Marginalist Microeconomics is a Highly Normative Ethical Doctrine

wrong or right ethical question

In a recent post Lord Keynes raises the question of the so-called ‘law’ of diminishing marginal utility. The ‘law’ states that we will derive ever diminishing satisfaction from the acquisition of a good or service. Lord Keynes notes that this is true for some goods — like washing machines — but may not true of others. He gives a number of examples — such as addictive arcade games and drugs — that seem to defy the ‘law’.

I think that it is interesting to note that all the examples he gives might be considered in some way to be ‘pathologies’. I don’t mean that they would be taken to be pathologies by marginalist economic theory — although they undoubtedly would — but rather that they would generally be taken to be pathologies in the most widest of senses; they would be manifestations of psychological, sociological and, ultimately, moral pathologies.

Actually, I would argue that it is the latter which is at the root of all this: such activities are properly seen, in any social discipline, as simply moral pathologies — this despite the fact that this term may be left out and replaced with other codewords (‘socially destructive’, ‘psychologically destructive’ and so on). At base, however, is a moral judgement: such activities are bad for either the individual, society or both. That is a moral judgement.

Viewed in this light the so-called ‘law’ of diminishing marginal utility is actually somewhat of a moral imperative. It does not so much tell us what we do but rather what we, at some level, should do. We can highlight this clearly by returning to the washing machine example.

Imagine for a moment that someone suffering from what we would consider to be a psychological disorder — perhaps some combination of OCD and hoarding — was obsessed with collecting broken washing machines. Imagine that they took them regularly from the dump and brought them home and filled their house and gardens with these objects. Although I am making up the washing machine example, this is a very real phenomenon and was dealt with in this psychological training film.

Now people suffering from this disorder clearly do not adhere to the ‘law’ of diminishing marginal utility. But what makes this a disorder? I would argue that the term ‘disorder’ here is moral in tone. I would argue that it is based on what we consider normal or good as a society. In short, I would say that when we apply the term we are in effect saying: “You are not engaged in activity that constitutes the Good Life”.

I do not want to diminish the fact that people suffering from such disorders are made unhappy by them. But what I am saying is that if these activities were looked upon as culturally normal and everyone did them then they would not be considered disorders and would not cause people pain. The determinants of what does and does not constitute normal behavior is ultimately a rather arbitrary function of what is considered normal by a given society. What may be pathological in one society may be the path to the Good Life in another.

Perhaps the best recent example of this is the case of homosexuality in the 20th century. Although Freud and the early psychoanalysts had rather progressive views on homosexuality, later psychology pathologised it in the same manner it had been pathologised in the 19th century. The first two editions of the Diagnostic and Statistics Manual (DSM), which is used by working psychologists and psychiatrists as a guide to diagnosis, listed homosexuality as a sexual deviation. In these years most of those working in the mental health professions would have seen it as their duty to ‘cure’ homosexuals by helping them lead ‘normal’ lives.

Homosexuality was removed from the DSM in the early 1970s. Why? Because psychologists and psychiatrists had found new evidence indicating that it was not a sexual deviation? No. The fact is that culture was changing and the DSM was trying to get in line with changing social norms. Nowadays if a homosexual walked into a mental health clinic you can be sure that the attendant psychologist would be far more concerned that they might be repressing their sexuality rather than practicing it!

The point is that what was once considered to be a deviant behavior is now seen by many as being, for people with such urges, the path to the Good Life. Nothing has changed about the behavior at all. Nor has anything changed about the evidence (or lack thereof) that homosexuality is either ‘normal’ or ‘pathological’. Rather society has changed and has integrated homosexual behavior largely into the mainstream.

Now that we understand how normativity broadly works in the so-called social sciences let us turn to a notion that goes right back to the ancients and that relates to marginalist microeconomics is a most immediate way.

In Western societies — and indeed, I would think in most — the idea of temperance is an important one. We can find this in writings of the early Greek philosophers. In their writings on ethics these philosophers tried to teach regimes of behavior that would lead to ‘eudaimonia’ which translates as (economists take note) ‘welfare’. A key component of reaching a state of eudaimonia was moderation or temperance. Another key component was in using Reason to moderate and organise one’s existence — the similarity to the rational agents of modern economics is no coincidence, as these are part of similar intellectual projects.

(For an extensive discussion of ancient regimes of normative ethics I encourage the reader to pick up Volume II and Volume III of Michel Foucault’s excellent The History of Sexuality which, despite the titles, go far beyond simply dealing with sexuality).

