Arming You to Fight Mainstream Economic Theory by Reconstructing It Into What It’s Properly About--by Larry Motuz
Given the comments I’ve received so far, some have ‘read into’ what I’ve said about objective benefits from the uses of goods, a.k.a. value-in-use, as an attempt to introduce ‘morality’ into economics. I have no intention of doing so. I have every intention, however, of re-introducing objective utility
back into economics. Objective utility is an always measurable, well-defined unit of benefit obtained when we use goods.
We buy goods to use them to obtain what benefits their uses can and do provide to us. We buy foods to eat for their nutrients we obtain when we eat them. We often also get some pleasure/subjective satisfaction when doing so. That acknowledged, we must not confuse the possibility that we might some pleasure or satisfaction with always having gotten some pleasure or satisfaction because that we obtain nutrients when we eat foods.
(That's why I previously mentioned George H.W. Bush being mightily unsatisfied if he had to eat broccoli!)
Now if we are producers-who-consume ::
And consumption is the use of goods we purchase/rent/lease buy to use/employ to get well-defined, objectively measurable benefits and possibly also some satisfaction in doing so :: that term neither means nor implies that we don't have subjective preferences or that these never metter.
We do have preferences. Heaven knows we have our likes and dislikes.
Mostly, when we can afford to, we try to obtain benefits in ways we prefer to. But when we cannot afford to, we 'make do'. Benefits and benefit levels matter more to us than our preferences do when we 'make do'.
Mainstream (a.k.a. orthodox) economics says that ‘rational’ people would never buy any amounts of anything which they got no pleasure or subjective satisfaction from. Indeed, a consumer cannot 'maximize' subjective satisfaction above all else if s/he 'behaves' contrarily. That would be, er, 'irrational' behavior according to the
Theory of the Consumer.
But that assertion rests upon confusing realizing pleasure or satisfaction with obtaining objective benefits. That confusion has seriously undermined the development of economics as a 'science'.
I'll note here that people are not the only actors in economic systems. Organizations are also actors.
These are ‘fictive persons’ that are economic actors. If 'for profit', these actors consume/employ goods with one objective particular benefit in mind: "profits" (measured in currency units).
These do not choose what they consume/employ on the basis of their subjective preferences between goods.
'Fictive persons’ have no ‘subjective preferences’. Which is not to say that those in charge of such 'fictive persons' are unable to exercise their particular preferences. If
these can do so without costing the 'fictive person' --read a for-profit Corporation here-- much if anything, their shareholders will be happy to let them do so. And, given cultural values, other 'values' may come into play also.
But
usually it's fair to assume theoretically that ‘fictive persons’ use ‘goods’ they choose on the basis of their cost and their respective contributions/usefulness as inputs into their production. A ‘for-profit’ corporation hardly buys a computer because it subjectively ‘prefers’ to have one over having, say, accountants or other workers. It does so mainly because using/employing a computer in some operations cuts the costs of those operations. It makes financial sense to buy a computer when that computer and its maintenance costs can be recovered or more than recovered when it's employed. [And, not to put too fine a point on this, there is also benefit in having a computer which never tires or argues back relative to workers who do both.]
Producers-who-consume is a term I use to include
all economic actors.
In my unfolding framework, the term replaces the notion that some actors --
people and only people-- are the only ‘consumers’ in economic systems. The term challenges the idea that others are the only ‘producers’. The term means that all actors use goods to obtain benefits from those uses. And that means that a proper
Theory of the Consumer cannot exclude
any economic actors.
If we are all producers-who-consume, buying goods and using them with regard to both objective and subjective benefits which we hope or intend to get,then we need new framework for economic theory and analysis. Constructing
that is my objective. And, it is my
only objective.
We know that a business must earn enough to cover its fixed plant and capital costs and the variable input and maintenance costs of what it employs to make what it sells. Unless it covers its costs though revenue generating sales streams, it will operate in the ‘red’,
underwater as it were. Without access to other finances than sales revenues, it may be unable to remain in business over time.
It would be absurd to hear a CEO say, “We’re losing money hand over fist in our operations and we expect to continue to do that, but, if we ignore this as merely incidental to our welfare and continued survivalas a business,well, then take it from our staff economists that we’re in greatest shape we could be in given our very strained circumstances. They tell us we've rationally done everything in our power to keep running/alive, so, by that measure ::
that we're still here despite everything! :: we've maximized our welfare. [That’s one among the many reasons business schools tend to burst out in hilarious guffaws when hearing what economists say. {*An exception to this is Engineering Project Management. This is effectively a sub-discipline within economics usually taught by Engineers to Engineers. It neither needs nor uses the economic Theories of the Consumer or that of the Firm.}]
Why should we accept any such statements when they are applied to people when talking about them having maximized their welfare?
