Another Reasonable Dialog

Now let's put this into context -- the context of the 200 year reasonable dialog that is economics. We can express it as a dialog between a skeptic (perhaps a student) and a committed neoclassical economist:

Skeptic:

I don't see how a "theory of demand" is possible. People demand different goods and services for all sorts of different reasons.

NE:

The economist's strategy is to abstract from all that. What all goods and services have in common is that they give the consumer satisfaction -- "utility" -- and our theory of demand is built on just that.

Skeptic:

That doesn't sound very promising! Can you say anything worthwhile at that level of abstraction?

NE:

That's just what the utility approach does, and it shows that we can say important things without worrying about all the reasons why people buy things. At the least, it gets rid of the Paradox of Diamonds and Water -- a wrong turn that confused economists for 100 years. That's pretty important, abstract as it is. It brings the idea of "marginal" utility to the fore. As we'll see, that has many more applications in microeconomics, and a few in macroeconomics as well. And it gets us started in the practical business of cost-benefit analysis. We're going to follow up that lead next.

Skeptic:

OK, I guess that proves the trick can be done -- but at what price, if you will excuse the expression! I have some problems with this whole utility approach.

NE:

Tell me what they are.

Skeptic:

What bothers me the most is this whole idea that the person's total satisfaction can be expressed as a number. I know that idea came from philosophy -- from the founder of Utilitarianism, Jeremy Bentham, to be specific -- and that some of the early neoclassical economists were followers of his, so they weren't bothered by that numerical stuff. But I think they were hasty -- it bothers me.

NE:

It bothered some of them, too, and it didn't take long for some of them to come up with alternative. It turns out that all we really need is consistent preferences. That is, suppose the consumer prefers five gallons of water and one diamond to fifty gallons of water and two diamonds. As long as those preferences are consistent, we can just use the preferences -- no utility numbers -- to get a theory of demand. Once again, we have to translate from barter (diamonds for water) to money exchange (diamonds for money). But once we do that, the theory is the same. So far as demand theory is concerned, it doesn't matter which approach we choose. Of course, there are a lot of technical details there we aren't going to go into in this introductory course.

Skeptic:

I'm supposed to trust you on that, huh?

NE:

You could sign up for Econ 201, Intermediate Microeconomic Theory. That's where we go into all these details. Or we could go ahead and look at the preference approach here.

Skeptic:

Let's do it!