Utility

Economics concept #1

So, the first concept that’s hopefully already obvious:

People want stuff.

In other contexts, we would separate “want” and “need,” but that’s not necessary here, because our brains are wired to want the things we need. If you need water, you feel thirsty, which makes you want water. If your body is losing heat too rapidly, you feel cold, which makes you want shelter or warmer clothing. And so on.

Traditionally, introductory economics divides the stuff we want into goods and services. Goods are physical things, like a hamburger or a car or a chair. Services are things people do for us, like haircuts or dental cleaning. But we can make it simpler – and avoid a problem that we’ll look at later when we cover common misconceptions – by combining them into a single idea:

People want to be happy.

We want goods, services, and less tangible things like friendship and mental stimulation because these things make us happier than we would be without them. In economics, anything that makes someone happier (or less unhappy) is said to have utility. Outside economics, that word means usefulness, so in a sense we’re saying things are economically useful if they make us happy.

Of course, “us” is a little misleading here. What makes one person happy doesn’t necessarily make someone else happy, or bring a different person the same amount of happiness as the first. Utility is subjective, not objective, and varies from person to person and even moment to moment. A peanut butter sandwich has a lot of utility for a hungry person, far less utility for someone who has just eaten, and none at all for someone with a peanut allergy, who is in fact better off without it than with it. This raises the question of how we measure differences in utility.

The answer is that we don’t. It’s not for lack of trying. A lot of people have put a lot of effort into coming up with a way to measure utility, but human psychology is just too complicated for that to be possible. Economists sometimes refer to the imaginary unit “utils,” but these are only useful for thought experiments, not describing actual decisions humans make in reality.

That doesn’t mean it’s impossible to compare the utility of two different things, though. We’ll get to that next time.