Home Page Forums Discuss Austrian Economics, Step by Step Marginal Utility of Money

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  • #13588
    John Winters
    Participant

    Professor,

    Thank you for all of your substantive and informative answers. Tom could not have picked a better person to teach this class. I’m sure that one day, people will be citing Herbener alongside Mises, Rothbard, Hayek, Salerno, etc.

    I’m wondering if you can tell me the Austrian take on the theory of the Declining Marginal Utility of Money, by which it is suggested that successive additions to one’s income produce, on average, less happiness or welfare then did earlier additions.

    My business ethics textbook suggests that this is a fact,” Richard Brandt, who says that “If we double a persons income, he will spend the extra money on items he wants less, and which will give less enjoyment than will the original income. The more one’s income, the fewer preferred items one buys and the more preferred items one already has. On the whole, then, when the necessities of life have been purchased and the individual is spending on luxury items, he is buying items which gives less enjoyment.”

    I can see this being used to support Marxist redistribution, and it doesn’t seem to me to be very scientific. Perhaps luxury items bring one more pleasure than basic items, like toothpaste etc.

    Do Austrians accept this, and if not, which of them wrote refutations?

    Thank you again

    #13590
    Jeff Herbener
    Participant

    Diminishing marginal utility refers only to equally-serviceable, additional units of a particular good that a person could possess at a moment of time. If a person has two iPhone SE instead of one, the value he places on an iPhone SE must be lower. DMU applies to money, since money is also a good that is divisible into equally-serviceable units. If a person selects the possession of $1,000 as suitable to attain an end, then having another $1,000 in his possession he would value less highly than the 1st $1,000.

    There are two problems with the claim you refer to. First, money holdings are not the same phenomenon as income. DMU refers to having additional units of a good in your possession. The MU of money is not the subjective value of the goods you can purchase by spending money. It is the subjective value of holding onto money as part of your stock of goods. Second, DMU refers to an amount of a good chosen by the person as suitable to the attainment of his end. A person may consider two iPhone SE as the unit suitable for his end if he wants his aging mother to have a phone also so that the two of them can communicate with each other. Likewise, the amount of money chosen a person as suitable for attaining his end is the unit of money. It is arbitrary, therefore, to conjecture a doubling of a person’s “income” as appropriate to think out the logic of DMU.

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