Marginal utility of money

Discussion in 'Economics & Trade' started by dnsmith, Jul 13, 2013.

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  1. dnsmith

    dnsmith New Member

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    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.
     
  2. Not Amused

    Not Amused New Member

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    I agree.

    What is the "utility" of those at the bottom of the economic ladder buying enough to survive, compared to those with enough excess to investment in business?

    In addition, those on low income spent much of that income on low cost imports, not on higher cost domestic products.

    Which begs the question how much "stimulus" effect there is from welfare, unemployment, and disability?
     
  3. Andelusion

    Andelusion New Member

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    I have to admit, I have never grasped this concept. Why would marginal utility decrease?
    If I have $40,000 instead of $20,000, I can buy two new cars instead of one. If I have $60,000, I can buy 3 cars.

    Now the benefit to the individual, might decrease, but even that would be dependent on the specific benefit being gained.
    The benefit of the cars, may not be quite as much since I can only drive one car at time. Obviously the benefit from 1 car over 0, is greater than that of 2 over 1.

    But even then, I know people who have multiple cars, and gain a benefit from each. Such as a car for work, verses a sports car to drive for fun. A third car large enough to drive the entire family in. An off road car, or stripped down rally car, for competition. (I actually know a guy who has 4 or 5 cars, for these reasons)

    But the utility of money itself, I don't see how that decline by anything.

    However, there are other things that money can be used for, which the benefit is steady.

    For example, a restaurant owner, who uses hundreds of thousands, to open a 3rd, 4th, 5th, store, would not have a decline in utility with each new store. A apartment owner, would not have a declining benefit, if the owner spent millions to build and rent out a new apartment complex.

    So I'm not sure where this concept is coming from, but it seems entirely unlikely to be true.
     
  4. dnsmith

    dnsmith New Member

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    Another think that must be considered is, the marginal utility which may increase (or decrease) is always in the eyes of the beholder. As you say, one can only get satisfaction from autos after buying some quantity (except for collectors). But when it comes to money, and since the marginal unit increases with wealth that increased marginal unit provides satisfaction for the individual who perceives the gain to be satisfying. We can correctly say that the marginal utility of goods and supplies do diminish as, how much rice or wheat gives more satisfaction after the initial need is satisfied?
    There are socialist paradigm economists who try to convince everyone that the marginal utility of money diminishes in the same manner as goods and services thereby justifying marginal tax rates from 50% to 70% of ones income based on the opinion that a wealthy person does not gain as much satisfaction for the next marginal unit as he did for his last. The fallacy of that thinking is the variation of the size of the marginal unit.

    If a man makes $100K a year the marginal unit may be $10K for which he gets adequate satisfaction. But if the marginal unit was only $1K no so much. But since the marginal unit gets larger with additional wealth as he gains income to $200K his marginal units may be conceived to be $20K. Again, the size of the marginal unit increases with wealth and is always in the eye of the beholder.
     
  5. Reiver

    Reiver Well-Known Member

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    Is it based on a valid economic theory? Is it supported by the empirical evidence? You can't just say "I think" and believe you've got a valid position. Here are a couple of examples of what economists say on the subject...

    "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. 90).


    "The early phases of economic development [as measured by GNP per capita] seem to produce a big return...in terms of human happiness. But the return levels off...Economic development eventually reaches a point of diminishing returns...in terms of human happiness". (Inglehart, 2000, p. 219).
     
  6. dnsmith

    dnsmith New Member

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    If you want to find an economist who supports diminishing marginal utility (not returns) it is easy. Any one of the socialist paradigm economists will claim this in the hopes that even larger and more drastic rates of tax are used with the more wealthy. Check out Diamond and Saez and their study. elsa.berkeley.edu/~saez/diamond-saezJEP11opttax.pdf But when you research capitalist paradigm economists they disagree totally. George Reisman is a classic example, as was his mentor Mises. Both are economists of the first order who follow the Capitalist School of economics.

