Marginal utility of money

I have never said, not even once, that the law of diminishing marginal utility does not apply to money. What I have said is, since the marginal unit goes up in size as wealth increases, that the marginal utility of money CAN INCREASE. It is all relative to the individual and what s/he chooses the size of that marginal unit to be.

I followed the thread, I started the thread, and I have repeatedly shown that economists in the Capitalist paradigm tell us clearly that the law does apply to money.

The fact of the matter is, Reisman did not say an expensive car had more utility. He said that the marginal utility increased in the mind of the individual, or to say it differently, the individual perceived more satisfaction from the more expensive car. That is all marginal utility is, the relative satisfaction derived from the marginal unit.

Correct, the marginal unit size increases as wealth increases.

Which begs the question, "why would anyone continue to maintain a constant marginal unit as his wealth increases?" That would be counter intuitive.

It doesn't make sense to people who do not understand marginal utility and why it can increase as wealth increases.

LOL! Socialist paradigm economists say that, not capitalist paradigm economists.

1. I have never said nor insinuated that the law of diminishing utility does not include money.
2. So long as you insist on MEASURING marginal utility using a constant sized marginal utility you will continue to misunderstand the issue.

Now you are starting to grasp the necessity to consider larger unit size.

I agree. When the individual perceives a larger sized marginal unit when wealth increases, the marginal utility of that larger marginal unit increases.

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Diminishing marginal utility pertains only to the perceived satisfaction of the individual. It has nothing to do with trade, hoarding or circulation of money.

 

Saying that the marginal utility of money increases as the supply of money increases is a direct refutation of the law of diminishing marginal utility. The law of diminishing marginal utility always applies. That is why it is a law.

That wasn't your original argument, and anyone reading the OP can see that clearly.

And that satisfaction is subjective, so it makes little sense to assume the rich man get's more utility from an expensive car. That was my point.

The law of diminishing marginal utility applies to constant units. When you are talking about people change the size of the units, you are no longer dealing with the law of diminishing marginal utility.

No. A socialist would ignore the subjective nature of the size of a unit. It is true that the size of the units can change, but that has nothing to do with the law of diminishing marginal utility. A capitalist would not deny that the law of diminishing marginal utility applies to a constant unit.

Yes you have. You have been trying to distinguish between the marginal utility of money and the marginal utility of everything else. I am saying the law applies to money in exactly the same way as it applies to all other goods. If you are no longer saying that, then there is no argument.

As far as the law of diminishing marginal utility is concerned, you will always be using a constant unit. Its in the definition of the law.

Of course you think in larger sizes. But that has nothing to do with the law of diminishing marginal utility...marginal utility refers to the marginal utility of a constant unit of a good. It is true that people think in larger sized units as they gain more of said units. But that is completely irrelevant to the law of diminishing marginal utility, which holds size constant. The law of increasing total utility is what deals with size.

Do you agree that the law of diminishing marginal utility applies to money just as it applies to everything else?

 

Only dragons don't experience diminishing returns on their horde of wealth.

 

Wrong answer. The law applies to goods and services and the fact that marginal utility of money can increase is part of the law.

This is the original post, "There have been discussions in some areas as to the validity of the economic position that the marginal utility of money always diminishes as wealth increases, and which has been suggested that income taxes on the wealthy would be justification for much higher %s of income tax than even what the Administration wants to do. My position is, as wealth increases the marginal unit itself increases proportionally such that the marginal utility of money either remains the same or increases." Not only did I say that, but it is supported by some of the most highly recognized economists of the capitalist paradigm.

Only in the mind of someone who does not want to believe that the marginal utility of money can increase. Your point is incorrect. It makes sense to anyone who understands economics.

Wrong!

Wrong again! As Menger said, "In an economy with money, the marginal utility of a quantity is simply that of the best good or service that it could purchase." As Reisman said in his Treatise on Capitalism (page 51)

As people grow richer, the size of the marginal unit tends to increase.
When this is taken into account, it becomes clear that it is a great mistake to assume that as wealth increases, the utility of marginal units dealtl with diminishes. On the contrary, the utility of these units actually increases!

