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.

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.

Marx’s Law of Crises and Depressions

All five of Karl Marx’s Laws of Capitalist Motion supposedly lead to economic crises and permanent depression (Ekelund & Hébert, 1990):

• Law of Accumulation and the Falling Rate of Profit
• Law of Increasing Concentration and the Centralization of Industry
• Law of a Growing Industrial Reserve Army
• Law of Increasing Misery of the Proletariat
• Law of Crises and Depressions (p. 276-278)

Each of these laws simply highlights imperfections present in pure capitalism, if such a system actually exists. Together these laws do not constitute a valid alternative to capitalism, but taken individually they offer some valid criticism -- Marx did not leave implementation instructions though.

Marx’s law of Crises and Depressions is an extension of Marx’s increasing misery doctrine. According to Marx, a crisis would ensue and a depression would take hold because of the capitalists’ never ending propensity to accumulate -- that is, pure capitalism would be pursued, without modification, no matter what the outcome.

There are several questionable assumptions behind the notion of permanence of the Law of Crises and Depression (Ekelund & Hébert, 1990):

• Technological advances have stopped. Labor is a perfect substitute for machinery and vice versa. Does a computer replace a secretary or instead make he/she more productive?
• Machinery does not require a significant number of associated workers. Does a foundry completely eliminate the role of the blacksmith or simply change the job?
• Workers do not readily adapt to displacement by machinery from old specialized jobs and therefore develop new skills. Will new skills be in demand? Is the division of labor a curse or a blessing?
• Long cycles of low wages among a mass of workers will exist.
• The capitalist’s drive for accumulation will always be unbridled and always leads to overinvestment -- information about the general level of overinvestment in other businesses supposedly would not be available, and thereby no change in behavior of individual capitalists would occur.
• Capitalists are innately blind to the plight of the workers and that pure capitalism would always be pursued regardless of the human cost.
• Class divisions are discrete and unchanging. Clearly, a democratic form of government might alter the class rigidity and social immobility that Marx described.

Perhaps the major implication of Marx’s law of Crises and Depression is that the depression would be permanent. This would result in an expanding industrial reserve army and social revolution. In practice though there is a group of persons who are unemployed, but this pool of talent is added to and drawn from as jobs are created, worker skills change, and jobs are eliminated over time. Certainly, in the West, the industrialized nations of the Far East, and the former Soviet Bloc, the law of Crises and Depression has not held a grip on an economy for long periods as Marx suggested.

Reference

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

Alfred Marshall’s Time and Ceteris Paribus Theory

One of the most confusing aspects of economic analysis is the wide range of interrelated forces that can affect the behavior of an individual or firm over extended periods. Alfred Marshall (1842-1924) constructed an ingenious methodology for isolating the influence that these forces could exert over periods and which could be used to treat these variables separately (Ekelund & Hébert, 1990). Marshall proposed that one variable could be examined in isolation, while other variables were assumed constant. This new methodological construct called Ceteris Paribus, meaning other things being equal, allowed the researcher, who often had limited data, resources, and analytical tools at his disposal to study a phenomenon by breaking a problem into its component parts. The effect of each component part could then be ruled out in having an effect on the variable under study.

Ceteris Paribus was a breakthrough because it provided a clear name and methodology to a technique that had been employed somewhat sporadically in classical economic analysis. The Historicists among others rejected classical economic analysis in favor of their own holistic views because of the very point that economic forces were too complex overall to comprehend. Marshall’s advancement of Ceteris Paribus shattered the notion that internal and external forces exerted on both the firm and the industry were always too complex for analysis.

Marshall’s own example of the fishing firm within the context of the fishing industry gives clear examples of the importance of judicious application of Ceteris Paribus. Seasons and weather affect the demand for fish in the short run. Availability of substitutes and changes in consumer tastes affect the long run demand. Underemployed anglers and existing boats being used for other nautical purposes could then fish existing waters to help allow for responses to short-run demand. Training new anglers and building new boats allow for long-run response to increased demand. Clearly, isolating these forces allows one to choreograph changes in competitive equilibrium with some sort of rational explanation. With Ceteris Paribus, Marshall demonstrated in his example of the fishing industry that some long run and short-run factors that do affect the fishing trade can be ignored or assumed constant for short periods.

Through application of Ceteris Paribus, one can understand the problems of continuous change over time on various forces that affect demand and supply. Marshall applied Ceteris Paribus to define the relationship between changing demand and production costs with normal price and competitive equilibrium. Marshall further noted that variables held constant under a Ceteris Paribus assumption are done so on a provisional basis only—problems unfolding over long periods of time could make special study of some variables necessary to determine the validity of holding the variables constant with Ceteris Paribus.

