UTILITY AND ALL THAT! Part 3

Arming You to Fight Mainstream Economic Theory by Reconstructing It Into What It’s Properly About--by Larry Motuz

Preface

This Part 3 is an unplanned-for detour prompted by many an intelligent comment which showed me such a detour was necessary.

What I will be outlining here can be summed up as: In production, the ‘utility’ of adding inputs to a fixed factor of production --like more feed to a cow-- is the increase of production -- gallons of milk-- arising from adding more units of the feed input to a fixed factor --er, the cow.

Diminishing returns will be observed as more units of the variable input {feed} are added to the fixed factor {a cow}. What’s generally see across all production, when more and more of any one variable input is used with a fixed factor of production, is an experience known as ‘diminishing returns’. Total production initially increases at diminishing rates of increase up to a production level that is a maximum. It then falls at increasing rates if more units of the variable input are then utilized.

There are, in other words, limits beyond which adding more of a variable input is not only not better but actually worsens production.

All this means is that, up to some point, additional installments of a variable factor to any fixed factor, are initially useful to raise production levels to a peak reached at some level of variable input utilization. This means that 'more is not always better’. There are productively optimal total additions of units of variable input to a fixed factor of production. Such productively optimal utilization of a variable input with fixed factors of production is not necessarily also economically optimal. {What's economically optimal depends upon the variable input costs and the expected revenues from the added output.)

In a nutshell, the same 'law' of diminishing returns was historically applied to consumption --the idea being that when more goods were added to a factor of consumption {the 'consumer': an implied person}, then the total production of subjective pleasure or satisfaction (measured somehow), just had to show the same kinds of diminishing returns up to subjective pleasure/satisfaction maximums.[See Note 1 below.]

Utility In Production

When the ‘utility’ of added inputs into production is defined as their contribution to total production, a benefit that is objectively measured, we can say that there appears to be a ‘law’ of diminishing incremental or marginal utility with respect to variable inputs applied to a fixed ‘production unit’.

Aside: A very serious set of issues arises when this law of diminishing returns --Viz., the diminishing returns of inputs in production when all other inputs, fixed or variable, are left unchanged -- is applied to ‘consumers’ who, in effect, ‘experience’ :: that is, internally produce :: levels of subjective pleasure or subjective satisfaction within themselves when buying goods. To be clear, when a good 'brings' subjective pleasure or satisfaction, it is necessarily the consumer who is producing that level of subjective pleasure or satisfaction within himself or herself. However, let's simply note here that this 'manufactured output' so to speak can neither be bought nor sold itself, so it is unlike objective production where both inputs and outputs have prices. Implicit notions that a 'consumer' is akin to manufacturers of objective goods and services sold in markets cannot apply. And, if we abandon that implicit notion, we must also abandon all of modern economic theory concerning the 'consumer' and 'consumer' welfare in aggregate.

The Shape of Objective Utility in Production

Utility in production is a value-in-use measure (a.k.a. a benefit-from-use measure). That's because utility in production is a recorded 'beneficial' change in output taking place when utilizing more units of a variable input when other production factors, fixed or variable, are unchanged. This is an 'other things being equal' condition also known as a ceteris paribus condition.

If we add units of fertilizer to an acre of farmland, these add more to the crop's size until a point where adding still more fertilizer begins to reduce the amount grown. Likewise, if you add more grave diggers with shovels to dig at a grave site, adding more diggers first helps. At some point, 'more' just get in each others' way. This adds to the time and monies spent digging this one grave if it gets dug at all.

So, and generally, adding more of an input to a fixed task or a fixed factor of production --like an acre of land or a machine-- leads to increases in total production only up to a point. After that, adding more decreases total production.

Let's get back to a cow and its feed for instance.

Kenneth Boulding in his book Economic Analysis, 3rd Edition,1955, illustrated how a cow's milk production (measured in gallons of milk) altered when a particular feed concentrate supplemented that cow’s diet.

That illustration (below) shows that adding units of concentrated feed initially led to increasing milk production and then to falling milk production.