This was an extremely extensive intellectual and ethical tradition that encompassed most of Western philosophical thought in the following millenia. But there was another tradition that existed all the way back to ancient times.

In the 19th century Friedrich Nietzsche distinguished the two. The first tradition — that which championed Reason, eudaimonia and so forth and which ran from Plato through Aristotle to Bentham and Hegel — Nietzsche termed the ‘Appollonian’ tradition, after Appollo, the Greek god of Reason. The second tradition — which represented excess and intoxication and ran from the Greek tragedies like Antigone through the German Romantics to Freud — Nietzsche termed the ‘Dionysian’ tradition, after Dionysus, the Greek god of wine.

Nietzsche argued that this excessive element in culture — which would be termed the ‘passions’ in philosophies like those of Spinoza and Hume or ‘drives’ in Freud — was not only always present in culture but was required for culture to move forward and thrive. It was this excessive element that gave Western culture its dynamism; its tendency to break boundaries; and to champion the newly discovered.

Without getting too deeply into this, however, I think that the reader can now appreciate that what is contained in the ‘law’ of diminishing marginal utility is deeply tied up with certain notions of ethics, morality and what is the ‘right’ and ‘wrong’ way to live one’s life. My point here would be threefold:

(1) When discussing human behavior and social organisation the moment we begin to speak of ‘normal’ behavior we are implicitly designating other behaviors as ‘pathological’. This is ultimately a moral judgement.

(2) The notion of ‘normal’ behavior relies on its obverse. If there were not ‘pathological’ behavior the idea of ‘normal’ behavior would be semantically meaningless. Thus, the idea of ‘normal’ behavior cannot exist without the existence of ‘pathological’ behavior. This means that any ‘laws’ that seek to establish norms for behavior actually undermine themselves as their norms rely, by definition, on cases that do not fit into these norms.

(3) Human activity always contains both Appollonian and Dionysian aspects. Innovation and entrepreneurship, for example, are Dionysian behaviors that involve taking incalculable risks buttressed by ‘animal spirits’** while the calculations of profit and loss utilised in carrying them out are Appollonian. In trying to suppress the Dionysian aspects of human existence — which I would argue is the function of marginalist microeconomics — we only succeed in remaining ignorant of a key component of human culture and psychology.

Beyond that, I think that people should be very well aware of the fact that microeconomics is an ethical doctrine —  as are many aspects of the so-called social sciences — and it should be judged accordingly. By positing it as a ‘science’ we are only engaged in ethical dogmatism — that is, we are giving its ethical proclamations a dimension of Absolute Truth which they simply do not possess. That is why so many are fooled by its form. Marginalist microeconomists convince themselves that they are engaged in ‘science’ when really all they are doing is applying a dogmatic ethical framework to the material they study. They are, rather humorously, priests who do not know that they are priests.


** The clever reader will note here that Keynes’ theory of financial markets and investment are eminently Dionysian. Indeed, I think that a Dionysian tone resonates in all of Keynes’ work — and I think that his writings on probability should properly be seen as an attempt to insert Dionysian considerations into the all too Appollonian discipline of mathematical philosophy. Whereas economics before Keynes was based on the hokey Appollonian doctrine that the virtue of rational saving was what led to economic growth, Keynes turned this on its head and showed that such saving could be socially destructive and that economic growth was dependent on the Dionysian actions of investors taking action in the face of an unknown future.


About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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22 Responses to Marginalist Microeconomics is a Highly Normative Ethical Doctrine

  1. Lord Keynes says:

    Nice post. Have also been reading Joan Robinson’s Economic Philosophy on this subject.

  2. NeilW says:

    ” But what I am saying is that if these activities were looked upon as culturally normal and everyone did them then they would not be considered disorders and would not cause people pain.”

    You mean like attending catholic mass 🙂

  3. Rob Rawlings says:

    “The ‘law’ states that we will derive ever diminishing satisfaction from the acquisition of a good or service. Lord Keynes notes that this is true for some goods — like washing machines — but may not true of others. He gives a number of examples — such as addictive arcade games and drugs — that seem to defy the ‘law”

    We can’t measure the amount of satisfaction derived from the acquisition of a good or service so this seems a not very useful way of looking at marginal utility. It would seem more useful to look at the marginal utility from the perspective of what an additional unit of a something would be used for, or what use would be given up if the qty available diminished by a unit.

