Utility

Utility

All men know the utility of useful things; but they do not know the utility of futility.

—ZHUANGZI[15]

In economics, utility is defined as the underlying reason for a person’s choice. Jeremy Bentham coined the term and argued that “the pursuit of self-interest [is] a rational activity based on a calculus of pleasure and pain.” It is this calculus that he aimed to cover with the concept of utility.[16] Utility, then, is a broad, general concept that aims to capture why people make the choices they do in how they buy.

There is thus a relationship between utility and value, in two ways. First, a product or service’s utility is what makes it worth paying for (i.e., gives it value). As Karl Marx put it, “Nothing can have value without being an object of utility.”[17] Second, something’s utility is tied to what we value and varies from person to person.

To the first point, regarding quantifiable economic value, something’s utility indicates what people might be willing to spend on it. Utility is directly related to how much things cost—or, as Thomas Edison put it, “Anything that won’t sell, I don’t want to invent. Its sale is proof of utility, and utility is success.” If people are willing to allocate some of their finite money for what you sell, then by definition, they expect it to maximize the utility of their expenditure.

The usefulness of additional units of any good tends to vary with scale. Marginal utility allows us to understand the value of one additional unit, and in most practical areas of life, that utility diminishes at some point. On the other hand, in some cases, additional units are subject to a critical point where the utility function jumps discreetly up or down. As an example, giving water to a thirsty man has diminishing marginal utility with each additional unit and can eventually kill him with enough units. Utility as traditionally conceived thus contains its own end. As Eric Beinhocker writes, “Diminishing marginal utility keeps consumers from consuming an infinite quantity of donuts.”[18]

It becomes trickier when we start thinking about something’s utility in terms of what we value. For example, why do I choose tea over coffee? Because tea has higher utility for me. This utility can be explained in a number of ways and is usually a combination of many factors. Maybe tea is cheaper, so I can afford more of it. Maybe the pleasure I get from the first sip in the morning is one of the best moments of my day. Maybe drinking tea is an activity I can do with others who have similar tastes. All of these reasons add up to me placing a higher value on tea than coffee. Given the choice between the two, I will choose tea due to its higher utility for me.

However, our perception of utility is also influenced by what society considers useful or valuable. While some expenditures are survival necessities, if you’re reading this, you probably have income to allocate on the basis of different kinds of utility, such as how it reinforces your identity. Utility, then, is also influenced by marketing, which is often about connecting intangible benefits to products. My tea drinking may be influenced by cultural stereotypes that suggest intellectual people drink tea (if I consider myself an intellectual) or persuasive advertisements that convince me I will have anything from more energy every day to less of a negative impact on the environment (if I value those things).

One common criticism of utility is that it is too broad a term to have real explanatory powers. Julie Nelson discusses the limitations of utility by saying that in traditional economics, the utility one gets from having children is comparable to the utility one gets from eating ice cream. Juxtaposed like this, it seems absurd to treat utility as a simple unit of measurement. “People in households act from a variety of motives and are organized in a variety of complex ways,” Nelson writes. “People face real dilemmas in their choices about where to work, what to purchase, how to form their families, and how to participate in public decisions.”[19] Often, the decision leading to the most utility isn’t clear, and really, the things that provide us utility are often complex and unique to us.

Therefore, when considering utility and the associated light it shines on value, we need to remember that not all of the things that satisfy our wants have a price tag or even can be priced.