Feed Concentrate (lbs)......0......4........8.......12.......16......20......24
Milk Production (gals.).....1......2.0.....2.8.....3.5.....3.9.....4.0.....3.9
Production rise (gals.)..... .0......1.0.....0.8.....0.7.....0.4.....0.1.....-0.1

Clearly, the cow’s total milk production rises in ever smaller amounts for every one 4 lb. unit of concentrated feed given to it.

Plotted on a graph, the total milk production per additional 4lb. unit of feed concentrate resembles a concave-downwards facing curve which rises from the origin (after adjusting for the +1 production before adding units of this input) to a maximum output of three gallons (4-1) when five units are utilized; and, falling to zero with more inputs (with 10 4lb. units utilized. [See Note 2 below.]

Obviously, this farmer would never give this cow more than five 4 lb Units of feed concentrate since the cow's total milk production declines when more is used. An economist would not only agree with the farmer but, also like that farmer, would also ask if the successive increases in revenues from sales of the increases in output equaled the additional costs of the feed concentrate feed. I.e., the farmer asks, "Is it worth my while?", which economists translate into, "Are the added revenues at the margin at least equal to the added costs of inputs at the margin? Both, in different ways, would say that the amounts to be used are ‘economically optimal’ only when the added costs of feed concentrate inputs are just equal to the added revenues obtained from the sale of the added output. (I need not get into how economists calculate this here but I will note that the 'marginal revenue product' curve for productive inputs is also the ‘demand’ curve business have for those variable inputs.)


All told, the rising sections of production curves show diminishing returns per added unit of the variable input, whereas falling sections show increasingly large reductions in total output per added unit. In practice this means that economists (and often engineers) tend to look at the former, rising sections when conducting analysis into the costs and benefits associated with variable inputs. [Only economists formally then derive 'demand curves' as such, however.]

Finally, objective utility for any producer is always measured as an increase in total output associated with increasing a variable input to a fixed factor of production while also holding other variable inputs fixed. This is its value-in-use, a.k.a. the benefit-from-use of variable inputs in this fashion.

I note here that marginal revenue product curve mentioned earlier measures the money value of the marginal gains in output when sold at market prices producers can sell for.

Subjective Utility in Consumption

These above matters become important when looking at how the ‘law of diminishing marginal utility’ has been shifted from being about producers’ demand for variable inputs into their production (always measurable units of output) to being about ‘consumers’ and their ‘demands’ for variable inputs :: goods :: which, upon their purchase, lead to their experiencing/(producing within themselves) increasing yet always immeasurable subjective levels of pleasure/satisfaction -- much like a cow producing invisible milk only it knows about and able to enjoy.


All people, including economists, agree that there is no objectively measurable unit of pleasure or satisfaction as an ‘output’ that ‘consumers’ produce within themselves when they buy goods. In effect, however, economic theory treats the consumer as a fixed factor of production, each of which then uses various goods as variable inputs to produce/generate subjective pleasures/satisfactions for itself by buying those 'goods'.{See Note 3 below.]

The ‘consumer’ uses variable inputs {‘goods’} by purchasing them. The 'consumer', in effect, is analogous to a farmer's cow to which feed is added or a machine to which variable inputs are added. All in all, the consumer is a fixed factor for the production of subjective pleasure/satisfaction.

Since this 'output', being subjective, can't be seen by anyone, it is simply presumed that 'diminishing returns' set in for such subjective pleasure/satisfaction production as can be observed for goods-production. Ignored in this transformation of consumers into fixed factors of production is the reality that there is no market for their subjective 'outputs'. Measurable benefits from the usages consumers have for the goods they purchase have vanished completely by assumption. And, of more than casual interest, somehow, values-in-use have become transmogrified into values-in-exchange despite the utter absence of any markets for the 'output' of the consumer.

Which means that whereas producers of commodities have a demand for variable inputs which is derived from their ability to generate sales for their outputs, for, for such producers, their marginal revenue from sales product curve, a.k.a, the marginal revenue product curves, are their demand curves for variable inputs, whereas consumers have no equivalent marginal revenues from sales for their 'outputs'.