Furthermore, the fact that the utility of a marginal unit of wealth of 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 whihc the marginal utility of any given size more and more approaches zero, while what we deal with more and more is progressively larger-sized units of wealth.​

Argue that with Reisman who in the paragraph above tells you the marginal unit does increase in size as wealth increases.

As long as you insist on the marginal unit remaining the same size you will continue to misunderstand marginal utility of money.

I agree that it applies to money, but NOT in the same way as it applies to goods and services. One can eat only so many steaks before the next steak is less satisfying. As the marginal units increase in size with wealth such that satisfaction is derived from each additional (varying size) marginal unit we can clearly say, as does Reisman, that the marginal utility of money can increase. My first marginal unit of money bought us food. My second marginal unit of money rented us a house, my third marginal unit bought me a car. I continued to get an increase in my satisfaction with every marginal unit of money I have received.

 

Money in the most general sense is in fact a good. There is nothing magically about it that makes it immune to the laws of economics, including diminishing marginal utility. That the marginal unit increases in size from the perspective of the individual doing the valuations is completely irrelevant to the law of diminishing marginal utility. As a man gains more butter, the size of the marginal unit of butter will also increase in his perspective. This is what you don't get. No where does the law of diminishing marginal utility reference an increasing size of the unit. The size is held constant for the purpose of the law.

You disagree that value is subjective? Because that is the point I was making in that sentence. The size of the marginal unit can increase. And that will increase the value of the marginal unit due to the law of total utility. But the marginal utility of a constant-sized unit will always decrease as its supply increases. The law of diminishing marginal utility applies to units of a constant size. Just as the law of supply assumes demand is held constant, even though in practice demand changes as well.

No, right. Its in the definition of the law itself.

I love when you post things that prove my point exactly. From your quote, here are the two important parts: "the utility of marginal units dealt with"

Notice the bolded words. The law of diminshing marginal utility does not apply to "units dealt with". It applies to units of a fixed size. The point Reisman is making is that as marginal utility diminishes, (which it always will for money) an individual will increase the size of the marginal unit. So the units dealt with are not less in utility because of the law of increasing total utility.

Reisman clarifies this point by saying the following: "the utility of a marginal unit of wealth of given size diminishes as the quantity of wealth available to us increases".

That right there is the law of diminishing marginal utility.

I'm not arguing with Reisman. You are just misreading him grossly. You are wrongly interpreting his point that the size of a marginal unit dealt with increases to mean that the law of diminishing marginal utility does not apply to money, and in fact the marginal utility of money increases as the quantity of money increases.

As far as the law of diminishing marginal utility is concerned, it stays the same size. You just don't understand scientific reasoning. Variables are held constant to isolate a given effect. It makes no sense to vary both the total quantity of money and the size of a unit of money. No meaningful conclusion can be drawn from that. It would be like saying the law that as supply increases price decreases does not apply because demand is increasing...while it is true that if demand is increasing the price will not decrease, the law of supply has nothing to do with that.

Only one variable changes. In the law of diminishing marginal utility, that variable is the quantity of the good being discussed. Everything else is held constant.

No, it applies exactly the same. As the quantity of money increase, the marginal utility of a unit of money diminishes. Laws don't "apply differently" to different things. There are no exceptions to laws, otherwise they aren't laws.

If you remembered a bit more about dependent and independent variables, you would understand that when the independent variable is total wealth, and the dependent variable is the marginal utility of a given unit of wealth, the dependent variable always diminishes as the independent variable rises (hence, the LAW of diminishing marginal utility).

Introducing another variable, the size of the marginal unit, makes the calculation meaningless.

 

Money is used as an exchange media. Unless you are into bartering, butter is of no more value than that for which it is used.

In fact several economists say the size varies in accordance with the perception of the individual. No where does it say it should remain constant. That came from your opinion.

I will not dispute that the constant sized unit will have a diminishing marginal utility. I have said as much and quoted Reisman who said as much.

Where did you read that the law applies to units of a constant size? Certainly not from a capitalist paradigm economist. In the case of money the size of the marginal unit increases as wealth increases to what ever size the person perceiving the utility to be.

Source with link please.

You are missing Reisman's point. He clearly says the marginal unit increases with wealth.

