Tuesday, September 20, 2011

Real Transferrable Utility

In economics, we don't normally treat utils as real things so much as a theoretical convenience to make the math easier.  It is preferences that are fundamental, we say, while a utility function just represents those preferences.  We set up u so that u(x)>u(y) whenever x is preferred to y, and then we just have to look at u to determine what the agent wants.

Indeed, this is so fundamental that within economics, "transferrable utility" really means "transferrable money."  (There are situations when you can and can't transfer money, and we refer to them as transferrable and nontransferrable utility situations).

But what if utils were an honest-to-god real thing, and what if we could trade them?  What if we could literally stick some utils in a bottle and trade them to someone else for bananas?  Although this may never be directly relevant to the real world, it is a very good exercise in economics to think through the implications.  In what ways is the transferrable utils world better than our world?  Does it solve any problems automatically that we would have to work hard to solve?  Which problems does it still not solve?  What sort of social welfare laws would we want to see in such a world?   What would a market look like?

More to come.  In the meantime, feel free to take a stab.

2 comments:

  1. It depends on how utils are produced. The implications would be very different if every individual could produce utils versus digging them out of the ground.

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  2. Think of the body as a machine that converts inputs like food into utils. That's basically what we imagine to be happening in the real world; the difference in the transferrable util world is that after you eat the food and generate 10 utils, you can bottle them and give them to someone else to actually *experience*.

    I could sell you a banana for 5 utils. Those utils, you either produced in your own body or obtained from someone else through other trades.

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