I guess I’ve decided that I’m going to start all of these off with quotes. It didn’t take very long to pick this one, given that Economics 102 was about value. “Nothing can have value without being an object of utility.” - Karl Marx. If you haven’t read what I wrote about value, I’d honestly suggest going back and reading it. Not because I think it’s the best explanation of what value is and why it’s so important, but because I don’t want to waste time having to re-explain more than I have to. I don’t like too much redundancy, but, also, I’m lazy.
So, anyway, utility. I think Marx’ statement is spot on. Before, I jumped into asking where price comes from and how value gets distributed to people who produce things. Let’s call that the production side of things. The side that I didn’t spend much time on was the consumer side of things. The person paying 54c/pound for bananas. The why those bananas were grown and shipped off to some distant grocery store display. You, as an individual, were willing to pay for them. You were willing to pay for them because they were useful to you in some way. In the specific case of a banana, potentially as a morning snack or as a pancake ingredient or as an eventual compost ingredient. At each step in the process of getting those bananas to you, someone was willing to pay some amount of money to the previous person because they felt that they would have some use for those bananas.
I don’t want to dive too deeply into the philosophical side of this, but I do want to make a clarifying statement before I continue. There needs to be a distinction between things that are created for “use value” (knitting a blanket for yourself) and things that are created to be a “store of value” (baking a pie that you plan to sell or exchange for something else). In general, I’m going to spend time thinking about the second type, the commodities. The things we produce for ourselves also have utility, but I don’t think that they are significantly impactful on the bigger society picture until they’re reclassified as something that other people can gain the benefits of as well - not necessarily for free. In any case, all of this to say that you should keep in mind that the comments I make are about the commodity side.
There are 5 types of utility that are generally considered in economics.
- Form - things that are more useful. It's easier to buy a fully assembled car than to go through the trouble of gathering all of the parts and putting them together
- Place - having goods/services where they're accessible to people who need or want them. Grocery Store.
- Time - having goods/services available when they're wanted or needed
- Possession - the usefulness of things once you have them. Having a cellphone makes communication on the go easier.
- Information - it's hard for something to be useful if no one knows about it.
We as individuals mostly pay for the first four. Information utility is a bit tricky and mostly gets tied to marketing. Anyway, the types above are fine and dandy, but I'm honestly not that big of a fan. So, I’ll describe how I choose understand utility:
I’m going to call the first part survival utility. We are willing to pay for food because without it we feel pain, don’t function well(looking at all of us hangry people), and after sufficient time starve. In the same thread as food are things like housing, healthcare, and security. All of these things get lumped into the most basic question of utility: “Does this help me survive?” In general, handling our day to day survival is pretty important to people. It might not always be the first thing on our mind, but we generally try to feed ourselves (I do at least). So, when we tie this back to the price of food, a solid chunk of the utility of that food is potentially tied to the fact that we need to eat it to survive. But, keeping that in mind, we can move on to the next segment of utility.
I’m going to call that next segment pleasure/comfort. When you go to the grocery store, sometimes you can buy the “good” brand of something or the “cheap” brand (I put good and cheap in quotes because they’re pretty subjective). If money is tight, there might not be much debate over which you’re going to buy, but if you have extra laying around you might decide to go for the better option. The better option might taste a little better or last longer or any number of different things that distinguish it from the cheaper option. The bottom line is, you’re willing to pay extra for the extra utility of having something that you don’t 100% need, but is nicer to have.
The third segment of utility is even more subjective and potentially ambiguous than the second. I’m going to call this section sociological benefits. Since I have no clue how to best package a definition, I’m going to give a few examples.
The purpose of fashion is to demonstrate that we can afford to throw away last year’s look and buy a new look, even if the old clothes are still perfectly good.
Parents want their children to go to an Ivy League school, even though there may be better options in terms of actual learning. Particularly, by attending them one gets access to a social world.
Keeping up with the Joneses. In terms of happiness, it is not our absolute wealth that matters as much as how wealthy we are in relation to our friends, neighbors, or co-workers.
Sociological benefits can effectively be boiled down to consumption for status. Now of course, not everyone fits into this framework neatly, but it’s worth considering in the context of utility. Consumer culture is to a great deal driven by this segment of utility.
The last segment of utility is mostly a catch all for anything that didn’t fit into the previous categories. For me at least, I think of this last portion as the “feel-good” section. The things that we value because they’re beneficial to our family or our community or because of our core beliefs. I don’t think that most of these things can fit squarely into any of the other categories, but there’s no denying that it often feels good to help other people. And it often feels good to make things better even if no one else, potentially not even you, will benefit meaningfully. The example I’d use for myself is something like putting the discard pile of playing cards into a perfectly neat stack. It doesn’t put them in a better position to be shuffled later, but putting them in order is appealing - in addition to the fact that it wouldn’t necessarily bother me if they weren’t perfect(maybe a little).
My four sections actually echoes Maslow's hierarchy of needs(not a fan of that either), which isn't all that surprising. In any case, the point that I'm most interested in is that we can(to some degree) measure how something is or would be useful to us as the combination of how it would be useful through each of the four categories. That combination is Total Utility.
In any case, the board is mostly set, but there’s one more necessary piece. I have to apologize in advance and tell you that this final definition is something very economics-y. We need to talk about marginal utility(you probably saw it above). Marginal utility is how much utility you would gain by having a tiny bit more of something. The best way to explain might be to go back to the bananas(yes, I go back a lot). You bought that one bunch of bananas for a few bucks. Let’s say there were 6 bananas in the bunch. Maybe you have 1 with breakfast each of the next 4 days and then use the last 2 to make pancakes on the 5th day. What if you could have bought a bunch with 7 bananas? Seems reasonable, get one more day of breakfast. What if there were 8? Or 9? Or 34?
As the bunches get bigger, the next extra banana becomes less useful to you. At some point in time, the total use you can get out of more bananas stops increasing - it might even become negative as your house becomes filled with bananas and they start rotting before you can figure out what to do with them and you become overrun by fruit flies and all of this talk about marginal utility seems irrelevant. The bottom line is more is only better to a certain extent. There comes a point when it’s not making your life better. (Note: There are some who would say that you can never have enough shoes - I don’t know anything about that)
Ok, summary. Utility is as important to the value of things as cost of production. In general, utility can be segmented into 4(ish) parts: Survival, Pleasure/Comfort, Sociological Benefits, and Feel-good. I’d like to think that this is the order of their importance, for most people. There’s this other concept, marginal utility, which is enormously useful to understanding utility when people are deciding whether to spend on more of something. This is to some degree an oversimplification, but I think we’re okay. I think we’re just about to the point of being able to put everything together.