    One must not confuse what the size of the marginal unit which can, according to some, diminish or the size of the marginal unit, which according to some, will increase with wealth. One can see that the poor would be satisfied with a small marginal unit, a sum which would elevate their status. It is equally easy to note that as wealth increases it would take a marginal unit of greater size to satisfy the more wealthy person. Thus the Capitalist School of economics recognize that when the more wealthy consider marginal units they become greater in size with wealth; it takes more to satisfy them. This fact does not address political or personal beliefs, it simply states what exists in the human mind.

    I personally agree with progressive taxation, and I don't need some socialist paradigm economist to tell me why.

    One other thing which escapes many when discussing marginal utility is, THE UTILITY BASES SOLELY IN THE EYES OF HE WHO CONTEMPLATES THE SIZE OF THE MARGINAL UNIT, AND WHETHER OR NOT THAT UTILITY GOES UP, GOES DOWN, OR STAYS THE SAME.

    It is a common misconception that the size of the marginal unit remains the same for each and every person. If in fact that were the case there would be no point in discussing marginal utility at all.

    Chapter 4 of Reisman's "Treatise on Capitalism" discusses man's limitless desire for wealth. As has been determined by many economists the study of Human Behavior is one of the keys to understanding economics. Google George Reisman Capitalism: A Treatise.
     
  7. Reiver

    Reiver Well-Known Member

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    There is no such school. Also its really not cunning to refer to economists that reject marginalism. You'd have to go the full hog, like attempting to replace the approach with the labour theory of value. Note also that the Austrians are rather useless. They don't even have an understanding of how economic agents interact.

    Progressive taxation has nothing to do with socialism.

    The problem here is that you haven't given anything to reject diminishing marginal utility of income. There's some recent research into how, to understand the concept, we also have to focus on personality traits. However, confirming the characteristics of marginal utility of income is merely an empirical exercise. As an example, there is Layard et al (2008, The marginal utility of income,Journal of Public Economics, Vol. 92, pp. 1846-1857):

    In normative public economics it is crucial to know how fast the marginal utility of income declines as income increases. One needs this parameter for cost-benefit analysis, for optimal taxation and for the (Atkinson) measurement of inequality. We estimate this parameter using four large cross-sectional surveys of subjective happiness and two panel surveys. Altogether, the data cover over 50 countries and time periods between 1972 and 2005. In each of the six very different surveys, using a number of assumptions, we are able to estimate the elasticity of marginal utility with respect to income. We obtain very similar results from each survey. The highest (absolute) value is 1.34 and the lowest is 1.19, with a combined estimate of 1.26. The results are also very similar for subgroups in the population. Thus, on the basis of our estimates, the marginal utility of income declines somewhat faster than in proportion to the rise in income.
     
  8. dnsmith

    dnsmith New Member

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    I disagree with this last blurb, as does the first class Capitalist Paradigm economist George Reisman. If you disagree with Reisman it is your prerogative, but never the less his comments in Chapter 4 of his Treatise makes complete sense as it refers to human behavior and the reasons why the marginal unit increases in size as wealth increases and why his contention that the marginal utility of money can increase with wealth so long as one recognizes that the size of the marginal unit is in the eye of the beholder. IE, no one can determine what the marginal unit is but the individual who perceives what the marginal utility of that unit is. One must determine the cost-benefit analysis for himself and no one else can objectively do so for another. The method Atkinson used is purely subjective, and reflects answers individuals gave him. There is no objective way to measure satisfaction, nor is there anyway to judge for another what the size of the marginal unit must be.
     
  9. dnsmith

    dnsmith New Member

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    There is no empirical way one can arrive at a solid conclusion. Human happiness is subjective, in the eyes of the beholder, thus studies which reflect "conclusions" based on subjective surveys have little basis in fact.

