The Futility of Utility – Consumers

The Futility of Utility - ConsumersConsequently, the average profit rate of producers is equal to the average profit rate of consumers and both rates are equal to economic growth. Therefore, there is no surprise in the fact that people so readily agree on the price of a certain goods item. Furthermore, with this approach, it is easy to explain how a price is established for a goods item that may serve as a consumer product and as a means of production. And if we follow the traditional point of view and assume that manufacturers value means for the production of a marginal product and consumers value an item in terms of marginal utility, then why do they agree so easily with the common market price of a certain product, which may be used both by producers and consumers?
There were, most likely, also other reasons for the strange victory of the utility theory and, later on, the marginal utility theory. Of course, this victory was aided by the lack of any easily defined alternative. However, the victory was never complete, or uninterrupted, small and large fires broke out here and there along the way and there were conspiracies and rebellions. The first sign of the collapse of the old concept of utility came about at the end of the 19th century and was linked with the name Fisher. Fisher demonstrated that, firstly, the entire theory of market equilibrium depends on assumptions on areas of indifference and nothing more. Secondly, if there are three or more goods, the areas of indifference may not be complete and therefore it is impossible to derive any utility function from the knowledge of these areas. Shortly afterwards Pareto continued with the destruction of the old concept. According to Hicks and Allen, of all the scientific contributions made by Pareto, perhaps the most significant was his proof of the immeasurability of utility. However, this was not the final nail in the coffin for the utility theory because Pareto generously cast a lifeline by replacing the concept of utility with the concept of a scale of preference. Despite this, it was no longer possible to restore the former glory and order of the utility theory. Although Alchian confidently talked of the rebirth of measuring utility, he himself stated that interpersonal comparisons of utility are questionable. When we compare the situations of two people, a rich person and a poor person for instance, we make our personal assessment of the two possible conditions in relation to ourselves. Samuelson comes to a logical conclusion with the statement that social indifference curves are not possible – they do not exist. This is the fundamental theorem of impossibility.
Despite all this, the fairly worn utility theory continues to occupy a place of honour in economic textbooks and magazines. Some authors continue to firmly believe that utility is a measurable value and others that it is an immeasurable value. We can understand those who believe it to be a measurable value. What is the value of a theory that is virtually impossible to verify? What can it give us? Using a theory such as this will give you any result you require. If you are not happy with the result obtained then slightly alter the starting conditions or substitute some of the preferences for others. However, utility is not measurable and this is now becoming clear to almost everyone. When studying the numerous statistics on a country or region we see a myriad of figures. We are able to compare GDP at different times, profits of corporations before and after taxation, we can learn a great deal about savings, investments, consumption, incomes per capita and much more. But there are no columns and no rows in statistical reports with the word “utility” and this is most likely a death sentence.
In the latter half of the 20th century there began to appear more and more studies that, to a greater or lesser extent, touched upon the issue of justifying the division of economic agents into consumers and manufacturers. Simon doubts that a firm’s objective is always maximum profit and a consumer’s objective – maximum utility. He states that some firm managers attempt to maximize utility and some consumers attempt to maximize profit. For example, a consumer gathers information until the time when the marginal costs for gathering additional information are equal to the marginal profit that may be obtained as a result of having this additional portion of information. Both in this case and in many other cases, the behaviour of manufacturers and consumers is in no way different – they both seek to maximize profit. Machlup justifiably asks a very simple question, which has remained unanswered: what does a firm maximize if it is always managed by a person who is undoubtedly a consumer? Finally, Becker always regards households as “small factories” that combine capital resources, raw materials and labour and produce useful consumer goods. The word “profit” is always present in all of his studies on human economic behaviour, without fail. A person receives further education until their marginal costs equal the profit that will be gained as a result of higher earnings. A criminal will continue to commit crime until his or her marginal costs equal the criminal income or profit that will be gained.
It is clear that claims to the utility theory have never gone away and what is more, they continue to grow. The smoke from the fires has not dissipated and the fire is beginning to engulf new areas. In this situation, one should consider the most reasonable solution to be the attempt to save anything of value that remains and build new foundations for a future home. It is unlikely that I will be able to complete this task. However, I will attempt to lay a few bricks in the foundations.