In a microecon class my teacher said that the second unit of a good may have greater marginal utility than the first, which struck me as impossible given Rothbard's Man, Economy, and State definition with the chart of ends. When I asked him how this was so, given that people satisfy their most urgent ends first, he said that each end has a different graph.
On wikipedia they also claim it is possible to have a second good have greater marginal utility that the first as a result of a tipping point (each additional blanket only provides warmth, until the nth one that allows one to make an escape rope, or a second ticket that allows you to bring a date to an otherwise unenjoyable event.
Is this answered by Rothbard's example of two horses constituting a single unit since they are needed in pairs to be a means to the desired end, or is it that each horse is valued according to its proportion in bringing such an end about (as a ticket is worth half a date that requires two tickets or a blanket is worth one fifteenth an escape that fifteen blankets would make possible). Or is there some third response? What is the Austrian perspective and where can I find a rebuttal to my teacher's Suggestion of Diminishing Marginal Utility (rather than law).
uhayile:Is this answered by Rothbard's example of two horses constituting a single unit since they are needed in pairs to be a means to the desired end,
Yes. You are simply valuing three different goods in those examples. 1) A date, 2) A night in, 3) An unenjoyable event. For a set of objects to be considered the same good (so the marginal utility theory applies), they must be equally serviceable units.
It would apply to a ticket tout making his valuations of tickets, for example, because he views each ticket as serviceable as any other. Each additional ticket will be valued lower by him because he will be able to charge less (or equal) for an additional ticket then the ones he already has. (Even if he charges an equal price, he will still value additional tickets lower, because the law of marginal utility applies to money).
uhayile:or is it that each horse is valued according to its proportion in bringing such an end about (as a ticket is worth half a date that requires two tickets or a blanket is worth one fifteenth an escape that fifteen blankets would make possible).
You cannot do arithmetic with values, because value is subjective.
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uhayile: On wikipedia they also claim it is possible to have a second good have greater marginal utility that the first as a result of a tipping point (each additional blanket only provides warmth, until the nth one that allows one to make an escape rope, or a second ticket that allows you to bring a date to an otherwise unenjoyable event.
That marginal utility can actually increase brings about an important distinction between the Neoclassical and the Austrian understanding on utility.
From the Austrian perspective, utility is stated in terms of means to ends. For example, let's say a man is imprisoned in a tower. He wants to escape from the prison. To help him escape, he plans to construct a rope from blankets and climb down from the window. Because the blankets are necessary material for the rope, and ultimately his escape, the blankets have utility. No escape plan, means the rope is not needed, and no rope means the blankets have no utility, at least for that particular purpose.Let's say the man needs five blankets to construct the rope. Less than five blankets, and he cannot construct the rope. Instead of five, the man has only four blankets available. Those four blankets are completely worthless for his escape, no usefulness whatsoever, and thus have no utility.But is it really true the blankets have absolutely no utility? If the man has another end for the blankets, such as to stay warm, then the blankets do have utility, but to a lesser degree. In the Austrian view, utility is a matter of preference, such as he can rank ends from more preferred to less preferred such as:1st. Escape from the prison2nd. Keep comfortable in the prisonHe would rather suffer in the cold and escape than stay warm in the prison. But since he has only four blankets available, he makes best use of them. His urgent need is warmth, so he uses the first blanket to cover himself. His next urgent need is something for his head, so he rolls the blanket as a pillow, and so on. Even though each blanket increases his level of comfort, each blanket has diminishing marginal utility because each additional blanket meets a less urgent need.Let's say somebody from the outside smuggles in another blanket. He has now five blankets to construct his rope. He has a chance to meet his highest preference, escape from the prison.Here is where the disagreement between the Neoclassical and the Austrian becomes apparent. For the Neoclassical, the fifth blanket is more valuable than the fourth blanket, and thus has increasing marginal utility, because without the fifth blanket, the rope would never be constructed. For the Austrian, the relative value between the fifth and fourth blanket is not very meaningful, since without the fifth blanket, the fourth blanket would be worthless for the highest possible end.Is there really a marginal utility increase between the fifth and fourth blanket? Marginal utility implies that removal of the last item should not affect the utility of the previous items. Else if the previous items were affected, then marginal utility analysis is not valid.Let's suppose there is no escape plan, and the man's highest end is comfort in prison. Both Neoclassical and Austrian will agree that the fifth blanket is less valuable than the fourth blanket. Let's assume a guard barges in and takes away the last blanket. Even though the there is one less blanket, the marginal utility of the fourth blanket should neither increase nor decrease because of the presence or absense of the fifth blanket. In other words, the value of the previous items are preserved.This proves that marginal utility exists for the blankets.Let's suppose the escape plan is the man's only exclusive end, and that he has no need for prison comforts. Then it's either all or nothing. Either he has has all five blanket to complete the rope, or the blankets will be completely worthless. If a guard barges in and takes away the fifth blanket, then the value of the four remaining blankets is destroyed.This proves that marginal utility is not valid for the blankets.But a Neoclassical will counter that the existence of a less preferred alternative (for warmth, sleeping, etc.) will provide the remaining four blankets some value. Removal of the fifth blanket would not necessarily destroy value. Thus there is indeed marginal utility for the fifth and fourth blankets.However an Austrian would respond back saying the real comparison should be for all five blankets, not just the fifth and fourth blanket. Either all five blankets are used for the less preferred end (prison comfort) or all five blankets are used for the more preferred end (prison escape).
