Monday, June 25, 2007

Jevons’ Utility Theory

Much of William Stanley Jevons’ (1835-1882) work in utility theory was his alone, especially the discovery of marginal utility (Ekelund & Hébert, 1990). Later he realized that others such as Dupuit and Cournot preceded him, to which he aptly gave credit. Nevertheless, Jevons’ work went beyond others in that he recast value theory in terms of utility maximization. Jevons was at heart a statistician and he expressed reservation that subjective analysis of an individual’s pleasure and pain (i.e., net utility) were at best only ordinal (not cardinal) estimates of the actual values around which valuation of goods in the entire economy revolved. Being the empirical statistician that he was, Jevons did not state that utility was directly measurable, but instead he defined the utility function as a relationship between the consumption behavior of an individual and the ethereal act of valuation.

Like Jeremy Bentham, he argued that positive utility was simply the net gain of pleasure over pain in the use of a commodity in four types of circumstances: (1) intensity; (2) duration; (3) certainty or uncertainty; (4) nearness or remoteness. Unlike Bentham, he distinguished between total utility and marginal utility, analysis of marginal utility and definition of the equimarginal principle. These were the hallmark of his study.

Jevons noted the difference between the additional utility provided by an additional unit of the commodity vs. the total utility of all the units of the commodity consumed to date. In summary, within a given time period the increase in utility offered by the addition of units of a commodity is not linear. In fact, it will decrease total utility if more units are added. For example, those first bites of a meal are of high utility and the last bites of the meal are comparatively the lowest in utility.

Further applications of Jevons’ utility theory can be seen in the Equimarginal Principle and Theory of Exchange. The Equimarginal principle illustrates how an individual maximizes behavior by allocating to uses in utility-equivalent portions. The Theory of Exchange shows how a trading body comprised of individuals maximizes utility by trading goods that have different marginal utilities.

I disagree with Ekelund and Hébert (1990) that the concept of a trading body always constitutes a “fallacy of composition” (p. 365) in aggregating the members’ individual utility functions because the participants in a trading body could be assumed to have implicitly charged the corporate body with the fiat to make utility maximizing decisions for all, at least for purposes of analysis of the trading body and not an ordinary group. Therefore, increasing the group’s utility (i.e., maximizing general welfare) could constitute a maximization of utility for most of the individuals, by definition.

(For purpose of analysis of a trading body, it seems wise to assume that if one has improved the utility of a group in the aggregate, that most of the members of the group are better off, because of the presumed choice to be part of the trading body. An example might be defending the country against a hegemonic enemy, whereas the country as a whole is better off, but the intensity of pain and pleasure among citizens may vary drastically. This is unlike the specific case of criticism of Jeremy Bentham’s conclusion on p. 131 of the Ekelund and Hébert (1990) where total welfare is calculated by summing the individual welfares. In sum, apportionment of utility seems wise where aggregation does not.)

Reference

Ekelund, R. B., Jr., & Hébert, R. F. (1990). A history of economic theory and method (3rd ed.). New York: McGraw Hill.

Monday, June 11, 2007

Data Collection Examples and Strategies

New Housing Development. A personal interview may be the best way to adjust the stream of questions to probe about specific problems experienced by the residents of a new neighborhood. The fact that the respondents live in a new neighborhood may make telephone and mailing lists unavailable. The open-ended nature of a study about what they like and dislike about life in a small subdivision may require probing on the part of the interviewer. An advantage of a personal interview in this situation is that the respondents are physically close together and that the newness of the neighborhood may make the respondents more approachable.

College Students Voting for Student Government. The university environment would make it difficult to use telephone or mail surveys. Some students may not have a telephone number, and if they do, they may be difficult to reach or they may be from only one particular socio-economic class. A mail survey would probably take too long to reach the students and be responded to, especially with off campus students. A personal interview including a small set of screening questions such as age, gender, ethnic background, and income conducted in the student union building would probably yield results accurate enough to project a favored candidate for the presidency.

Human Resources Professionals in Grocery Distribution. A personal interview of this population would be extremely expensive. However, with only few major companies involved, it is desirable to contact almost all of the companies. A telephone interview is a reasonable compromise from contacting each one personally. A mail survey would probably result in very low response rate, and a higher response rate is needed because of the small population, so it is not recommended.

Attitudes toward Economic Outlook by Fortune 500 CFOs. This is a hard to reach, geographically spread out group of respondents. Personal interviews would be far too expensive. Mail surveys may not be returned in sufficient numbers. The closed-ended nature of the mail survey may limit the answers given. A telephone survey seems provide the best balance of expense, accessibility, and flexibility. Furthermore, a telephone interview would give the greater flexibility needed to probe and get predictions for the next year’s economic forecast. If the research budget is limited, then a mail survey would be the best choice.

Surveying Retail Pharmacies. This audience could be very numerous and spread out geographically. This topic would be of great interest to this audience, not always typical of mail surveys, so a high return rate would be possible. A mailing list for this audience could be easily secured. The expense of a personal interview would not be necessary, as the respondents are too many in number and too spread out geographically. Telephone interviews would yield good results, but the extra expense would not be justifiable.