Jessie is a friend, yeah, I know she’s been a good friend of mine. But lately something’s changed, it ain’t hard to define. For those of you who know me, you are probably aware that my big black cat, Jessie, died this month. We discovered that she had cancer about three weeks ago, and she rapidly declined. She was eventually unable to eat so we had to do what many families with pets have to do at some point and did the Ol’ Yeller thing with her. I have to say that I am tremendously sad and will miss my friend greatly.
Jessie did not do a whole lot. She could not sing or dance, her spelling was not great, and she was so fat that she really could not run and jump much. But she was big and fluffy and as a pure bread Maine Coon was about as friendly as they come.
Cats are an amazing species in general. They have found a way to become part of a human household without being dominated by it. If they had opposable thumbs I swear they would be the ones in charge rather than us. They also provide a great example of the economic concept of utility.
When Adam Smith, and John Stuart Mill and those who first wrote about the basic structure of the economic machine tried to explain differences in the monetary amount that people were willing to pay for something, and the monetary amount that it actually took to produce the item they were at a loss. At the time, the idea of the value of a product was closely tied to the monetary cost of the labor needed to produce it. If, for example, it took 2 man-hours of work to produce a hammer, and one hour of work to produce a keg of beer, then a hammer was worth two kegs of beer. It all seemed very straightforward.
But in the marketplace, the hammer was selling for the equivalent amount of gold as just a single keg of beer. Even after expanding on the labor theory of value to include all of the labor going into every input in the beer, the amounts could not be rectified. From this dilemma, the economist Karl Marx broke the concept of value into something called exchange value which represented the relative amount of labor in a commodity or product, and use value, a concept which was later translated into the term “utility.” So whenever economists or politicians talk about the utility of something they have Marx to thank.
Utility is a very difficult concept to understand because it is personal. There really is no market utility, but markets reflect the utility calculations of many individuals. In a simple sense, utility measures the amount of satisfaction, or usefulness or pleasure that an individual obtains from a good or service. In the case of Jessie, my wife and I received a great deal of utility from our big lump of a cat. On the other hand, a friend of ours – who is allergic to cats – received almost none from her. My sister was actually kind of scared of her so received very little utility either. People who enjoy pets pay a lot of money to purchase, feed, nurture, and in our case, euthanize them. Other people could not even consider spending a dime on an animal.
This concept is extremely important in public policy as well, and we find it all the time in the cost-benefit studies that we do and the government regulatory impact analysis reports that we are often countering. Policies, or taxes, that are designed to get people to change behavior, or to purchase or not purchase a specific commodity, all often come about because regulators or politicians fail to accept that different people have different utility functions. Worse, many of these policies are designed to force citizens into the same utility realm as the regulator. Examples abound. Take prohibition of alcohol or cigarette sales. Policies to limit these are often justified because smoking and drinking are considered by some to be “bad.” But cats are considered by some to be bad as well, as are dogs, or cars, or for that matter, children. On the other hand, people who spend their hard earned dollars on a cigarette, or a beer, or a Whopper with Cheese or a Big Gulp, are generally doing so because they receive utility – satisfaction – from their purchase.
Differences in utility functions (what some may call tastes) are what helps the economy function. In a Orwellian world, where everybody is forced to be the same, all products would be commoditized, and all would be produced solely to keep the human organism functioning and serving the whole. In a world without differences in utility there is no trade, no competition, no music or dance, no style, no flavors, and no color.
When I like to have cats around it creates a market for cats, when people what to drink adult beverages, it creates markets, not only for wine, and spirits and beer, but for bars, music halls, restaurants and all of the other activities that are complementary to drinking. The same is true of all markets.
So next time someone wants to ban something, or to impose regulations to force people to conform to a certain standard, remember my little black cat, and think about what is important in your own world, and how it might differ from others. And thank you Rick Springfield for the opening lyrics – of which I took liberty – I don’t think I will ever find a girl like that again.