Tuesday, November 22, 2005
THE MARGINAL VALUE OF MONEY
Lately I’ve been thinking about a concept that underlies much of the political, economic and social ideology of the modern world: the decreasing marginal value of money. The basic concept is simple. As is often the case, David Friedman does as good a job as anyone of explaining basic concepts of economics in terms that normal human beings can understand:While we could discuss marginal value in terms of apples, it is easier to discuss it in terms of dollars. "The value to you of having one more orange is $1" means that you are indifferent between having one more orange and having one more dollar. Since the reason we want money is to buy goods with it, that means that you are indifferent between having one more orange and having whatever goods you would buy if your income were $1 higher.What is this supposed to mean in the real world? The strongest and most widely shared understanding of this is that the second dollar you earn has more value to you than the one-million-and-second dollar you earn. At one level, this is obviously true: In many a real human situation in the real world right now, that second dollar is the difference between starvation tomorrow and life tomorrow, while someone earning their one-million-and-second dollar isn’t going to starve tomorrow (so long as they are in a situation in which any food at all is available for purchase).
But I am slowly but surely coming to the conclusion that in the real world the basic assumptions underlying the application of the concept of the marginal value of money hide almost as much as they reveal. With any luck, I’ll have a chance to write more about this over the next few weeks, but for now, I’ll jump to an intermediate conclusion: above some fairly small number, the marginal value of money is so highly variable among individuals in the real world that other concepts become more important and that, therefore, strong reliance on this concept as a guide to policy and action in the real world isn’t a good thing. That may seem like a pretty obscure statement (and as laid out without further explanation, it is), so I hope to be able to explore it in more depth here soon.
GB, THHotA
posted by Greg 7:02 AM
