In mainstream economics, utility is often regarded as a feeling of satisfaction or enjoyment derived from buying or using goods. By popular thinking, an individual’s utility scale, or the preference scale, which is internal, determines his choices. The decision to buy or not to buy a particular good is considered subjective valuation. According to some mainstream thinking, since the buying of goods is not linked to any particular goal, this buying is of a random nature. Thus, an individual purchases goods because the preference scale decided for him to do so. This purchase did not emerge because of a conscious, purposeful action.
If, however, valuation is the outcome of the mind valuing things, then it is questionable that the preference scale is “wired” in an individual’s head and remains constant. According to Murray Rothbard, valuations do not exist by themselves without things to be valued. By this thinking, valuation is the outcome of the mind valuing things. It is a relation between the mind and things.
According to Carl Menger, an individual subjectively ranks goods in accordance to the relative importance those goods to satisfy ends and how much of those goods is available. Various ends that an individual values decrease in a descending order, making wants competitive relative to one another and requiring choice. According to Menger,
Thus, if economizing men must choose between the satisfaction of a need on which the maintenance of their lives depends and another on which merely a greater or less degree of well-being is dependent, they will usually prefer the former.
Hence, an individual values goods according to the satisfaction he expects to receive from it, relative to its scarcity and other wants. These benefits are likely to vary given changes in an individual’s circumstances.
Mises’s Framework of Consumer Choices
According to Ludwig von Mises, given that individuals have a certain internal and experiential knowledge of their own choices, and recognizing the performative contradiction of the denial of human action, a logically-derived choice theory is possible. For instance, one can observe that individuals are engaged in a variety of activities. They may be performing manual work, driving cars, walking on the street, or dining in restaurants. Yet, unlike simple natural processes, the distinguishing characteristic of these activities is that they are conscious and purposeful.
Using this awareness, we can establish the meaning of individual conduct. Thus, manual work, for example, may be a means for some people to earn money, which, in turn, enables them to achieve various goals like buying food or clothing. Dining in a restaurant can be a means for establishing business relationships. Driving a car may be a means for reaching a particular destination. Individuals operate within a framework of means and ends; they use various and scarce means to secure goals.
The knowledge that human action is conscious and purposeful is certain and not tentative. Anyone who tries to object to this contradicts himself. Therefore, certain conclusions derived from this knowledge are valid as well (as long as they are consistent and non-arbitrary). This means that there is no need to subject them to various laboratory tests as is done in experimental economics and other sciences.
Purposeful action implies that individuals assess or evaluate various means at their disposal relative to their ends. An individual’s ends set the standard for valuations of means and thus choices. By choosing a particular end, an individual also sets a standard of evaluating various means.
If Bob’s intention is to buy a car, there are all sorts of cars available in the market. Therefore, Bob has to specify to himself the specific ends that the car will help him to achieve. For instance, Bob may need to consider whether he plans to drive long distances or short distances. Bob’s end will dictate how he will evaluate various cars. Now, it is possible that Bob will conclude that, for a short distance, a second-hand car will do the trick. Given that individual ends determine the evaluations of means, the same good could be valued differently as a result of changes in another individual’s ends.
At any point in time, individuals have an abundance of ends that they would like to achieve. What limits the attainment of various ends is the scarcity of means, time, and space. Hence, once more means become available, a greater number of ends, or goals, can be accommodated—i.e., individuals’ living standards will increase.
By popular thinking, if the valuation scale is constant and given, then it is possible to compress these preferences into a mathematical formulation (i.e., one could capture individuals’ preferences by means of a formula). In mainstream economics, this is called a utility function. Also, given that utility is commonly presented as some total quantity—total utility—it becomes possible to ascertain the addition to this total, which is labeled additional utility or marginal utility.
Ends are Not Arbitrary
While it is true that valuations are subjective, they are, however, not formed arbitrarily by some valuation scale or survey or determinism, but are formed consciously by an individual and demonstrated in action. However, many wrongly assume that total utility can be determined and that past mathematical data can determine market demand. But this disconnects from human action, choice, and subjective preferences. According to this framework, since the buying of goods is not linked to any particular goal, this is of an arbitrary nature. In fact, this leads to assuming that the formation of valuations is arbitrary.
While it is true that valuations are subjective or personal, relative to an individual’s wants and circumstances, they are not formed random, arbitrary or haphazard (even if they are mistaken in achieving utility). Want and valuations are not formed mechanically by some “valuation scale” but are formed by acting, choosing individuals attempting to accomplish something.
Marginal utility is not, as the mainstream perspective presents, an addition to the total utility but rather the utility of the marginal end. Utility is not about quantities but about priorities or the ranking that each individual sets with respect to his goals. Obviously, one cannot add priorities arithmetically as such. Since total utility does not exist as such, various models in economics that are based on the view that such total exists are nonsensical.
Conclusion
Following the thought of Menger, Mises, and Rothbard—that subjective valuation is not about arbitrary consumer choices—a particular end or goal sets the value for the corresponding means for each individual. Ends are not set arbitrarily, but in accordance to their perceived serviceability.
