Summary: One concept I’ve touched on with many of my pillars and “bad guy quotes” since we started the podcast a year and a half ago is “Utility.” It’s a concept that is used in economics fairly regularly but I don’t think that the average citizen has a real firm grasp on what it truly is. And after doing a bunch of research, there doesn’t even seem to be a good resource anywhere that I have found that talks about what it philosophically means. All of the economics blogs and articles I’ve read delve too quickly into how to quantify it and fun graphs and calculations. So I wanted to take a pillar and really dive deeply into what it means. I don’t even know if the way I look at it is truly the proper way to describe it, but it’s one of those concepts that is really worth thinking about because you can apply it to so many situations to make a little more sense of why things cost what they cost, and how much value we derive from things. It’s almost more of a psychological concept than economic, at least the way I see it, and can be applied to many situations that help us better understand why things are the way they are. “Utility” is the measure of satisfaction we gain from consuming something. Now a while back, Perek did a great pillar about money and how it’s an indicator of value, but there are some problems with using cost and prices to determine the value of things. One of the biggest problems is that price is a crappy way to measure our satisfaction because everyone’s preferences and what money means to people is different. A $100,000 car would give me a larger amount of satisfaction than it would for Bill Gates. A $3.00 hamburger means a lot less to me than it would for a starving kid from India. You get the picture. Taken even a step further, the satisfaction we derive from something changes even for a single person based on our circumstances. An ice cold beer provides more satisfaction for me, for instance, after I’ve just mowed the lawn on a 100 degree day, than the 9th beer I have at the end of a night of partying. So even though that beer “costs” the same in both situations, the first beer after mowing the lawn is “worth” more to me than that 9th one. The lawn beer has more “utility.” You also can’t measure satisfaction of less tangible things with money. The feeling of satisfaction I get from a sunny, crisp fall day is not something that I could easily attach a monetary value to, but it definitely still has “value.” So it’s helpful to have a concept like utility to talk about our relative satisfaction. Economists even have units that they can measure utility with, and they came up with the creative name of “Utils.” Using utils is a meaningful way to quantify these abstract concepts like a sunny day, or a cold beer. That lawn beer might be worth 100 “utils” whereas that 9th beer at the end of the night might be worth only 5 utils to me. Heck, if that beer gives me a hangover the next morning, I might even say that it has “negative utility” and I could assign a value of -10 because it detracted from my overall sense of satisfaction and well-being. So these utils are a fun thing to play around with and economists love drawing graphs that have utility curves. I don’t like to get too crazy with trying to quantify these abstract concepts, but as an example, I could draw a beer utility curve that describes how much I value each beer as I consume them during a night. It would rise steeply at first, but with each successive beer I drink, the “Marginal Utility” of each beer gets less and less until it finally goes negative when I’ve had too much. So the fact that “at the margin” each beer is worth less to me, is the concept you might hear called “Diminishing Marginal Utility.” So that’s as deep as I care to get right now in terms of really trying to quantify it. But again, “utility” offers us a way to talk meaningfully about our preferences. Once we have a good understanding, (To use a term from my college calculus professor, “y[...]
