In the economic primer, we looked at a textbook description of modern economic theory. Much of it is common sense, like the relationship between price and supply and demand. We discussed how an ideal free market maximizes “utility” given people’s incomes. Utility describes how important a particular market product or service is to you. To review: you make your purchasing choices to maximize your “utility” or satisfaction given your finances and prices. That in turn causes businesses to compete for resources to produce the levels of products and services demanded by the market. Add that up across all consumers and you get resource utilization that maximizes “utility”: there is no way to divide up resources that makes people more satisfied given their finances.  

You may have noticed that the phrase “given their finances”, is key to the above definition of utility maximization. As we discussed in the box on the minimum wage, an extra $1,000 to a poor person is almost certainly going to buy them more “utility” than is lost by a rich person who gives up $1,000. In fact, charity is sort of based on this concept: it provides “utility” to the giver as well as the receiver: both gain utility because of this voluntary exchange.

 We won’t go into a discussion of “utilitarianism” other than to note that a true free market almost certainly does not maximize overall “utility” when there is considerable inequality. In a true free market people are paid what their labor is worth under supply and demand just like any other input to the production process. But humans are not like inanimate factors of production. We could increase overall satisfaction (utility) by paying workers at the lower end of the income scale more. However, that might disincentivize such workers from seeking education to make their labor more valuable and productive, or from changing jobs, which could hurt overall productivity gains and thus future real incomes. But that in turn assumes that there is a reasonable level of mobility: as a low wage worker can you realistically pursue education if you’re supporting a family for example? 

 Since there is no way to measure “utility” directly, the above soup of conflicting considerations must be addressed politically. We don’t want to kill the golden goose of productivity gains brought to us by market competition, including labor competition. We should support mobility through education and other programs. But even with good support for mobility, not everyone will be able to find “good paying work”. Someone trained in yesterday’s technologies who was a solid cog in the productive wheel may not be able to learn a new occupation. There may be a glut of labor in some markets at some times. Advanced economies certainly produce enough to give everyone a decent standard of living, but do we strive to do so, and how? A variety of approaches have been used by rich countries as we discussed in the chapter on inequality.

While utility can’t be measured directly, pollsters have found ways to rank “happiness” in terms of self-declared “life satisfaction” in consistent terms. Rather than detail that here, I will point you to the excellent discussion in Our World in Data[1] and summarize the findings. In brief, life satisfaction goes up with income. People are more satisfied with their lives in richer countries than in poorer ones as measured by GDP per capita. Within countries, people who make more are more satisfied with their lives than those who make less. In other studies, people are overall happier when income distribution is more equal. In sum, people are happier when they make more but the relationship between happiness and additional income is not dollar for dollar: a thousand dollars in ongoing income makes more of a difference to a poor person than to a rich person.

[1] https://ourworldindata.org/happiness-and-life-satisfaction