In her excellent book Economic Philosophy (available as a PDF here) Joan Robinson undertakes an extensive discussion of marginal utility theory. Here I will be more so interested in her technical criticisms. But before going into these it should be noted that Robinson characterises the impetus of marginal utility theory in a way many might find unusual.
Basically, she claims that it is a revolutionary leftist doctrine. The reason she makes this claim is because if we apply the law of diminishing returns to income it soon becomes clear that radical egalitarianism — indeed, some sort of socialism or communism — is the best manner in which to maximise the utility of society as a whole. Robinson points out that the early marginalists — many of whom, like Walras, were socialists — recognised this full well. She quotes Alfred Marshall in this regard,
Next we must take account of the fact that a stronger incentive will be required to induce a person to pay a given price for anything if he is poor than if he is rich. A shilling is the measure of less pleasure, or satisfaction of any kind, to a rich man than to a poor one. A rich man in doubt whether to spend a shilling on a single cigar, is weighing against one another smaller pleasures than a poor man, who is doubting whether to spend a shilling on a supply of tobacco that will last him for a month. The clerk with £100 a-year will walk to business in a much heavier rain than the clerk with £300 a-year; for the cost of a ride by tram or omnibus measures a greater benefit to the poorer man than to the richer. If the poorer man spends the money, he will suffer more from the want of it afterwards than the richer would. The benefit that is measured in the poorer man’s mind by the cost is greater than that measured by it in the richer man’s mind. (pp52-53)
She also points out that Wicksell — another socialist — considered marginalist economics to be a “thoroughly revolutionary program”. I think Robinson is correct. Marginalist doctrines fit market socialist or market communist societies better than they do capitalist ones. That today’s marginalist economists think otherwise is merely indicative of their extreme lack of imagination: there are no Marshalls or Wicksells among today’s oh-so vapid marginalists.
For this reason Robinson’s criticisms of marginalism should not be read as being politically motivated. Indeed, criticisms of marginalism should be insulated from all politics. The simple fact is that marginalism is wrong not because it leads to right-wing politics — this simply isn’t true — but because it is a logical mess. This is where Robinson’s more technical criticisms come into play.
First she lays of what the term ‘utility’ means to marginalists. In doing so she quotes Marshall once again.
Utility is taken to be correlative to Desire or Want. (p48)
Actually it is slightly more complicated than this because, as Robinson points out, utility is also tied up with satisfaction. If we agree that we should have economic agents maximise utility then we assume that their Desires or Wants are leading to some sort of satisfaction. If we did not implicitly think this then the principle of utility maximisation would not be socially desirable. Robinson raises the examples of the drug addict and children who dislike school; are we really to say that these people should be allowed maximise their utility? Presumably not.
These are interesting points — although I’m sure that marginalists could concoct a scheme to reintegrate such anomalies into their vacuous framework — but this is not the key problem with marginalism for Robinson. In order to highlight this problem she again quotes Marshall to make clear the marginalist position.
There is however an implicit condition in [the law of diminishing utility] which should be made clear. It is that we do not suppose time to be allowed for any alteration in the character or tastes of the man himself. It is therefore no exception to the law that the more good music a man hears, the stronger his taste for it likely becomes; that avarice and ambition are insatiable; or that the virtue of cleanliness and the vice of drunkenness alike grow on what they feed upon. (p50 — My Emphasis)
Robinson might equally well have quoted Samuelson who in his famous textbook Economics wrote,
What is assumed is that consumers are fairly consistent in their tastes and actions – that they do not flail around in unpredictable ways, making themselves miserable by persistent errors of judgement or arithmetic. (p78)
Robinson doesn’t let the marginalists get away with this rather obvious blunder. She is quick to point out that this condition, one which is absolutely essential for marginalism to function, turns the theory into vacuous babble.