"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 richer people deal with Cadillac- or Mercedes level automobiles rather than Chevrolet or Toyota level automobiles. When differences in quality are considered, a house, a suit or a dress, a restaurant meal, practically everything, tends to be a larger sized unit of wealth for a richer person than for a poorer person. When this is taken into, it becomes clear that it becomes clear it would be 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.
(when thinking about utility it is actually the perception of satisfaction, not a specific measurable utility. A Chevrolet will get you from point a to point b, but that is not the utility of which we are speaking. Marginal Utility is all about what the INDIVIDUAL perceives his satisfaction to be.

Furthermore, the fact that the utility of a marginal unit of wealth of A GIVEN SIZE (CONSTANT 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 ANY GIVEN SIZE (CONSTANT SIZE) more and more approaches zero, while what we deal with more and more is progressively larger-sized units of wealth.​

Note: the marginal unit of wealth of a given size. Ie if you keep the unit size constant, if you keep a given size, the marginal utility will diminish. That is why he consistently tells us the unit size must increase with wealth.

The law of diminishing marginal utility does not say anywhere that the unit size must remain constant. And in the case of increasing wealth and the natural desire to limitless wealth, the marginal unit must increase. Go back to page 51 of Reisman's Capitalism: a treatise on the left hand column.

Sorry, but it is not I who is misreading him. I cut and pasted where he says clearly that the unit size increases.

Variables are held constant? No way. It is the variable one is measuring in most experiments.

It makes all the sense in the world. That is why the wealthy continue to get an increase in marginal utility from the larger sized units.

You just said it. The VARIABLE IS THE QUANTITY OF THE GOOD BEING DISCUSSED. ANOTHER WAY TO SAY THE SIZE OF THE MARGINAL UNIT. And it increases in size with wealth and the marginal utility goes up as well. That is the whole point of this exercise.

Thus the fact that in the normal circumstances of civilized life people value diamonds above water is not at all paradoxical or irrational. It is perfectly consistent with considerations of genuine utility, provided the latter are properly understood - that is, in the light of the principle of diminishing marginal utility. (Diamonds can be used as a media of exchange)
It is a question of the context of how much wealth or income one has available and thus the marginal utility to the individual of a unit of wealth or income. (IOW when one has enough wealth and his next marginal unit of money (or exchange media) is perceived to be satisfying because of what kind of luxuries he can acquire with that marginal unit.)​

Au contraire, it is what makes the perception of satisfaction meaningful.

In fact your entire argument here is with Reisman, because he calls it different than you. I suggest you read from page 51 again and try harder to understand what he says.

 

There is no "theory" in economics. That is a scientific term and you would do well to remember it.

Conjecture, opinion, ideology, certainly not "theory".

 

Taking this comment, ""Comparing across countries, it is true that income and happiness are positively related and that the marginal utility falls with higher income. Higher income clearly raises happiness in developing countries, while the effect is only small, if it exists at all, in rich countries" (Frey and Stutzer, 2002, p. 9" The error in that study is glaring. Their methodology does not all the perceiving individual to consider ever increasing marginal units. In other words, the pre-determined point they were trying to make automatically prevented the study from coming to proper conclusions. When, as George Reisman says, the marginal unit necessarily increases in size as wealth increases which would in many cases reflect an INCREASE IN MARGINAL UTILITY AS WEALTH INCREASES.

A simple exercise can prove my point, using your own perceptions. Assume you make $10K per year and you get a new marginal unit of 1$k, or 10% raise all at once, it is likely you would perceive that with satisfaction. Now assume you make $100K per year and you just got a bonus/raise of $10K, also a 10% raise; it is equally likely you would perceive that with satisfaction. The satisfaction is always what the individual perceives, not some ethereal figure someone else chooses. The studies quoted above presume the marginal unit remains constant which would force a diminishing marginal utility for wealthy people. In addition, but Mises and Reisman contend that there is no empirical way to measure satisfaction without introducing some arbitrary outside comparison. Thus bad methodology creates bad conclusions.

 

Without constants there is no way to measure. Assuming that marginal units grow with wealth takes arbitrary measure to new heights, no different than using a yardstick that is longer than standard because you need more cloth to cover your expanding girth. The yard of cloth is still a yard of cloth in your eyes, but turns the entire concept of a yard as an reliable standard into a relative and therefore completely useless and meaningless arbitrary standard of measure.