Here is where the Neoclassical model breaks down. For marginal utility to be valid, the existence of an additional item presumes that the previous items are still available to meet the previous needs. In other words, the first blanket must be always available to meet the man's need for warmth at all times. But because the man must make an allocation decision, the moment he constructs a rope, he would deprive himself the warmth of the blanket. Either the first blanket is for the rope, or the first blanket is to keep him warm. He cannot have it both ways.
Furthermore, if the first blanket is reallocated from a less preferred end (warmth) to a more preferred end (escape), then by definition the utility of the first blanket has increased. This is also true for the remaining blankets, as the utility of each blanket increases from a less preferred to more preferred end.The problem with the Neoclassical conception is that it assumes the previous four blankets are still servicing the less preferred end (prison comfort), while at the same time servicing the more preferred end (prison escape). From the Austrian perspective, all five blankets services the same greater end, at the exclusion of the lesser end, thus all five blankets have higher utility.If the Neoclassical insists that the fifth blanket has an increasing marginal utility, then the Austrian can counter that the first to fourth blankets must have increasing utility as well!!In conclusion, the Neoclassical makes two fundamental errors in the marginal utility analysis:1. The Nth good has no affect on the utility of the (Nth - 1) good.2. The 1 to (Nth - 1) good are still servicing the lower utility preference.
The fact that the second unit was used after the first unit means that the second unit is worth less. The only possible way for the "second unit" to be worth more than the "first unit" is if the ends are re-evaluated, thus, rendering the first evalutation irrelevant, thus, making the comparison between the two evaluations fallacious. In conclusion, what your professor said is wrong, and he used language carelessly.
EDIT: To clarify, when the units are re-evaluated, the "first unit" is no longer the first unit and the "second unit" is no longer the second unit.
To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process. Rabbi Lapin: "Let's make bricks!" Stephan Kinsella: "Say you and I both want to make a German chocolate cake."
uhayile:On wikipedia they also claim it is possible to have a second good have greater marginal utility that the first as a result of a tipping point (each additional blanket only provides warmth, until the nth one that allows one to make an escape rope
This is flawed logic. For blankets and warmth, the first has the most value from being cold, since without it you have nothing and the second relies on the first to increase your warmth so the utility of value is still in the same direction.
In relation to a rope, you need all the previous blankets before you get to the ninth. The problem is saying that the ninth blanket would be more valuable than the previous eight, which is nonsense. What would be of more value "escaping"? A rope of eight blankets or just the ninth by itself? After you reach enough blankets that you feel you can safely "escape" extra blankets have less value to you for this purpose but that does not mean the ones you have are valueless. It is still possible to take a riskier chance by dropping from less blankets. The utility of value is still in the same direction, starting with the first item.
"Anarchism misunderstands the real nature of man. It would be practicable only in a world of angels and saints" - Ludwig von Mises
Poptech: In relation to a rope, you need all the previous blankets before you get to the ninth. The problem is saying that the ninth blanket would be more valuable than the previous eight, which is nonsense.
In relation to a rope, you need all the previous blankets before you get to the ninth. The problem is saying that the ninth blanket would be more valuable than the previous eight, which is nonsense.
Even trying to use the cardinal value idea that makes no sense. Your teacher is just plain dumb. Sorry to say.
Maybe your teacher should remove his head from mathematical equations and graphs and try actually learn some economics. DMU applies to homogeneous goods, not physically identical goods. I don't know why people can't get this.
Freedom of markets is positively correlated with the degree of evolution in any society...
Jon Irenicus:DMU applies to homogeneous goods, not physically identical goods.
lol, thats why they dont get it !
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