Do not people have bodies? Do they not have to cover the costs of their operations? Do they not have to maintain themselves?
These are not
moral questions whatever the answers. And
"Yes", they have bodies and must replenish what they use to maintain themselves.
To be sure, they both are and have bodies which cost them nothing to get. A business must buy, rent, or lease a plant out of which it operates, so people are different in that regard.
However, both sets of actors face variable ‘costs’ associated with maintaining their 'bodies' and continuing their 'ongoing operations'. What people's bodies metabolically use up needs be replenished.
If a business dips into savings or uses its ongoing sales revenues to do so, people also do so.
For most people most of the time, their income is what they earn when they sell their time and skills to employers.
So, if, say, I need 80 units of protein daily to maintain my health and life, then that is an Exigency requirement (ER) which I must meet. Should I only manage to afford to obtain only 40 units daily over any significant period, it cannot be said that I am doing well. Protein shortfalls/deficiencies lead to diseases over time, eventuating in death. Neither disease nor death, at least to me, is equivalently 'doing well'.
Let's now generalize. Let’s say we label what a person gets to obtain daily as (G). That’s
all they manage to Get (G) in a period. We can now create an Index of Utility
because we know the Exigency requirement (ER).
We'd do so by using the formula t*(G-ER)/(t*ER)[where t is the length of the period in, say, days] to create a simple Index of Utility. If t*(G-ER) =0 then so does the Index Measure. That's good.
Any index value less than zero over a significant period of time period leads to health decrements. If the period is long enough, that can mean lifetime disease, disability and/or death. So, Utility Indices less than zero could indicate poor physiological well-being if we're looking at lengthy periods over which this shortfall is happening.
If the index is greater than zero, well how much greater matters? Gout,for example, is one disease which may result if one consumes too much protein over a significant period. (There are other diseases associated with overmuch protein consumption.)
Which is to say that
more is not necessarily better. There’s usually a range of nutrient consumption which we can define as relatively good. It's sandwiched between other ranges that are ‘bad’.
I don’t think it’s a task of economists to tell anyone if s/he is consuming too much of anything: that too much is bad specifically for them.
A doctor perhaps, but not an economist.
But should it not be a task of economists to develop useful indices of well-being or welfare?
Similarly (but not identically) for a business, if GSR is sale revenues (SR) received/gotten (G) in time period t, and if, say, in a quarter, its sales revenue target is ExigencySR (ESRt)to cover its fixed and variable costs, then we get (GSRt -ESRt)/ESRt as an Index of Covered Costs. An index value of Zero will be ‘good’ because costs have been covered. Profits always being desirable to businesses,
more than Zero is better, for there’s no upper range where profits ever become excessive: I.e., ‘bad’ for them. An index value above is
gravy. [Just like people can't have too much money --they'll take more if someone offers to give it to them--businesses can never have too much profit.]
That said, in yet other respects, businesses are like people. They do not want inventories of inputs piling up, for storage costs can become very costly to business. Just like an excess of proteins for an individual, an excessive supply of inputs can become harmful to a business.
Though more money is never 'bad', more input than needed can be.
I've no doubt whatever that businesses use far more sophisticated indices, measures and algorithms for keeping track of inputs needed for the production capacity utilisation warranted by anticipated/hoped for market revenues. My purpose here is simply to illustrate that economists have no measures at all to indicate when too little is too little or too much is too much. Getting ahead of myself here, they have confused a singular characteristic of monies :: Namely that more is always better to have :: with this being a property of 'goods'. [They've done so due to the fact that, in monetary economies, goods can be exchanged for money.
Ipso facto, more goods has become better (as long as there aren't substantial transactions costs associated with turning that 'more goods' into 'more money')!
Indices of objective utility don’t exist in orthodox economic theory. Instead, human welfare is taken to be an entirely subjective matter, and, being subjective --in the mind of the ‘consumer’ so to speak-- are beyond direct, objective measurement.[See Note 1 below for what a scientist has to say about the measures they do use for 'utility'.]
That problem lies not only in ignoring a significant and measurable part of what we obtain when we buy goods to use them in some way/s, but also in how ‘utility’ has been cast in orthodox theory as being ‘subjective preferences’ in the minds of ‘consumers’ who are
never treated as ‘producers’.
That’s not to say that subjective preferences don't ever matter.
Conspicuous consumption, at least in Thorstein Veblen’s sense of displaying how wealthy one is to those less wealthy and merely eking out their existence, has bio-psycho and cultural roots and benefits.
