth increases it is important to use larger sized marginal units such that even the wealthiest among us have an increase in marginal utility (satisfaction of the last marginal unit) as wealth increases.

My personal satisfaction (marginal utility) tends to increase when the marginal unit is around $10,000 (increases my annual income).

It is important to remember, marginal unit size and marginal utility is only the perception of the individual and two individuals cannot be compared, nor can an outside source be compared to in the process.

Rothbard explained why this is:

In order for any measurement to be possible, there must be an eternally fixed and objectively given unit with which other units may be compared. There is no such objective unit in the field of human valuation. The individual must determine subjectively for himself whether he is better or worse off as a result of any change.​

 

You mean like, leverage?

 

No, marginal utility has nothing to do with leverage, government spending programs, people living close to the margin or any of the ways you have suggested thus far. Nor does it relate to "special pleading" or anyone hoarding money? or anyone making more money than another, or rent seeking or anything other than the perception of the individual that a marginal increase of money will satisfy him.

 

Here are some definitions:

Why limit the concept to special pleading?

 

You're making no sense. Utility is subjective. Happiness provides a means to test its nature without needing anything like an artificial util measure. And if it wasn't capable of doing it? We wouldn't see such consistent results across data sets. We also wouldn't see common ground with the experimental economic approaches.

I don't think you understand what has been said at all. For diminishing marginal utility of income to show we have to show happiness isn't linearly related to income. Job done!

 

Doesn't marginal utility diminish when size is held constant? It doesn't matter the size, since even a Jolly Green Giant sized marginal unit would yield diminishing returns to a jolly green giant at some point.

It provides a rational choice for trade of marginal units that may have diminished in utility for the owner while still being a valuable product.

 

I did not disagree with your comment. I posted a quote from Rothbard which agreed with you.

Yet Reisman said clearly that as wealth increases the marginal unit size increases and marginal utility will rise if the marginal unit is large enough. Wealth can be measured in money or possessions.

I don't compare different goods. Wealth is wealth and I only stipulated that as wealth increases the marginal unit increases in size and with that there can a corresponding increase in marginal utility.

I accept that.

The manner in which Reisman used the ox cart or the Ford or the Cadillac was relative to the generally understood cost/value of some models over others. Strictly speaking he would have been better off using values such as $1K. $20K or $50K which would make it more difficult to misunderstand or nit pick his comment.

Yep, he does say exactly that. Note the unit of wealth of a given size. IOW if the unit size is given, and does not go up with wealth then the marginal utility would go down rather than either stay constant or increase.

No, it doesn't. Right there he was talking about a given size of marginal unit, a fixed value marginal unit, as opposed to one which increases in size as wealth increases.

 

No matter how much you wish to believe it is objective, surveys produce subjective results. And I agree totally with Rothbard when he says,

"In order for any measurement to be possible, there must be an eternally fixed and objectively given unit with which other units may be compared. There is no such objective unit in the field of human valuation. The individual must determine subjectively for himself whether he is better or worse off as a result of any change."​

Of course subjective information can give the researcher some idea about what people think or believe or even feel, but it is never empirically accurate. And depending on the questions asked in that survey you referenced, what were the questions? Did the survey allow for the individual to consider ever larger marginal units? Or did it as most surveys showing a diminishing marginal utility ask about a fixed size marginal unit.? I suspect the latter.

For example, if the question asked, " would you get satisfaction from a $100 a week salary increase?" of someone who makes $500K per year, the answer would be negative. But if the question was asked of a man who currently only makes $100 a week, his answer would likely be positive. Its all in the questions asked and it is still all subjective.

 

Again you make no sense. The objectivity is in the methods used (and the happiness literature is very diverse). Of course the dependent variable is subjective. It has to be. And guess what? It confirms the diminishing utility of income. It also confirms the experimental approach where individuals refuse to behave like you want them to.

You're a classic case of someone confused by the bobbins spewed by the Austrians, nothing more

 

this seems to be special pleading, in a vacuum. Simply "changing the goal posts" is not very convincing. Your premise exists only due to relative forms of wealth, not absolute wealth.

 

No matter how much you disagree, there is no true empirical way to measure opinion. It is always subjective. Last I heard, Rothbard was a very highly recognized American Economist who just happens to agree a lot with the Austrian school of economics. I personally believe that he and George Reisman are two of the most important economists of the capitalist paradigm.

You still haven't produced the verbiage of the questions used in the survey study. They will tell a lot about how accurate or reasonable the conclusions were.

 

Me? Nope! Its the consistent empirical evidence and its consistency with other methodologies such as experimental economics. You've read some Austrian guff and you've gone off one. How bleedin predictable!

 

That you discount two highly qualified capitalist economists reflects on your capacity to be predictable.

 

Neither can discount the empirical evidence and its consistency with the experimental economics results. As I said, you've just read one biased outlook and then constructed cobblers around it.

 

One? I have quoted three economists during our discussion, Mises, Rothbard and Reisman. I have even referred you to another study which ineffectively tried to prove the same thing your referenced study concluded and their study reads more likely. No Reiver, your leanings sound more like the socialist paradigm economists who have done their best to destroy the British economy over the years.