The Futility of Utility – Introduction

The concept of “utility” came about 300 years ago, when the fundamentals of the mathematical theory of probability began to be developed and, deservedly, it is linked to the name of the mathematician Bernoulli. Later on, thanks to the efforts of the English philosopher Bentham, the economist Jevons and their numerous followers, “utility” became firmly and successfully settled in economic science. How is it at all possible that the representative of an outstanding family of Swiss mathematicians could require such a vague concept as “utility”, which was rather difficult and challenging to quantify, in order to explain human behaviour? It is necessary to answer this question because, given the current level of economic knowledge, the answer will help us to not only point out the inaccuracies and mistakes of Bernoulli, but also indicate alternative methods of explaining human behaviour.
Bernoulli believes that the value of utility is measured not by the price of something, but rather the benefit that is gained from it. The price is determined by the item itself and is the same for all, but the benefit depends on individual circumstances. Everything is correct, up until this point nothing raises objections. It seems that it would be logical for the mathematician to use such a concept as profit as a benefit. But we should not draw hasty conclusions because at the beginning of the 18th century, a step such as this did not appear to be so obvious. At that time in Europe and in other parts of the world, exchange in kind was still dominant; the monetary economy was only just beginning to defend its right to existence. In conditions where there was still no large-scale production, where the use of hired labour was scarce and irregular and steam engines had only just begun to arrive, it was, of course, premature to speak of the natural use of the mathematical concept of “profit”. If one continues reading Bernoulli, it becomes clear that there existed another, more serious problem. An income for a poor person of one thousand ducats has greater significance than for a rich person, whilst the monetary value is the same for both. Benefit or utility obtained from a gain is inversely proportionate to an existing financial condition. One person has a wealth of 100,000 ducats and another has the same amount of half-ducats. If the first receives a gain of 5,000 ducats and the second receives the same amount of half-ducats, then it is entirely obvious that for the first person a whole ducat is the same as a half ducat is to the second person. This means that different people value different amounts of profit in the same way. But if you think about it, this does not at all negate the possibility of using profit rather than some kind of utility as the main motive of decision-making for a person. Both a poor person and a rich person value their gain in the abovementioned example in the same way for the reason that the profit rates in these cases are equal at 5%. In other words, the effectiveness of their monetary investments turned out to be the same. It is clear that in order to evaluate any economic activity of a person, the effectiveness of the decisions made and the profit rate are most important, not the absolute value of profit. It is unlikely that a poor person would be able to obtain the same profit as a rich person. The rich person has the opportunity to invest more funds into a financial or production operation and earn more, even if the profit rate is the same for him or her and the poor person. It is natural that a person evaluates their decisions by comparing their profit rate with the profit rate of others. And when choosing between different methods of using their money, the person makes a decision comparing the profit rates gained from their investments. The person acts rationally because having determined the most effective method of investing money, he or she will have the opportunity to allocate additional funds. In this way he or she will generate the maximum possible profit. Finally, there was another reason for ignoring profit when examining consumer behaviour. Many people thought and continue to think that profits are, to a great extent, coincidental and for this reason both profit rates and absolute profit values differ widely for different producers and consumers. This means that the same goods item will be valued by different consumers in a completely different way. How, under such circumstances as a result of market trading, can consumers arrive at an agreement and set the market price for goods and services? It is an impossible task. Today, however, this task no longer seems so impossible. Many people believe that profit is not a random value. There are grounds to suppose that the average profit rate in any closed economic system is equal to the economic growth expressed as a percentage (Bilych, 2012).