    The most generic way of thinking about this is probably: What would an individual do with an additional unit of money ? What would he/she give up if they had one unit less?

    For the obsessive washing machine collector or video-game addict the answer would always be “buy/give up a washing machines” or “buy give up one more play”. This would not be very interesting but would not violate the law of diminishing marginal utility in any way. This would be true even (as is likely) the individual subjectively felt “10 machines/games is better than 9”, or even “the 10th game was more satisfying than the 9th”.

    Seen in this was the law is useful for economic analysis but has nothing to do with psychology.

    The economic implications of OCD and other psychological dis-orders may well be an interesting topic (and this article was indeed entertaining) but you should be aware that its premise is based on a non-standard interpretation of the law of diminishing utility.

    • No, mine is the standard interpretation. See:

      The law of diminishing marginal utility is at the heart of the explanation of numerous economic phenomena, including time preference and the value of goods… The law says, first, that the marginal utility of each homogenous unit decreases as the supply of units increases (and vice versa); second, that the marginal utility of a larger-sized unit is greater than the marginal utility of a smaller-sized unit (and vice versa). The first law denotes the law of diminishing marginal utility, the second law denotes the law of increasing total utility.

      That is the definition I am referring to. As I say, it relies on some notion of ‘normal’ behavior. Any ‘pathological’ behavior — drug addiction, hoarding, gambling — shows it to be reliant on some implicit notion of ‘normal’ behavior. So, it rests on a normative notion of behavior even though it doesn’t make this explicit.

      • Rob Rawlings says:

        OK, we agree on definitions. To my mind what this law is really trying to explain is how people will use available resources to address their needs. They will use these resources to address their most urgent needs first and so on down their list of needs. Each additional need satisfied will bring diminished marginal utility.

        Why is the compulsive washing machine collector necessarily in violation of this law ? His 10th washing machine may indeed give him less additional utility than his 9th. But as he buys it anyway he must value it higher than any alternative use of his resources. The marginal utility of the extra washing machine to him has been demonstrated to be higher that the marginal utility of any alternative acquisition.

        This would be true even if psychologists might brand his behavior pathological. If he bought washing machines in preference to food, clothes and shelter then he may well be deemed mad in today’s society. I guess you could imagine a weird society where his behavior may be deemed normal. This would all be interesting in terms of studying human psychology but I still don’t think it changes the economic analysis much.

      • Nope. That’s not the law. The law is:

        that the marginal utility of each homogenous unit decreases as the supply of units increases

        So, the utility of the tenth washing machine or the fiftieth game on the arcade machine must be lower than the first washing machine or the first game on the arcade machine. But the behavior of the hoarder/game addict implies that this is not the case. The tenth washing machine and the fiftieth game seem to be just as valuable to the hoarder and game addict as the first.

        It doesn’t matter if you measure this against a basket of goods. You get the same result.

  4. Rob Rawlings says:

    “The tenth washing machine and the fiftieth game seem to be just as valuable to the hoarder and game addict as the first. ”

    My point is that people who manifest the kind of behaviors that society views as pathological may be acting in perfect consistency with a marginal utility of each homogenous unit decreasing as the supply of units increases. It just happens that for them they never reach satiation point. It is perfectly consistent to think his marginal utility did decrease with each addition to his collection but by only a small amounts each time.

    However even if all this was true then you could still argue that society stigmatizes behavior that manifests non-normal marginal utility and that economic theory is being used to reinforce societal norms. I already said that I find that quite an interesting argument.

    • So, the effect may be there it is just completely unobservable? That doesn’t strike me as very convincing.

      What we see is a player in a video arcade playing the game all day. His potential basket of goods doesn’t change — he can leave at any time and spend his money elsewhere — but he continues to put coins in the machine. All the evidence indicates that he is deriving at least consistent utility from each play.

      Drug addicts are even more extreme. In this case it appears that the user gets more utility from each unit of the drug as his usage increases. After some time, his dependence will build and his resistance to the drug’s effects will increase. So, he needs more and more units to reach satiation. And the more he uses, the more dependent he becomes on the drug (i.e. the more utility he derives from it vis-a-vis another basket of goods).

      So, no. I don’t think so.

  5. deusdarkjaws says:

    Philip, your writing on economics is always helpful. You have always tried to lay bare the foundations of marginalism and for that you should always be commended, because few these days bother to tread on that territory on the blogosphere.

