Economics is based on two concepts; the first is the idea of the incentive, and the second (which is of greater relevance to the post) is utility. Demand for commodities, services, capital etc are all essentially derived from the desire for satisfaction and this fact justifies the placing of ‘utility’ in the centre of the structure of economics.
Traditional belief indicates that utility is directly proportional to quantity resulting in the law that a specified value of products will yield the same level of happiness regardless of who it is given to. Yet to determine the exact utility of a given amount of money, a second agent (namely income) must be introduced.
Take persons A and B; ‘A’ has a profession granting him access to an extremely high level of income and wealth. His salary is £700,000 and the aggregate value of all assets in his ownership amount to £2,000,000. Furthermore, the scale of A’s spending/saving/investing has been large for twenty years. Person ‘B’, on the other hand, has been living in relative poverty for a similar time period and has an income/wealth level of £12,000/£60,000. Now imagine both part with all their assets and are each granted £500,000 to use in any way which suits their longings.
Would it be sensible to state that the amount of pleasure gained from the money will be equal for both people? This question is not of an equivocal nature - it is indubitable that B would enjoy the given wealth to a greater extent than A due to the fact that they constitute a rise in living quality for him (whereas the opposite is true for A). This provokes the following conclusions stated below.
“The utility of a certain level of income is dependant on its standard relative to what was previously experienced”
“The lower the living standards of a person, the greater the amount of satisfaction gained from each $ of income”
The strongest piece of evidence confirming the convictions given above lies in an aspect of everyday life; however, prior to its revealing, it will be necessary to introduce new terminology relating to the concept of utility. Every purchased object requires preparation before its consumption - a cup of tea must have its ingredients bought, and then processed before being drank, and it is the inconvenience in consumption which, I think, has been overlooked in the past. Economists have been neglecting pain and focussing entirely on pleasure when analysing utility. To clear the perplexity, two new concepts are introduced below.
The total amount of satisfaction yielded by a good or service (without the inclusion of the disutility of preparation) shall be referred to as gross utility, and after having deducted the factor, we are left with net utility. This can be summarised by the equation U(n)=U(g)-Z where U(n) is net utility, U(g) is gross utility, and Z is the disutility of preparation. In order for there to be an inducement to consume, U(n) must be positive.
In society, it is far more common for those in poverty to allow no room for wastage in comparison with the wealthy. A poor man will ensure to devour every part of meat on a boned chicken and carefully count his coins guaranteeing none has been lost; a rich man, contrary wise, is unlikely to do the same. Referring back to the equation, we can assume the disutility of all actions stated will be constant for both people. The fact that the poor man carries out the stated actions but the rich man does not implies U(n) is positive for the former, but negative for the latter insinuating U(g) must be greater for those in poverty in comparison to those in wealth.
The overall connotation derived from the theory is the following.
“Whereas the inequality of income in terms of money may be extensive, the inequality in terms of utility is far less so”
Though not essential to the theory itself, below are numerous suggestions relating its propositions to economic doctrines and ideologies as well as those of religion.
Utilitarianism - This is the belief, proffered by John Stuart Mill and Jeremy Bentham (and supported by many others), of “the greatest happiness for the society as a whole”. Referring to the idea of a positive change provoking greater pleasure than continuity, if a community is to adapt the utilitarian approach, the requirement is for the poor to receive any increment in aggregate income as they are able to acquire more satisfaction out of $1 than the rich. Therefore, in the event of economic growth, the excess of:
Y(t)-Y(t-1)
must fall into the hands of the working class; where Y(t) is the income of the current time period and Y(t-1) is the income of the previous time period.
Capitalism/Communism - By indicating the donation of any increment of income to the poor, it can be said the theory is in support of communism, however personally, I feel it provides stronger approval of the opponent. Income inequality (ie the class struggles) is believed to be amongst the most major disadvantageous aspects of the capitalist society (as stated by K. Marx in the opening line of The Communist Manifesto). The aim of communism is for each and every citizen to achieve an equal amount of happiness through their wealth, and it does this by ensuring perfect income distribution across the population. The proposition stating how income inequality in terms of utility is far less extensive in comparison to that in terms of money, effectively implies capitalism has achieved communist objectives without the severe costs which accompany the planned economy.
Divine Proof? - This point is of far less significance than the two above, and is characterised with a question mark to signify my own uncertainty. The theory could, to a certain degree, be the first example of economic proof of the existence of God. The similar level of satisfaction supposedly felt be people across the nation is an idealistic situation and is something which may be a result of divine intention. Though the above appears absurd, economics has never been used as a tool of design proof and the inclusion of this point is to show a possible direction for the future world of economic thought.
In reality, the principles cannot be applied in all cases; they are, for example, appropriate only to a society free of absolute poverty (due to reasons which have, and will not be(en) explained. However, they do relate to a large sector of today’s world and their importance should not be overlooked simply because of minor faults. The independent variable of past income (or living standards) is arguably indispensable to the analysis of utility and its neglecting in past study has, questionably, resulted in the need for a reworking of theories and concepts previously put forward in regard to the concept.