We can observes the reaction of an individual to two different sets of prices only at two different times. How can we tell what part of the difference in his purchases is due to the difference in prices and what part to the change in his preferences that has taken place meanwhile? There is certainly no presumption that his character has not changed, for soap and whisky are not the only goods whose use affects tastes. Practically everything develops either an inertia of habit or a desire for change. (p51)
This is a damning indictment of marginalist theory. It means that, in a very real sense, the framework cannot be applied to empirical material. Because it necessarily assumes fixed preferences it cannot deal with changes in these preferences. And due to this it cannot conceive, in experimental settings, of how much consumer activity responds to price fluctuations simply because it does not — and, indeed, cannot — assign any numerical value to preferences that are in a constant state of flux. Robinson continues,
We have got one equation for two unknowns. Unless we can get some independent evidence about preferences the experiment is no good. But it was the experiment that we were supposed to rely on to observe the preferences. (p51)
Let me just restate what Robinson has just pointed out so that people are crystal clear on this point. 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.
My feeling is that if this was pointed out to, for example, Marshall or Samuelson they would have conceded the problem to undermine marginal utility theory as they had sharp minds and actually understood the structure of theories that they were dealing with. Most marginalists today, who tend to be exceptionally poor at basic logic, cannot understand this criticism at all. They convince themselves that they can integrate changing preferences blissfully unaware that if they do so the entire framework collapses because it becomes impossible to determine which change in consumer behavior emanates from the changed preferences and which change emanates from price changes.
In reality the theory of marginal utility is entirely without substance. All it provides is a set of puzzles that would-be economists spend vast amounts of time trying to solve. The theory of marginal utility is not, despite appearances, an economic theory. At best it is a parlor game played by economists; at worst it is a doctrine which seeks to morally shape the minds of men.
What’s worse today, since the so-called microfoundations critiques (another doctrine that is internally logically inconsistent), economics is using utility nonsense even in the sphere of macroeconomics. Meanwhile, figures like Gary Becker are attempting to colonise other social sciences with these incoherent dogmas. Unfortunately, Robinson didn’t see just how polluting the marginalist doctrines could possibly be.
Addendum: I have written extensively on marginal utility theory before. Here are what I consider to be the most important things I have written — I list them in order of importance.
Marginal Utility Theory as a Blueprint for Social Control, Naked Capitalism, October 3rd 2011
Confessions of a Non-Utilitarian Shopper, Naked Capitalism, October 7th 2011
Fixing the Economists 
This is one of the most thought provoking posts I’ve read in ages.
One question and a comment.
Question: surely it is reasonable to assume that many people do as a general rule derive decreasing utility from a good as they consume each additional unit?
I find that to be an empirically reasonable idea.
I know you can find exceptions and problems: it is not some universal law, and obviously changing preferences complicates things.
But e.g., most people’s demand for washing machines is pretty stable: maybe some people (with big families and enough room in the laundry) might derive significant utility from a second washing machine, but by the time we get to the 3rd or 4th, they are pretty much useless.
My comment: It is also curious that some of the Austrian founding fathers — such as Friedrich von Wieser and Eugen von Philippovich — were sympathetic to the Fabian socialism of their day.
Wieser even used subjective marginal utility theory to justify progressive taxation and was proud of it:
http://socialdemocracy21stcentury.blogspot.com/2013/07/friedrich-von-wieser-on-progressive.html
Anyway, this was a great post.
Thanks LK.
As far as the question goes, this goes back to whether this is a “law” or not. Obviously it is not. People do not get diminishing utility (what is ‘utility’ anyway…) from the accumulation of money, for example. Given that capitalist economies are based on this drive this seems a fairly large oversight.
The washing machine example is instructive. But this is an atypical good. Consider instead a car. Does the washing machine criterion fit? I would argue not. People who like cars always want a bigger and better car than they have now. If I have a BMW I still dream of owning a Ferrari and so on.
So, I would say two things. First of all, the idea of diminishing quote-unquote ‘utility’ is categorically not a law. Secondly, it mischaracterises the nature of human desire. Human desire, as the advertisers know well, is infinite. There is no real point of satiation. The diminishing returns ideology masks this and thus masks how human desire operates. In that sense it is — even if it may apply in some narrow senses — definitively false.
