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Economics, Methodology, Philosophy

Is a Small Amount of Money More Valuable to a Low Income Person than to a High Income Person?

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I answered this question over at Quora. Just about all the other answers were wrong, so I thought I’d set things straight.

No. Value is not a quantity. It cannot be compared across individuals, so we cannot say that $50 is more valuable to person A than to person B.

To understand value, you must understand action. To act is to select one thing and set aside another. Thus, an ability to evaluate one thing over another is a necessary prerequisite to action, one that all mentally functioning humans possess. Valuation is always a comparison between two alternatives. It is a comparison made in the mind of an acting human.

Because the high income person and the low income person are different individuals, their valuations cannot be compared. We could say something like, “the low income person values an hour of his time less than $50, while the high income person values an hour of his time more than $50.” But this does not mean the low income person values $50 more than the high income person does in any absolute sense, because an hour of time is not the same to different individuals.

Some people have said that the answer is yes because marginal utility decreases with quantity. This is a misinterpretation. It is true that people tend to value additional units of a stock of interchangeable consumer goods less with each additional unit. This is because a person will use the first unit of the good to satisfy his highest unmet need, the second unit to satisfy his second highest unmet need, the third unit to satisfy his third highest unmet need, and so on. Thus, marginal utility does decrease with quantity. But it only meaningfully decreases with respect to other goods! If I have five dumplings, I might value an additional dumpling more than a battery, but if I have six or more dumplings I might value the battery more than an additional dumpling.

While I value things less with each additional unit, we can’t take this to mean my valuation of my total wealth must decrease as I grow wealthier. Total wealth comprises everything, leaving nothing to compare it against, so valuation is meaningless.

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Education

Teaching Economics: Age of Empires and Central Planning

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When I was young, I played a lot of Age of Empires. For those who are unfamiliar with the series, they are games where the player must direct a tiny civilization’s development. He begins with one building and only a few villagers. By right clicking on a villager, then left clicking on a tree, stone mine, gold mine, or animal, the player can direct the villager to gather wood, stone, gold, or meat. He can also direct villagers to make buildings. And with buildings, he can recruit more villagers or soldiers.

By directing every action of every person in his civilization, the player can eventually turn his tiny village into a sprawling city, clashing militarily with other players’ civilizations.

I think a game economy like that one could be a good teaching tool for young people. In the early stages of the game, centrally managing a few villagers works well. But as the civilization grows, the player’s attention becomes more stretched. It is common, in the game economy, for the player to discover a group of villagers clustered around a (now exhausted) mine or forest. The growing economy becomes ever more difficult to manage, and it becomes more difficult to coordinate the growing numbers of workers and soldiers. Continue reading Teaching Economics: Age of Empires and Central Planning →

Podcast

Jane Jacobs as Spontaneous Order Theorist with Pierre Desrochers

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This episode of Economics Detective Radio features Pierre Desrochers discussing the life and work of Jane Jacobs. Jacobs, born Jane Butzner, was a thinker and activist who wrote about cities. She spent her early career as a business journalist. When she started writing about urban renewal, she recognized the policy for the disaster it was. Jacobs became a voice for the general dissatisfaction with a policy that would bulldoze whole neighbourhoods, relocating the inhabitants into new buildings preferred by urban planning reformers and political elites.

The editors of Fortune Magazine invited Jacobs to write a piece about downtowns. Her piece, “Downtown is for People” became the magazine’s most-discussed article. She developed the ideas in that article into her first and most famous book, The Death and Life of Great American Cities. The book launched her as a minor celebrity.

In New York City, she successfully opposed initiatives to “renew” Greenwich Village. She also opposed a plan that would have cut a highway through SoHo, Chinatown, and Little Italy. Eventually she found herself opposing the Vietnam War, and, fearing that one of her sons would be drafted, moved to Toronto.

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