Traditional belief indicates that utility is directly proportional to quantity resulting in the law that a specified value of products will yield the same level of happiness regardless of who it is given to. Yet to determine the exact utility of a given amount of money, a second agent (namely income) must be introduced.
Take persons A and B; ‘A’ has a profession granting him access to an extremely high level of income and wealth. His salary is £700,000 and the aggregate value of all assets in his ownership amount to £2,000,000. Furthermore, the scale of A’s spending/saving/investing has been large for twenty years. Person ‘B’, on the other hand, has been living in relative poverty for a similar time period and has an income/wealth level of £12,000/£60,000. Now imagine both part with all their assets and are each granted £500,000 to use in any way which suits their longings.
Would it be sensible to state that the amount of pleasure gained from the money will be equal for both people? This question is not of an equivocal nature - it is indubitable that B would enjoy the given wealth to a greater extent than A due to the fact that they constitute a rise in living quality for him (whereas the opposite is true for A). This provokes the following conclusions stated below.
“The utility of a certain level of income is dependant on its standard relative to what was previously experienced”
“The lower the living standards of a person, the greater the amount of satisfaction gained from each $ of income”
The strongest piece of evidence confirming the convictions given above lies in an aspect of everyday life; however, prior to its revealing, it will be necessary to introduce new terminology relating to the concept of utility. Every purchased object requires preparation before its consumption - a cup of tea must have its ingredients bought, and then processed before being drank, and it is the inconvenience in consumption which, I think, has been overlooked in the past. Economists have been neglecting pain and focussing entirely on pleasure when analysing utility. To clear the perplexity, two new concepts are introduced below.
The total amount of satisfaction yielded by a good or service (without the inclusion of the disutility of preparation) shall be referred to as gross utility, and after having deducted the factor, we are left with net utility. This can be summarised by the equation U(n)=U(g)-Z where U(n) is net utility, U(g) is gross utility, and Z is the disutility of preparation. In order for there to be an inducement to consume, U(n) must be positive.
In society, it is far more common for those in poverty to allow no room for wastage in comparison with the wealthy. A poor man will ensure to devour every part of meat on a boned chicken and carefully count his coins guaranteeing none has been lost; a rich man, contrary wise, is unlikely to do the same. Referring back to the equation, we can assume the disutility of all actions stated will be constant for both people. The fact that the poor man carries out the stated actions but the rich man does not implies U(n) is positive for the former, but negative for the latter insinuating U(g) must be greater for those in poverty in comparison to those in wealth.
The overall connotation derived from the theory is the following.
“Whereas the inequality of income in terms of money may be extensive, the inequality in terms of utility is far less so”
Though not essential to the theory itself, below are numerous suggestions relating its propositions to economic doctrines and ideologies as well as those of religion.
Utilitarianism - This is the belief, proffered by John Stuart Mill and Jeremy Bentham (and supported by many others), of “the greatest happiness for the society as a whole”. Referring to the idea of a positive change provoking greater pleasure than continuity, if a community is to adapt the utilitarian approach, the requirement is for the poor to receive any increment in aggregate income as they are able to acquire more satisfaction out of $1 than the rich. Therefore, in the event of economic growth, the excess of:
Y(t)-Y(t-1)
must fall into the hands of the working class; where Y(t) is the income of the current time period and Y(t-1) is the income of the previous time period.
Capitalism/Communism - By indicating the donation of any increment of income to the poor, it can be said the theory is in support of communism, however personally, I feel it provides stronger approval of the opponent. Income inequality (ie the class struggles) is believed to be amongst the most major disadvantageous aspects of the capitalist society (as stated by K. Marx in the opening line of The Communist Manifesto). The aim of communism is for each and every citizen to achieve an equal amount of happiness through their wealth, and it does this by ensuring perfect income distribution across the population. The proposition stating how income inequality in terms of utility is far less extensive in comparison to that in terms of money, effectively implies capitalism has achieved communist objectives without the severe costs which accompany the planned economy.
Divine Proof? - This point is of far less significance than the two above, and is characterised with a question mark to signify my own uncertainty. The theory could, to a certain degree, be the first example of economic proof of the existence of God. The similar level of satisfaction supposedly felt be people across the nation is an idealistic situation and is something which may be a result of divine intention. Though the above appears absurd, economics has never been used as a tool of design proof and the inclusion of this point is to show a possible direction for the future world of economic thought.
In reality, the principles cannot be applied in all cases; they are, for example, appropriate only to a society free of absolute poverty (due to reasons which have, and will not be(en) explained. However, they do relate to a large sector of today’s world and their importance should not be overlooked simply because of minor faults. The independent variable of past income (or living standards) is arguably indispensable to the analysis of utility and its neglecting in past study has, questionably, resulted in the need for a reworking of theories and concepts previously put forward in regard to the concept.
Add comment
| Promote (1) |
|
Add to favorites
|
| Create synapse |
|