All in all, this means that the demand for variable goods which consumers have must be very different from the demand producers have for variable inputs. If, indeed, a consumer cannot sell any of his or her 'subjective output', then this effectively means that some other way of constructing a consumer's demand curve for 'input' :: goods :: had to be constructed.

It was! It was an entirely fictional way of constructing consumer demand curves for goods, a way unlike any which might be applied to any producers of marketable goods. This was a construction that depended upon constructing seemingly plausible narratives which magically hid the problems work, much like the patterned distractions of magicians when performing tricks before their audiences. Such 'tricks' astound only as long as the subterfuge underlying them remain unrevealed.

Revealing the subterfuge is what the next installment, "Demand and All That!', will do.

This detour is over. I hope those commenters who prompted it now understand that I have not thrown out the 'law of diminishing marginal utility' except as it has been misapplied to consumers purchasing goods. The value-in-usages which goods have has been cavalierly set aside as if these are incapable of measurement or simply do not matter. They cannot be subsumed under headings like subjective pleasure/satisfaction when realizing these depends not merely upon preferences but also upon the measurable quantities of the various benefits being sought by consumers. And, though there are definite meanings to demand and to aggregate demand, those are not the meanings found in economic textbooks. An entirely new construction is required. It is one Keynes hinted at in his General Theory. It is one actually used practically, if only with a subliminal awareness, by many a practicing economist, especially 'unorthodox' ones who are always adjusting their 'blackboard economics'.

And it is one I intend to unfold.

NOTES:
Note 1. Today 'more is always better' in current consumer theory. There are no levels wherein consumers become, say, satiated, simply not wanting any more of a good. No limits as it were. No enough! No harm associated with passing any limits. Which means that somehow the current theory left its initial constructions of 'Utility' behind. Leaving that last issue for another day, I'll talk here only about the early construction of utility as subjective pleasure or satisfaction.)Note 1: Limits vanished because, uniquely in monetary economies, all goods are perfect price-substitutes for each other monetarily (if we can ignore possible transactions costs associated with finding buyers and delivering goods to them). The price architecture goods have in relation to each other and captured by their relative currency prices is a creation of monetary economies. This fact has not been fully appreciated by either orthodox or unorthodox economists. The misunderstandings this has caused so entered the modern analysis of consumer ‘choice’ behavior as to render it not merely useless, but also harmful to any proper understanding of consumer behavior, choice and welfare .]

Note 2. The formal shape which the plot traces is that of a curve which faces downwards: namely, a concave-downwards facing parabola. Mathematical functions having the form y = f(x> = ax*x + bx +c are either concave upwards or concave downwards. Concave-downwards facing curves which rise from the origin to a peak to then fall back to Zero at some greater value for x have the mathematical form y = f(x) = bx-ax*x (for ‘c”, a constant in all such cases, is zero). Since y = U = f(x> = bx-ax*x that, without any bells and whistles, is the general form of total production 'curves' when only one variable input is changing.]

Note 3. It is vital to all consumer theory in economics that, at the moment of purchase, the consumer perfectly foresees all of the future pleasures the 'good' will provide to him or her, bringing this foresight into the moment his or her decision is made about buying the 'good' or 'goods' up for purchase. It is vital because, without that assumption being made, the demand curve of the consumer relative to the prices that the consumer faces for 'inputs' cannot be derived. Therefore, if for any reason the consumer cannot see all of the future pleasures to be experienced with/produced by the 'good or goods, and if the total production of subjective pleasure or satisfaction does not exhibit diminishing returns, all consumer theory cannot provide any guidance to the levels of welfare consumers are said to have within the Theory of the Consumer. In short, if either is false, so is all of consumer theory.

Links to previous articles in this series:
1. Economics And All That! https://dispol.blogspot.com/2020/04/economics-and-all-that.html
2. Utility And All That! Part 1. https://dispol.blogspot.com/2020/04/utility-and-all-that-part-1.html
3. Utility And All That! Part 2. https://dispol.blogspot.com/2020/05/utility-and-all-that-part-2.html