Reference

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

Leadership Behaviors that Support Shared Values

Modeling the way is how to set the example through behavior that supports and is consistent with shared values. Setting the example or modeling the way is all about leaders doing what they say will do. Leaders must therefore execute the following principles that underlie the strategies in Commitment #7: "Set the Example by Behaving in Ways That are Consistent with Shared Values" (Kouzes & Posner, 1995, p. 232):

1. Clarify personal values and beliefs and those of others;
2. Unify constituents around shared values;
3. Pay attention constantly to how self and others living the values. There is a simple and time-honored religious principle that applies to this discussion: “We’d rather see a sermon than hear one, any day.”
   

Clearly, a leader must provide an example that matches what they are promoting. Kouzes and Posner (1995) provide the following guidance on aligning the messenger with the message:

• A. "Take a look in the mirror" (p. 232) – spend some time reflecting on who you are and what your values are in order to become more self-aware.
• B. "Write your leadership credo" (p. 233) – translate your personal values into a personal leadership credo that describes how you wish your team to proceed in your extended absence.
• C. "Write a personal tribute and a tribute to your organization" (p. 234) – draft an ideal, lofty vision of yourself and then of your organization.
• D. "Open a dialogues about personal and shared values" (p. 235) – ask your team and other important players in your organization to craft credo paragraphs and then share them, melding them into one common understanding. Go first.
• E. "Audit your actions" (p. 236) – contrast what you preach with what you do on a daily basis.
• F. "Trade places" (p. 237) – spend some time doing other jobs in the organization, especially those of your constituents, to gain a perspective of how others view your position and how you might view their positions.
• G. "Be dramatic" (p. 238) – dramatizing events is a great way of driving home points and making them memorable.
• H. "Tell stories about teachable moments" (p. 239) – look for teachable moments and then tell them as parables to instruct various constituencies; these stories will become part of the organization’s oral history.
  

Reference

Kouzes, J.M., & Posner, B.Z. (1995). The leadership challenge (2nd ed.). San Francisco, CA: Jossey-Bass.

Values in Highly Successful Organizations

Kouzes and Posner (1995) adapt three central themes from management professors David Caldwell and Charles ORielly with respect to the values that are practiced in highly successful organizations: "(1) High performance standards; (2) A caring attitude toward people; (3) A sense of uniqueness and pride" (p. 216).

It is fascinating to note that while each of the organizations studied had different business strategies, they had important core values in common. The highly successful organizations exhibited many other values but three central values that were present stressed a commitment to excellence, a concern for how others were being treated, and a sense of pride in the organization. These values must be ever present and easily measurable when interacting with employees. Employees must allow the values to influence how they work. High performance, a caring attitude, and pride in the organization must be endorsed and supported throughout the organization.

Reference

Kouzes, J.M., & Posner, B.Z. (1995). The leadership challenge (2nd ed.). San Francisco, CA: Jossey-Bass.

Dysfunctional Management Teams: Focus on Programmed Decisions

Programmed decisions are routine, recurring decisions about well understood situations where a precise set of procedures and policies have been developed to deal with their occurrence (Gibson, Ivancevich, & Donnelly, 1994). For example, shipping and installing products at a customer’s site can be handled by a programmed decision. Nonprogrammed decisions are nonroutine, possibly unique and complex, decisions where the situations do not occur frequently enough for procedures and policies to have been developed. For example, defining the market requirements and developing a new product line cannot be handled by a programmed decision making process. Procedures for making programmed decisions can be developed for almost any recurring business issue and the organization can be trained to cope with their occurrence. Methodologies exist for identifying unique problems and developing complex solutions, but there is nothing routine about the process.

There are a number of implications to how an organization handles programmed and nonprogrammed decisions, if programmed decisions can be thought of as often being tactical and nonprogrammed decisions as strategic. The executive team should be delegating decisions that can be programmed to their direct reports and their respective organizations. If the executive team is spending more time on programmed decisions than on nonprogrammed decisions, this could be indicative of a dysfunctional management team. By its very nature, the executive team should be spending more time on strategic issues and planning than on handling tactical recurring issues.

Reference

Gibson, J.L., Ivancevich, J.M., & Donnelly, J.H., Jr. (1994). Organizations: Behavior, structure, processes (8th ed.). Boston, MA: Irwin.