It’s rather to say that even though objective benefits can pale before the a person's psychological motivations/pleasures in some purchases, we cannot simply ignore objective benefits by only emphasizing such subjective preferences. Indeed, though a house always serves as a shelter, there are many other other factors which go into purchasing houses. Some
are subjective: the status and prestige of owning a house in a ritzy neighborhood for example. Others are more objective in their dimensions: distance to and quality of neighborhood schools; ready access to rapid transit/transportation systems; to mention only two.
I've focused attention on objective benefits because the analysis of objective analysis is completely absent from the
Theory of the Consumer. Not only is there no attempt to measure the values-in-use which goods provide us, some notable economists have be painstaking in their denials of such things as measurable values-in-use. Take George J. Stigler, for instance, and his famous article “The Development of Utility Theory 1” {See;http://kisi.deu.edu.tr/sedef.akgungor/Microeconomic%20Theory%201%20Fallm2009/stigler.pdf}
Stigler criticized Ricardo in this way:
Ricardo says that, if a person receives two sacks of corn where formerly he received one,"he gets, indeed, double the quantity of riches--double the quantity of utility-- double the quantity of what Adam Smith calls value-in-use." Hence, he did not believe that marginal utility diminishes as (total) utility increases. ((Total) added by me for clarification.){Note:This means that increments to total utility fall as more and more of a good is acquired, so the rate of change of total utility is always falling.]
And Stigler, after quoting yet another statement he disapproves of, he goes on to say "The writer of this passage [Ricardo] cannot be said to have been close to the notion of
marginal utility" [That’s the notion that increments to total utility grow become ever smaller less as more and more of a good is consumed.]
And I have to acknowledge that Stigler was absolutely right about Ricardo not having grasped the idea that the rate of change to total utility falls as more units of a good are purchased.
But why would Ricardo or anyone choose to believe that?
Imagine you said to your local jeweler that it made you sad to learn in your economics class that the ‘law of diminishing marginal utility' meant that he could only make ever smaller total amounts of jewelry out of his second and late acquisitions of gold/silver ingots at market prices compared to what he could make from from the first one he acquired.
He'd rightly wonder if you were
daft! Imagine him puzzling:
”Why do economists say that? I’m sure I always make the same amount of jewelry with the last gold/silver ingot I bought as I do with the first. Each ingot has the same unit weight of gold/silver. Why shouldn’t one be as equally useful to me as another? I’m awfully sure that if I have 10 ingots of equal weight, I can make 10 times the amount of jewelry than I can with one.The total utility of the first ingot is not greater than the last.”
Stigler's problem with David Ricardo, Adam Smith, and other classical economists of the 18th and 19th centuries was due to one thing. Twentieth century trained economists like Stigler had absolutely no idea how important it was to distinguish between values-in-use and values-in-exchange. Somehow, so caught up have they become with values-in-exchange ::I.e., the money prices of things :: that they’ve lost all awareness of the values in-use of things. They’d graduated from their classes having learned the prices of everything and the values of nothing-at-all.
As Ricardo said, the person with two sacks of corn as wages has twice the benefit as before with only one. That is so whether s/he uses them as food (for their nutritional value as food) for the rate of change of nutrients per unit ‘bag’ do not decline as the numbers of bags acquired grows. Nutrient levels per unit measure do not fall as more unit measures are acquired, nutrients levels being equal per unit measure of corn. Constant returns per unit acquired,not declining ones, are more the rule. And should s/he sells both bags for money, or if s/he keeps one and sells the other, s/he is obviously twice as better off with two bags than with only one.
And for you to understand
how this happened, I will have to show what happened and why.
'Nuff for today.
{Readers: I’d hoped to deal with ‘utility’ in only two sections. Comments on Part 1 made it very clear that I could not leave utility as quickly as I wanted to. I’d have have to add a Part 3 about how it came to be thought that prices --values-in-exchange-- became associated with the intensities of the desires a person had for goods. ‘Demand’ curves and prices ‘consumers’ were thought to be ‘willing to pay’ flowed out of such thinking, as did notions that consumers generally were able to ‘buy’ goods in markets for less than they would be ‘willing to pay’. If so, consumers generally get more ‘value’ in markets than they pay for. That’s so if but only if it is the case that they would have been willing to pay more than the ‘market’ requires them to pay… something economists call ‘consumer surplus’. I intend to produce Utility and All That Part 3 next.}
Note 1. I refer more mathematically and technically minded readers to
On Ordinal, Cardinal, and Expected Utility by Jonathan Barzilai, a respected Canadian Engineer. He has very persuasively argued that economic measures of utility (and the welfare which emerges from such measures) lack all meaningful definition. Though he doesn't use my term 'mathemagics' for what economists do when misusing mathematics, he might as well have. There are numerous Internet websites which have this publication.
Links to prior posts on economics:
