The concept of utility in economics refers to the pleasure, or relief of pain, associated with the consumption of goods and services. The terminology is derived from the utilitarian theory of social choice proposed by Bentham in the 18th century. Disregarding the difficulties of constructing a numerical measure of utility, Bentham based his utilitarian theory on the proposition that political organisations should be organised to achieve ‘the greatest good of the greatest number’ by maximising the sum of individual utilities.

Although utilitarianism, with its emphasis on rational optimisation, was compatible with the spirit of classical economics, economists made little use of utility concepts until the neoclassical ‘marginalist revolution’, associated with the names of Jevons, Menger and Walras. Their central insight was that the terms on which individuals were willing to exchange goods depended not on the total utility associated with consuming those goods, but on the utility associated with consuming the last or ‘marginal’ unit of each good. The critical point is the principle of diminishing marginal utility, based on the observation that consumption of any commodity, such as water, is first directed to essential needs, such as quenching thirst, and then to less important purposes, such as hosing down pavements.
It is the utility associated with the marginal use of the commodity that determines willingness to engage in trade at any given prices. The use of the principle of diminishing marginal utility led to a resolution of the classical ‘paradox of value’, exemplified by the observation that, wherever water is plentiful and diamonds are not, diamonds are more valuable than water, even though water is essential to life and diamonds are purely decorative.
The principle of diminishing marginal utility had egalitarian implications which Bentham almost certainly did not anticipate. If the marginal utility from consumption of an additional unit of each individual commodity is diminishing, the marginal utility from an additional unit of wealth must also be diminishing. If utility is represented as a real-valued function of wealth, diminishing marginal utility of wealth is equivalent to downward concavity of the utility function. If all utility functions are concave then, other things being equal, an additional unit of wealth yields more utility to a poor person than a rich one, and a more equal distribution of wealth will yield greater aggregate utility.
The rise of positivism and behaviorism in the early 20th Century reduced the appeal of theoretical frameworks based on the unobservable concept of utility. The ‘New Welfare Economics’ developed by Hicks (1938) and others, showed that ordinal concepts of utility, requiring only the use of statements like ‘commodity bundle A yields higher utility than commodity bundle B’ were sufficient for all the ordinary purposes of demand theory and could be used to derive a welfare theory independent of cardinal utility. An ordinal utility function allows the ranking of commodity bundles, but not comparisons of the differences between bundles.
Opponents of egalitarian income redistribution also attacked the use of cardinal utility theories to make judgements about the welfare effects of economic policies. Robbins’ (1938) claim that all interpersonal utility comparisons were ‘unscientific’ was particularly influential in promoting the idea that cardinal utility concepts should be avoided. The basic difficulty is that there is no obvious way of comparing utility scales between individuals, and, in particular, no way of showing that two people with similar income levels get the same additional utility from a given increase in income.
The apparent coup de grace was given by Samuelson’s (1947) recasting of welfare economics in terms of revealed preference. Samuelson showed that, the standard theory of consumer demand could be constructed without any overt reference to utility. Even the use of ordinal utility, Samuelson suggested, was purely a matter of expositional convenience. The analysis of consumer demand can be undertaken using only statements about preferences. Samuelson’s claim is correct in a formal sense.
However, consumers will have well-defined demand functions only if preferences over bundles of goods are convex, that is, if a bundle containing an appropriate mixture of two goods is preferred to either of two equally valued bundles each containing only one of the goods. The only plausible basis for postulating this kind of convexity of preferences is the principle of diminishing marginal utility.
Moreover, as is discussed , cardinal utility was no sooner driven out the front door of economic theory than it re-entered through the back gate of game theory and expected utility theory.
Bibliography

Robbins, L. (1938), ‘Interpersonal comparisons of utility: a comment’, Economic Journal 48(4), 635–41.
Samuelson, P. (1947), Foundations of Economic Analysis, Harvard University Press, Cambridge, Massachusetts.

For most of the 20th century, growth in the scale and scope of government activity appeared to be an irreversible trend in developed economies, at least those that had not embraced full-scale socialism. Many observers predicted gradual convergence between the economic systems of the capitalist and communist blocs, with the final outcome being some form of mixed economy.
Expansion in the scale of government activity was primarily the result of expansion in the importance, relative to the economy as a whole, of the services provided by government, such as health, education and social welfare services. Expansion in the scope of government activity was the result of a range of policies including the nationalisation of private firms. Outside the United States, most infrastructure services, including railways, airlines, electricity and telecommunications were nationalised. Beyond the infrastructure sector, nationalisation policies varied from country to country, but included a range of financial services, manufacturing and mining.
The case for nationalisation rested in part on socialist views about the undesirability of private profit. In the mixed economy, however, no fundamental challenge to the legitimacy of private business was posed. Arguments for nationalisation of particular industries rested on the view that governments would manage these industries better than private owners, by avoiding the exploitation of monopoly and by undertaking better-planned investment.
By the 1970s, however, disillusionment with the performance of nationalised industries was widespread, and a range of theoretical arguments in favour of private ownership were developed. These arguments focused on the role of private capital markets in guiding investment and disciplining the managers and employees of businesses.
The first large-scale privatisation program was that of the Thatcher government in the United Kingdom during the 1980s. Other English-speaking countries, including Australia and New Zealand, followed the UK lead. Privatisation soon became part of the political orthodoxy throughout the world, especially after the collapse of the Soviet Union.
By the beginning of the 21st century, however, the first signs of a resurgence of public ownership were becoming evident. The collapse, and effective renationalisation, of Railtrack the privatised owner of the British rail network was an indication that governments could not walk away from the consequences of poorly-designed privatisations. Other English-speaking countries, which had taken the lead in privatisation, also appeared ready to reconsider the issue. New Zealand has renationalised its airline and accident compensation scheme, and re-established a publicly-owned bank.
The arguments for and against privatisation have become more sophisticated over the years. However, no final resolution of the debate is likely in the near future.

Like some other Ozploggers, I’m counting on my readers and commentators to keep the blog alive while I eat, drink and make merry for at least the next week! Comment on any topic (no coarse language and civilised discussion please).

Yet another excellent piece from Ross Gittins

This is my first Christmas since I started blogging, and it’s a particularly big one as my son Leigh is getting married early in the New Year! I’ll be returning to the Deep North (Townsville and further) for a couple of weeks. The TiBook is coming with me, so there may be occasional posts, but obviously I’ll have more important things on my mind than blogging. Judging by visitor numbers over the past few days, a lot of readers have already blogged off, but I still feel the need to supply something for those who remain. Ken Parish has dealt with the problem by addressing a set of questions to his readers and letting them argue it out. The debate seems to be moving along pretty well, particularly on the perennial question “What should Labor do next?”. I’ll try to post the Monday Message Board as usual, but I thought I’d try something different.

Using the “Future post” facility of Blogger Pro, I’ve put up a series of posts on various aspects of modern thought (part of the dictionary project in which I’m involved) to be published at a rate of one per day. I’d really appreciate your comments. But if you’re the kind of person who prefers to rip open all their presents at once, the whole series is already available over at Modern thought.

I also plan, if I get time, to implement the “Best of …” feature discussed a while ago, resurrecting posts I found interesting and using them to fill programming gaps in the non-ratings season.

In case I don’t get back to blogging till 2003, I wish all my readers peace and happiness for the New Year and all who celebrate it a Merry Christmas.

Alan McCallum has weighed with a rural view of the debate on urban heat islands . I’ve taken the liberty of reproducing his short post in its entirety

As promised in a comment to a post by John Quiggin, here is a splatter diagram of all available Oz rural stations. It is a mistake to believe that because there is a pronounced difference between cities and rural areas [urban warming, or UW] that warming trends are not happening at rural climate stations. I can duplicate this exercise for the world, or assign world stations to about a thousand zones and average in each zone etc etc. The result is the same: The RURALS, as measured, and taking all of them into account, are warming!! Next question??

Don’t just look at the diagram though. Visit Alan’s site for a fascinating comments on a wide range of issues. Alan and I disagree on a lot of things (he lists me as his ‘token leftie’), but I think we agree on a lot of basic values and a fair number of specific issues.

Like me, Alan started getting leery of Keith Windschuttle when he mounted his attack on Popper. And I’m pleased to say that reading Lomborg converted Alan’s view of the global warming issue from “sceptic” to “fence-sitter”. He says

I still think that the data is not in, but just because the data is not in it is still possible to take a “guess”. And this “guess”, the mainstream scientific opinion, is probably right to some extent on the simple grounds that it is [almost] impossible for me to imagine either a major conspiracy, or a complete failure of the peer-review system. If either possibility were true Science is in serious difficulties.

This isn’t far from my own view of the issue, though I see the evidence as a bit more solid than Alan does, certainly enough to justify precautionary actions like Kyoto.

Update Aaron Oakley at Bizarre Science has blogged at inordinate length about the fact that I didn’t provide statistical evidence of significance here. He doesn’t appear to have noticed that I am linking to a scatterplot drawn by Alan McCallum, so obviously I don’t have the original data. In any case, I presented a statistical analysis months ago showing that the upward trend in global temperatures is indeed statistically significant, and Oakley commented several times, so he’s well aware that this issue has been resolved.

Here’s one for Uncle at ABCwatch. An ABC news report with the headline ” Polls show Labor support still sliding”. The report starts

Two polls out today say the Labor Party is continuing to lose support.

but the actual news is that

The Morgan poll said if an election was held this month, it would have been too close to call as the two-party preferred count is close.

before going on with a brief summary of a Newspoll, reported in more detail in the Oz under the headline Labor’s faithful desert Crean The key finding

According to a quarterly Newspoll analysis of polling in marginal and safe seats, done exclusively for The Weekend Australian, the Coalition’s support has risen in key marginal electorates from 41 to 44 per cent, while Labor’s is unchanged on 39 per cent.

At the November election, where marginal seats determined the Coalition victory, Labor support was 40 per cent and the Coalition’s 42.8 per cent. Were an election held now, the figures say the Coalition would have a clear victory.

So we have two polls, one showing a dead heat and the other showing a tiny swing to the Coalition on first preferences (the rise of the Greens, whose preferences strongly favour Labor, would probably offset this). Of course, Howard is romping in on the “preferred Prime Minister” poll, but the incumbent nearly always leads on this measure

In my view, the reporting of these polls is indicative of bias, but not of party-political bias. Rather it is the bias of the conventional wisdom (this marvellous phrase, like many others is due, I believe to JK Galbraith). The CW has it that Howard is sitting pretty and so evidence is reported as reinforcing it, even when it is, at best neutral.

Ross Gittins is one of the few economic commentators who understands that leisure and a pleasant working life are just as important as production, if not more so. In this piece, which came out when I was moving house, he asks

If micro-economic reform has been as hugely successful as the econocrats keep assuring us – and as the productivity figures confirm – why has the reform process virtually ground to a halt? Why have our politicians been struck down by “reform fatigue”?

and concludes that many of the apparent benefits of microeconomic reform are ‘false economies’. I get a nice mention as a ‘neoclassical iconoclast’.

While we’re on the subject of world-class cliches, does anyone else find “back to back”, as in “back to back premierships” a trifle bizarre? Applied to people, or to any objects with a back and a front, it implies “facing in opposite directions”. And after putting two wins (or whatever) “back to back” what are you supposed to do with a third?

I’m definitely in a minority of one in thinking that the odds of war with Iraq have declined over the past month. The Slate Saddamometer has the odds rising from 50 per cent, just before the Iraqi declaration (or non-declaration) to 72 per cent after Powell’s declaration that Iraq was in ‘material breach’. And virtually every newspaper commentary has declared that war is on the way.

It’s true, contrary to my expectation, that the Iraqi government seems to have made no serious attempt to account for (or even explain away) the stocks of WMDs that were unaccounted for in 1998. I’m more impressed, though, by the dogs that haven’t barked in the night. Two are particularly notable. First, at any time after the declaration, the US Administration could have brought the process to an end by producing the clear evidence it had claimed (or at least strongly suggested) it had of Iraqi weapons programs. Second, on Thursday the US could have declared that the omissions in the Iraqi declaration were, in themselves, grounds for war.

Now that neither of these has happened, the decision has pretty clearly been deferred until Blix reports on 26 January. According to todays NYT, the US will now begin handing over its evidence to the inspectors, but no-one seems to expect too much from this.

Obviously, if the inspectors discover weapons (or a susipcious factory with locked gates and armed guards) the game is up for Saddam. The same is probably true if interviews with Iraqi scientists produce a really convincing defector, though presumably such a defector could point the way to physical evidence in any case.

But the likelihood that the inspectors won’t find anything and won’t face serious obstruction has risen, not fallen, in the last month. Over a hundred sites have already been inspected, including those that the US and UK governments pointed to as most suspicious. Apart from a couple of low-grade incidents where the person with the keys was out to lunch, there don’t seem to have been any compliance problems. Presidential palaces, supposedly an insuperable sticking point, have been opened up promptly.

Suppose that this continues until 26 January. By then, hundreds of sites will have been investigated, the best US intelligence will have been tested out, and the key Iraqi scientists will have been interviewed. If nothing has turned up, I can’t see how Blix’s report can possibly provide Bush with a casus belli. And by then, it will be too late to go back to the omissions in the declaration.

If I thought that those predicting war had some particular expertise, I’d defer to their wisdom. But on issues of this kind, I’m happy to back my own judgement even against an overwhelming majority. After all, I’d be willing to bet that most of those reproducing war hype today swallowed the hype about Y2K three years ago.