    As Reisman described, I looked to my own experience. Based on my own wealth (or lack thereof) I know what size the marginal unit would be for me to perceive sufficient satisfaction to suggest an increase in marginal utility of my one situation. If I choose $100 as a marginal unit then the utility of that unit would be diminished below that of the last unit. But if I perceive satisfaction by a marginal unit of $10K my own marginal utility would increase with my wealth.

    The whole point being, NO ONE CAN PREDICT MARGINAL UTILITY OF MONEY FOR ANYONE BUT THEMSELVES.

    We can objectively say that the marginal unit which would satisfy me as to an increase in marginal utility will be significantly larger than would be needed for a poor man to perceive marginal utility.
     
  10. Reiver

    Reiver Well-Known Member

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    I don't give two hoots to be honest. Its an example of how easy it is to empirically test marginal utility of income. Those results not consistent with your bias? Tough titties!
     
  11. Reiver

    Reiver Well-Known Member

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    Clearly not true, otherwise we wouldn't have so precise (and consistent) estimates across populations
     
  12. dnsmith

    dnsmith New Member

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    It all depends on the individual. For example, if your income was $50K a year and you CHOSE to use a marginal unit of $100 added to that income, you likely would not get substantial satisfaction from that small amount as you did from the $100 raise you got when your income was only $10K per year; thus you would likely conclude that the marginal utility (of a raise of $100 a year) had diminished. It is all in the individuals perception and no one can judge the issue for you.
    It comes from some economists who follow the socialist paradigm (I am not saying they are socialists). Diamond and Saez are two who contend the marginal utility will diminish because the start with an assumption that all marginal units are the same size from beginning to the end of one's increase in wealth. That assumption would be a poor way to attempt to justify what marginal utility of money really is.
     
  13. Reiver

    Reiver Well-Known Member

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    What are you trying to say then? Your argument lacks power. It comes across as a "I've read some stuff so I'm just going to repeat it but forget to embed it in an argument"
     
  14. dnsmith

    dnsmith New Member

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    Looking at that survey you quoted showed SUBJECTIVE information, not OBJECTIVE information, therefore the measure of marginal utility was not empirically tested. I don't discount the information gleaned in the survey, only that its conclusions are subjective since the data was subjective..

    As you suggested, you don't give two hoots, yet you obviously don't recognizing that simply asking people for their opinion (which is all their survey was) is never objective. I might also say if Reisman's, Mises', or Rothbard's assertions are not consistent with your biases tough titties as well.
     
  15. Reiver

    Reiver Well-Known Member

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    Nope! It uses an objective methodology to estimate a utility function. By using happiness as the dependent variable, there is a straight-forward analysis into the relationship between utility and income

    You're not saying anything! There are two possible attacks. First, that the analysis used is not robust. You'll struggle to support that proposition mind you as most of the paper is focused on analysing robustness (using different methods and looking at different sub-groups). Second, that the econometric methods encourage bias. Again you're going to struggle given the consistency in results across different populations.

    I only give two hoots about valid argument. You haven't come close
     
  16. dnsmith

    dnsmith New Member

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    Yet you are still touting a SURVEY study which is subjective. As to what YOU give two hoots about, I consider that irrelevant. Diamond and Saez were more objective in their work, yet they, as the study you support, still put the whole effort into their own bias and position.

    Neither study would accept the reasonable assertion that the marginal unit size was variable in accordance with increasing wealth, thus their work is significantly slanted away from reality.

    BTW, why the hostility? Nothing I said was hostile to you. I guess your argument is weak so you can't produce reasoned debate.
     