And yes, most of the early marginalists had socialist leanings. It’s not surprising. There is a lot of socialism implicit in the doctrine.
“People who like cars always want a bigger and better car than they have now. If I have a BMW I still dream of owning a Ferrari and so on.”
This doesn’t actually invalidate MU theory. At my current income level I buy the combination of BMW’s and Ferrari’s that maximize my utility given what I would have to give up in order to purchase them.
Dreaming about what I would buy if my income was higher doesn’t count.
Do you actually read any of this stuff, Rob? That example was explaining a non-static theory of desire. It also said nothing about income. Please read carefully before you engage.
People do get diminishing utility at the accumulation of money. Someone with no money would find more utility in moving from 0 to 1 than if they went from 1,000 to 1,001. Or, to go further, from an infinite amount to an infinite amount +1.
If there was no real point of satiation, people wouldn’t retire from working. Clearly, there is a point where one feels they have “enough” and leisure provides more utility than more money.
1. Infinites do not actually exist. They are potentials only. We’ve known this since Hilbert. Using them in the way you are is obviously wrong.
2. Lots of people continue accumulating money past any point of satiation. Say, Warren Buffet or George Soros. Most investors are willing to accumulate POTENTIALLY infinite amounts of money. This is in keeping with the potentially infinite nature of human desire itself. Human desire cannot, by nature, die. Otherwise we would not get out of bed in the morning. Often this desire affixes itself to money itself and in these cases — typically manifest in the investor — there is never any satiation as money becomes a pure scorekeeping mechanism totally devoid of any relationship to any basket of goods.
“Human desire, as the advertisers know well, is infinite. ”
I’d argue with that.
It’s very finite, because of the lack of time. Even if everybody gets exactly what they want, they run out of time to do everything.
Which of course means that the only truly valuable thing a person has is time.
The desire is infinite — or, more correctly, potentially infinite.
The time is finite.
The finitude of time limits the potential infinitude of desire.
“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.”
Is not a whole chunk of economic theory all about explaining the effects of changes in people’s preference ? If you assume fixed preferences and only have to look at the supply side economics becomes much simpler. Changing preferences is quite a common theme in “mainstream economists” (Google “relative demand shocks” or “consumer preference” to see this).
Additional point : When Joan Robinson said that marginal utility was a “socialist doctrine” I’m guessing that she has in mind interpersonal utility comparisons. This might lead someone to say something like “a dollar spent by Bill Gates will provide him less utility that a dollar spent by someone on welfare therefore we should tax the rich and increase welfare because this will increase total utility”. While not without some logic such a view is generally rejected by mainstream economist as unprovable (since utility cannot be measured) and inadmissible in economic theory.
I was just thinking about Ayn Rand’s critique of utilitarianism. Ludwig von Mises was Rand’s favorite economist, but he was a utilitarian, like most marginalists. Rand took him to task for his utilitarianism because she saw that as promoting what she despised most, altruism. Part of her critique of utilitarianism is that she viewed it as a philosophy better suited to the defense of socialism. In her view, a utilitarian defense of capitalism could only be made to work via special pleading. However, if what you (and Joan Robinson) say about utilitarianism is correct then its rejection will knock out the foundations of Mises’s economic theory, which Rand had so admired. So ironically Rand’s critique of Mises’s utilitarianism would end up undermining the very economic theory that Rand so admired.
“When Joan Robinson said that marginal utility was a “socialist doctrine” I’m guessing that she has in mind interpersonal utility comparisons. This might lead someone to say something like “a dollar spent by Bill Gates will provide him less utility that a dollar spent by someone on welfare therefore we should tax the rich and increase welfare because this will increase total utility”. While not without some logic such a view is generally rejected by mainstream economist as unprovable (since utility cannot be measured) and inadmissible in economic theory.”
You do not have to think interpersonal utility comparisons are explicitly and objectively measurable to make that argument.
