How Exactly is Marginal Utility Theory Based on Circular Reasoning?

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explainthingstome's picture
explainthingstome
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Dec 31 2018 11:03
How Exactly is Marginal Utility Theory Based on Circular Reasoning?

Paul Mattick wrote:

"It was not long until the entire theory of marginal utility was abandoned, since it obviously rested on circular reasoning. Although it tried to explain prices, prices were necessary to explain marginal utility."

And Law of Value: the series says:

"When you are in the supermarket calculating your preference scales [...] you aren’t just considering your preferences for fish and coconuts in the abstract, as if on a desert island. You are also considering the market prices of these commodities. This market price already exists before you make your subjective value judgements. But this is problematic. Subjective valuations were supposed to explain price, but now we have to assume the prior existence of prices in order to explain subjective value judgements."

I don't fully understand the reasoning. Why would I need to have already existing prices to make subjective value judgements?

I am under the impression that me making my "subjective value judgements" means that I'm sitting in a chair thinking things like "1 car = 154 dollars", "1 bicycle = 10 dollars" etc. I.e. that I'm ranking commodities in my mind. I wouldn't have to know the market prices to be able to do this.

I would then go to a market and buy the bicycle that I wanted as long as the market price was not higher than my subjective value judgement of a bicycle. (I guess there are other factors aswell; if I really, really needed a bicycle really bad I would buy it even though the price would be higher than my subjective value judgement, assuming that I could afford it of course. But these factors are perhaps not very relevant for the discussion.)

Have I misunderstood the term "subjective value judgement"? Or is there something else that I'm not seeing?

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Jan 2 2019 17:32

Try giving this a chew over:

https://fixingtheeconomists.wordpress.com/2014/02/17/joan-robinsons-critique-of-marginal-utility-theory/

"Marginalist doctrine claims that we cannot measure utility directly. We know of a person’s utility only due to the fact that they buy something — this is called ‘revealed preferences‘ in the literature. So, we only know the cause — i.e. the utility of a purchase — by the effect it produces — i.e. the actual purchase that is made by the consumer. If we consider preferences as being fixed then this makes some sense. But if we allow that preferences fluctuate the whole edifice falls apart because now we cannot be sure to what extent consumer decisions have changed due to price changes and to what extent they have changed due to a change in preferences."

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explainthingstome
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Jan 2 2019 20:51

Thanks for the link darren, your explanations are always welcome.

"We know of a person's utility only due to the fact that they buy something"

I have two questions about this quote.

a) Surely it is the product, and not the buyer, that has utility? Did the writer of the blog post mean to say "subjective value judgement" instead of "utility"?

b) Isn't the marginalist view that the purchase reveals only that the buyers subjective value judgement is either higher or at the same level as the price of the purchased product? I.e. that the purchase only shows what the subjective value judgement of the buyer isn't? (For example if I buy a book for 100 dollars, we only know that my subjective value judgement isn't below 100 dollars.)

Perhaps these "issues" are not the main thing here, but nevertheless I got confused by them.

I will try to write my thoughts on the main point later, after I've read the article a few more times

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darren p
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Jan 2 2019 21:36
explainthingstome wrote:

"We know of a person's utility only due to the fact that they buy something"

I have two questions about this quote.

a) Surely it is the product, and not the buyer, that has utility? Did the writer of the blog post mean to say "subjective value judgement" instead of "utility"?

I think "we know of a person's utility" can be parsed as "we know what a person finds utility in.."

Quote:
b) Isn't the marginalist view that the purchase reveals only that the buyers subjective value judgement is either higher or at the same level as the price of the purchased product? I.e. that the purchase only shows what the subjective value judgement of the buyer isn't? (For example if I buy a book for 100 dollars, we only know that my subjective value judgement isn't below 100 dollars.)

In neo-classical economics "marginal-utility" is related to the extra utility that is gained by purchasing an extra unit of a said good. If marginal utility is greater than marginal cost (the cost of buying one more unit) then the consumer will not buy that additional unit. So the theory goes:

https://www.investopedia.com/terms/m/marginalutility.asp

https://www.youtube.com/watch?v=DD128Y0P9YU

https://youtu.be/VVp8UGjECt4?t=159

bastarx
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Jan 3 2019 02:20

In a hurry but in Australian economist Steve Keen's book Debunking Economics he makes what seems like a pretty solid claim that the mathematical core of marginalism is incoherent. He also criticises Marxism along similar lines although I don't think explaining relative prices is a key concern for communists.

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explainthingstome
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Jan 3 2019 11:26

Maybe I don't get the term "marginal utility". What would be a good, "easy" synonym?

"A consumers decreased satisfaction with a purchased apple as the amount of consumed apples increases"?
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So is this the beginning of the reasoning:

The price of an apple is 10 dollars. 5 apples are bought.

The seller increases his price to 13 dollars. Only 2 apples are bought.

We can't tell if the decreased consumption was mostly the result of

a) subjective value judgements staying the same as before the price increase

or

b) changed subjective value judgements ("yesterday I valued the utility of an apple 10 dollars, but now I value it at 5").

And what does that tell us about marginalism?
-
Sidenote: is it wrong to say that marginalists make the strange assumption that the marginal utility of a commodity is the same for every individual?

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darren p
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Jan 3 2019 14:10
explainthingstome wrote:
Maybe I don't get the term "marginal utility". What would be a good, "easy" synonym?

Marginal utility is concerned with the change in utility that happens when an extra unit of a good or service is consumed, hence "marginal" rather than "total". There's lots of stuff written about it, the Wikipedia page says the same as what you'll get taught at undergraduate economics.

Quote:
Sidenote: is it wrong to say that marginalists make the strange assumption that the marginal utility of a commodity is the same for every individual?

Yes that would be wrong, they don't say that. But the will refer to "total utility" that is all the individual utilities in an economy added together. If there really is something called "utility" that can be measured and added up in such a manner is a separate question..

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explainthingstome
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Jan 3 2019 16:11
darren p wrote:

Marginal utility is concerned with the change in utility that happens when an extra unit of a good or service is consumed, hence "marginal" rather than "total". There's lots of stuff written about it, the Wikipedia page says the same as what you'll get taught at undergraduate economics.

I've now read some of the parts of the articles on marginal utility and marginalism. I might understand it a bit more now but I can't say I fully get it. The example of diamonds and water made me (perhaps incorrectly) think about the "supply and demand-explanation" for value..

Was the argumentation "chain" that I presented in my previous post correct? If so, what does that mean for the validity of marginalism?

Anarcho
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Jan 7 2019 21:16

You may find this -- and its various references -- of use:

C.1 What is wrong with economics?

It is from An Anarchist FAQ.

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explainthingstome
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Jan 8 2019 14:59

Thank you, I'll check it out.