Learning Objectives
By the end of this section, you will be able to:
- Identify the history of utility and its relationship to economic ideas.
- Define use-value
- Contrast Adam Smith and Jeremy Bentham with regard to their view of utility.
- Contrast cardinal and ordinal utility
- Define revealed preference theory
For those interested in the study of economics the concept of utility has a long history. Going back to the time of antiquity, great thinkers such as Aristotle made reference to the importance of the creation of use-value. From an Aristotelian standpoint use-value is the idea that human material production ought to be directed toward the creation of things that benefit human beings. Aristotle prioritized usefulness and discouraged wastefulness.
The role of the utility theory of value as a central component of the preferred ideological vision of orthodox economists of today, in some ways dates back to the time of Adam Smith. Smith, continuing the Aristotelian line of thinking, also saw significance in the concept of use-value.
Use-Value – The idea that the value of an object is based on how useful the product is to the consumer. Products have an intrinsic value to their consumers.
For Smith though, use-value represented the perceived benefit that people would derive from consumption. For Smith, consumers would be more apt to buy products that they perceived as useful as opposed to products that they believed are not useful. Still, Smith’s analysis remains a long way from how utility is utilized by orthodox economists.
Although Smith does not go into much further development beyond his acknowledgement that consumers attach some kind of use-value to useful items, it is clear that Smith opens the door to the potential development of the idea that utility plays a role in determining the prices of products. Consider, if utility, or use-value, is important to consumers, then, presumably, utility must play a role in determining consumers’ interest in purchasing a product. Because consumer demand is a reflection of consumer purchasing interests, consumer demand will be essential to the determination of the prices of products. It is with the evolution of economic ideas in the 19th century that the relationship between utility and prices is cemented within orthodox economic thought.
In order to understand the role of utility in contemporary orthodox economics, the place to begin is with the early 19th century philosopher and political economist Jeremy Bentham. Bentham possibly had the most prominent influence on the philosophical development of utility. Bentham’s perspective is known as utilitarianism. Bentham describes utility as the cornerstone of the “Greatest Happiness Principle.” In Bentham’s usage, utility evolves beyond a description of usefulness into the embodiment of happiness. Utilitarianism espouses the belief that people are pleasure maximizers and pain minimizers. Therefore, any action that a person engages in must be driven by the