  17. Reiver

    Reiver Well-Known Member

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    I'm referring to a correctly undertaken empirical study of the marginal utility of income. It doesn't support your beliefs. Why? I don't particularly care. As I said, all you've done is read something and had a tantrum

    I haven't been hostile. I've been dismissive. Learn some personality traits; it might be useful in fine-tuning your understanding of the empirical investigation into the marginal utility of income
     
  18. dnsmith

    dnsmith New Member

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    Tantrum? Who? Not I. I could care less if you put all your eggs into a subjective study which does nothing but prove what people said to the various questions and which the researcher subjectively came to some conclusion. If you want to believe studies like that be my guess.
    Like as if you understand anything about human behavior. I understand both empirical investigation and subjective surveys and have done both during my life. Diamond and Saez were more empirical than the study you referenced and even then their data was tainted by bias. You need to look into the questions which were asked in that survey, then maybe you will understand just how subjective and biased it was.
     
  19. Reiver

    Reiver Well-Known Member

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    Afraid so. We see that, for example, with your whinge about a subjective study. Its an objective study with a subjective independent variable. The use of happiness measure is quite standard.

    Given your reaction to the study, I know this isn't true.

    We have the reality of it: diminishing marginal utility of income is easily tested empirically. Can you refer to any study to dismiss it? Please go past the tantrum
     
  20. dnsmith

    dnsmith New Member

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    Sure it is, standard in a subjective survey.
    Sure it is, especially when they are discussing Maximum likelyhood estimation, and the robustness of the estimates. Go ahead, make my day, show us all just how objective that study is:)

    The facts are, I am more of a student of psychology, and I am aware of the lack of objectivity in questionnaires about happiness as expressed by individuals. I also am aware of how simple changes in questions can bias a survey study. One of the big problems of this particular study is allowing the elasticity of marginal utility with respect to income to remain constant. Their basic assumption is incorrect in that as income increases, ie as wealth increases the size of the marginal unit must necessarily increase in proportion. That being the case, using their constancy of utility suggests that as wealth increases marginal utility decreases. Of course it will look like that with their constancy (with respect to income) of marginal utility is inversely proportional as wealth increases. Their entire approach is tainted because they do not increase the size of the marginal unit but rather keep it constant. Ergo, their conclusions fall short of reality.
     
  21. Reiver

    Reiver Well-Known Member

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    Just more tantrum. That a happiness measure can be used to test the nature of marginal utility of income is obvious.

    You're making even less sense now. You were asked something very straight-forward: Can you refer to any study to dismiss it?
     
  22. dnsmith

    dnsmith New Member

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    Actually considering their methodology uses a constant sized marginal unit we don't need to go to another study, we can automatically throw out the conclusions of that study. In other words Reiver, unless the study uses a variable marginal unit size which increases in size as wealth increases the outcome can predictably be biased in favor of diminishing utility. Of course since you do not understand marginal utility and the limitless desire for wealth and their relationship to one another you would not recognize the invalid methodology.
     
  23. Reiver

    Reiver Well-Known Member

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    This is drivel (which you've already tried). The paper uses a measure of happiness to estimate the utility function. There is not a 'marginal unit', there is only an elasticity measure enabled by the methodology. You merely confirm what I already know: you don't understand how this type of analysis is used.

    Note that I've been terribly friendly with my dismissive conclusion. I've asked you to refer to one empirical study that rejects the diminishing marginal utility of income hypothesis. I look forward to it!
     
  24. dnsmith

    dnsmith New Member

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    The Law of Diminishing Marginal Utility

    The law of diminishing marginal utility can be logically deduced from the axiom of human action. To show this, let us start with some remarks on utility.

    Utility is a subjective concept. It denotes "satisfaction" (or "happiness" or "contentment"). It rises if and when an individual increases his or her state of satisfaction. Conversely, if and when someone considers himself in a worse state of affairs, his utility decreases.

    What is more, utility is an ordinal concept, meaning that utility cannot be measured in terms of higher or lower utility from the viewpoint of an individual; and changes in utility among different people cannot be measured. All one can say is that utility is higher or lower from the viewpoint of an individual. Ludwig von Mises

    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.[2]
     
  25. Reiver

    Reiver Well-Known Member

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    The basics of orthodox supply & demand! Note of course you were referring to the diminishing marginal utility of income. You know so little that you're just stamping your foot for effect
     
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