Congratulations, you have accomplished exactly the same with marginal utility.

 

Rather than say the same thing multiple times by dividing your post, I am just going to briefly and quickly get straight to the point.

When dealing with laws, everything is held constant except for one factor, the independent variable. That variable is changed, and the effect is then observed on the dependent variable. In the case of the law of diminishing marginal utility, the independent variable is the total quantity of a good, and the dependent variable is the marginal utility of a unit of that good. The size of the unit, like all other variables, are assumed to be constant for the purpose of the law. If you introduce size as another independent variable, the law makes absolutely no sense and becomes meaningless.

Saying the size of the unit increases as people get wealthier is correct...but it's simply not the law of diminishing marginal utility.

 

Only dragons don't experience diminishing returns on their horde of wealth.

 

Independent variable, like the size of the marginal unit?

Go back and read the OP.

Please note, I was not discussing a dependent, or an independent variable, or even if the law involved was the "law of diminishing marginal utility," even though it is in a paradoxical manner. You are arguing over a point not even relevant to the OP.

 

What state-of-the-art forms of Post infrastructure are we not experiencing, "diminishing returns" on whenever wealth is being concentrated by the private sector instead of the public sector? Our wars and analogies to war are merely a form of entitlement spending on a for profit basis by the private sector that does nothing to improve our infrastructure.

 

No. The size of the unit is not the independent variable of the law of diminishing marginal utility. The independent variable is the total quantity of the good.

You would have to be incredibly dishonest to argue that your statement in the OP which questions "the validity of the economic position that the marginal utility of money always diminishes as wealth increases" does not have to do with the law of diminishing marginal utility, which is the economic position that states that.

 

Actually I am not arguing at all. I am stating facts, individuals consider larger sized marginal units of money as their wealth increases. Ergo the marginal utility of those larger units increases. I could care less if you believe it is "the law of diminishing utility" or not. It is the satisfaction I feel as my marginal utility of money increases and Economists Mises and Reisman state it clearly as well. The paradox is discussed starting on page 51 of Reisman's Capitalism: A Treatise

BTW, I would consider carefully calling people dishonest as it is tantamount to calling them a liar.

 

Why quibble so much over relative wealth?

 

Then we can agree that the law of diminishing marginal utility applies to money just as it applies to everything else.

 

I have never disagreed except to acknowledge that with money, the paradox suggests that marginal utility of money can increase as wealth increases.

 

The law of diminishing marginal utility applies 100% equally to money as it applies to everything else. Do you agree, yes or no?

 

It applies in a paradoxical manner because contrary to the marginal utility of goods and services, because it is a medium of exchange, as wealth increases marginal utility can increase. Apparently you did not read all of the marginal utility section of Reisman to which I referred you.

 

Sounds bunk. Please explain how a $1000 has greater marginal utility to a billionaire than it would to a person who doesn't have enough money to buy food and shelter.

 

There is nothing paradoxical about it, and Reisman would agree. Reisman is talking about the size of the perceived marginal unit changing. The law of diminishing marginal utility assumes a constant sized unit. So Reisman is not talking about the law of diminishing marginal utility applying to money paradoxically.

 

Of course the law of diminishing marginal utility applies to money, but paradoxically such that as wealth increases the marginal utility of money can increase.

Your claim that the marginal unit cannot change is incorrect. As wealth increases the perceived value of the marginal unit increases proportionally.

 

No. There is nothing paradoxical about it. I am not claiming that the marginal unit cannot change. I am correctly stating that that law of diminishing marginal utility deals with constant units that do not change. Hence there is no paradox. That a larger-sized unit has more perceived value than a smaller-sized unit has to do with the law of increasing total utility. There is no paradox between the two whatsoever.

 

You are still wrong. In the chapter dealing with marginal utility Reisman discusses the paradox of "goods" which can be used as an exchange media. Money being the principle one has the potential for its marginal utility to increase and the reason is very simple. As the perceiving individual considers ever increasing marginal unit size as wealth increases the marginal utility of their money can increase. If you don't want to believe that is related to the "law of diminishing utility" so be it. But as wealth increases people get more and more satisfaction from increasing sizes of marginal units.