    However, I am amazed at how you can go from laying bare the historical/philosophical foundations for economics (and hence attacking the foundations of it) to not questioning your own method of inquiry. Your genealogical ethical foundations, with its once-and-for-all relativism, is far more vulgar (to me) than the mainstream economics research program (even if it has given you the tools to rightly criticize the metaphysical foundations of modernity’s other children)

    The problems you exhibit include: The autonomy of morality; the sharing with Popper of a concern only with means and not with ends; and combined with other posts you’ve made, including ones strictly concerned with Keynes, of viewing society in mechanistic terms that must be manipulated to get the desired outcome; the appeal to impersonal, timeless standards in your rational arguments (which is metaphysical, despite your own railing against metaphysics from time to time); this implies that (in continuing the Nietzchean research program) your end of seeking out the Truth? is simply impossible by your own standards, and if your goal is something else then it is unintelligible (which goes to be unconcerned with ends); and to restate my biggest problem as I mentioned it above, manipulation is really your only goal, through unwittingly having a dogmatic, academic voice, the likes of which you rail against yourself. So of course it was necessary for you to connect Plato/Aristotle/Hegel with Bentham, as if there was no difference between what the former espoused and what the latter did in their respective ethics. (Some of these issues I outlined may involve some exaggeration, but overall I think it describes the problems well).

    You are a good child to your fathers Nietzche and Foucault (among others), but I think if you want to go beyond manipulation you’ll have to start looking at things in a different way. Morality in the days of Aristotle and until the protestant reformation was concerned with human action, not human behavior (and not to be confused with Mises’ adoption of the term in a completely disingenuous, ideological fashion).

    • I’m just criticising any morality that is founded on strict rationality because I don’t think that people are largely dictated by Reason. I think that they are largely dictated by the Passions, as Spinoza and Hume called them, or the Drives, as Freud and Lacan called them.

      I think that any approach that ignores this basic fact — and in that I would put 90% of modern social ‘science’ — will just be talking rubbish. That’s all. I think you ascribe to me aims far beyond what I espouse. I’m certainly no Antichrist, haha!

      • deusdarkjaws says:

        There is still some confusion here that needs to be cleared up. I’ll lay out my own approach and maybe you can post it here as a guest blog.

      • To be honest, I think that you want some coherent rationalist ethics. I’m against that because I just don’t think people act that way. I think that the Christian doctrines — with notions of Passion and Sin — were far more psychologically realistic than the Ancient rationalist doctrines.

      • deusdarkjaws says:

        See for yourself. I will have something within a few days, and I think it will be something you can appreciate.

  6. deusdarkjaws says:

    Forgot to add….Suffice to say, in making a critique of the normative foundations of utility theory I would never take the route you did….it would certainly take a more nuanced approach. I might write something up in response.

  7. Lord Keynes says:

    “His potential basket of goods doesn’t change — he can leave at any time and spend his money elsewhere — but he continues to put coins in the machine. All the evidence indicates that he is deriving at least consistent utility from each play.”

    Exactly — and his marginal utility may even rise with successive games: as you get better, you enjoy the thrill of winning at higher and higher levels of the game.

    Even when you get to the end of the game, you may still get rising or constant utility or varying up and down utility in continuing to play and being extremely good at it (say, beating your own time or score).

    • Yes, agreed. Although we cannot actually tell utility — because it cannot be measured directly — all the evidence from watching someone play an arcade game indicates rising utility with more and more plays. This is the case with many things, actually.

    • deusdarkjaws says:

      And if you yourself are interested, Cameron, Mark White recently wrote a book on libertarian paternalism.

  8. Denys Greenhow says:

    You are looking with a philosophical and economic model at this. I would like to add another two model’s you probably won’t like but that are bandied around a bit in terms of individual aspirations. The first is Maslows hierarchy of need, that says by summary, you need to build on meeting your basic needs before you can become more refined in your aspirations, and the other was the philosophy of Viktor Frankl of the Third school of psychotherapy Vienna who noted those who survived the holocaust were likely to be those who harboured a sense of meaning, not necessarilly the best fed. Basic needs do not always have to be met first. This is actually a basic philosophical idea in the west of “get on your bike”. You put aside your basic needs to get ahead. Both the basic needs view of economics and aspirational view whereby one can leap frog basic needs to a certain extent have their place and again run around the marginal utility view which seems an overly static and cautious view of reality. .

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