It follows as soon as you accept the general principle of diminishing marginal utility as true that a very rich person should — generally speaking — derive less utility from an extra dollar than a person who is very poor, even if you can’t measure it in some absurd quantity like utils.
LK,
Theory says that Bill Gates will derive less utility from the billionth dollar spent than his first dollar spent. But you can’t tell if the utility he gains from that billionth dollar is greater or less than the utility a poor person would get if they spent it instead. At least that’s what opponents of ICU would say.
I agree that from a common sense perspective it’s hard to accept this logic.
I’m aware of that evasion. Anyone who buys into it is obviously not being rational. If they accept marginal utility theory the result should be some sort of market socialism. This became obvious in the Socialist Calculation Debates.
As to the other point, are you saying that adherents of marginal utility theory take into account changes in preferences? If so, how do they separate changes in consumer behavior due to shifts in preferences versus changes due to prices? It clearly becomes impossible unless you introduce some sort of psychological profiling. But that is precisely what marginal utility theory and ‘revealed preferences’ seeks to avoid.
‘How do they separate changes in consumer behavior due to shifts in preferences versus changes due to prices? ”
If you see consumers using less of a good and the price changes at the same time there is no way you can tell from this alone if the causes are changes on the supply-side , the demand-side or both.
If you have theories that explain how demand-side changes and supply-side changes affect the economy then you can use these theories as a guide to look for other data-points and “explain” what the underlying cause of the observed behavior was. For mainstream economists marginal utility theory provides part of the demand-side story.
This comment does not seem to address the question I posed. Why are you talking about demand and supply side, for example? These have nothing to do with what is being discussed.
I can only conclude that you have not properly digested Robinson’s criticism.
Take 2 extreme scenarios:
a) People’s preferences change every moment. Spending is totally random.
b) People preferences is fixed for all time. These preferences are revealed in their spending over time.
You could build models based on either assumption.
You could also look at the data , filter for exogenous factors that affect spending and prices, and see which theory is most consistent with the facts. The closer to a) the more useful marginal utility is to economic theory. The closer to b) the the less important it becomes.
What is wrong with what I just described ?
Are you just saying that you think we are closer to a) or that unless we are exactly on b) the theory is totally useless ?
Do you understand basic micro?
Take scenario (b). Now go and look at your micro book on revealed preferences. It will tell you that we gain insight into preferences in the manner that people consume. We then assume preferences are fixed and we can then see how people respond to price signals. Then we can calculate demand elasticities etc.
However, if preferences fluctuate then how can we see how people respond to price fluctuations? Any time we saw a change in demand when the price rises/falls this may just be due to preferences changing and have nothing to do with demand elasticities.
I really think that people should consider that maybe — just MAYBE — Samuelson and Marshall knew what they were saying when they explicitly stated that the theory required fixed preferences… But the amount of times I’ve had to explain this leads me to believe that very few people actually understand the theory.
Your quote above from Samuelson “What is assumed is that consumers are fairly consistent in their tastes and actions” actually seems consistent with what I just said.
Empirical evidence suggests (I think) that they actually are “fairly consistent” (not absolutely consistent) and this means the theory has some uses.
The criticism implies that the empirical studies can’t work. That’s the point.
Anyway, my preferences are far from stable. And I’d imagine that if most people reflected on it they would find their’s to be unstable too.
dear phil,
This is very good. I very much enjoyed reading it.
Have you seen Lenin’s take on the “law” of diminishing returns?
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Assuming that preferences are not static( which seems reasonable), isn’t all that one can derive that it isn’t possible to make predictions based on the theory, only observations as to the end result in the complex decision making processes of all market participants at any one time?
To me this would not disprove that marginal utility exists for every person based on available resources and then-current preferences and that such aggregate decisions would affect pricing, but not in any perfectly predictable way.
Sure. That makes it a tautology. To you this may still mean something. But you cannot prove it, test it or use it in any practical way. That makes it a non-scientific theory in any sense of the word. People can believe in it — but then people can believe in Bigfoot if they want, but they can’t prove or substantiate it.