lfb.org / By Jeffrey Tucker /
I’m at dinner and the hostess serves me pie for dessert. I gobble it up. Then the hostess says, “Would you like another piece?”
I politely decline.
In her head, she is thinking “he hates my pie,” but this is totally wrong. I love her pie, especially the first piece. But the second piece has slipped from A to B in my preference ranking, and “no pie” has moved from B to A. Im are not making a judgment on the whole stock of goods, I’m choosing based on my perceived value of the incremental unit. This is a gigantic difference.
“So you don’t like my pie enough to have a second piece?”
“No, I absolutely adore your pie. When I had the first piece, it was the most important thing in the world, and I went wild for it. But when you offered the second piece, I evaluated it as an independent unit of pie. I still love it so much! But eating it is B — not A — on my internal preference ranking. If the option to decline the pie were not present, I would eat it and be overjoyed. It just so happens that what economists call the marginal utility of the second piece is lower than the first, too low to be a point of action for my choosing person.”
“I see. You hate my pie!”
What’s going on here? The hostess doesn’t understand this idea of marginal utility as I do.
Having been steeped in this topic now for the better part of a week — all in anticipation of the release of Philip Wicksteed’s Common Sense of Political Economy — I can see why two generations of economists, from the 1870s-1910s, were in a total meltdown frenzy over the concept of marginal utility. This is an idea that can save the world.