There are many variations on the theory of spiritual/moral development: famously, those of James Fowler and Lawrence Kohlberg. While the number of stages in the process vary from theory to theory, you can summarise them generally into four main personalities:

Stage 1: The Reprobate

Chaos, where your moral actions are defined by what punishes and what makes you feel good right now. Also: “it’s only a problem if you get caught”. Much like a toddler that eats the biscuit knowing that if mom catches him, he’s going to get beaten*.
*I don’t believe in naughty corners – it feels like emotional manipulation.

Stage 2: The Fundamentalist

At some point, you realise that punishment and reward need context. Enter: a rigid code of Law, to which the Fundamentalist mindlessly adheres. In practice, this guy may look a lot like someone in Stage 4. But you can generally tell the difference by his/her reaction to debate: a fundamentalist is a general fan of verses and quotes.

Also, a personal observation: Fundamentalists know they’re right. Like, they just know.

Stage 3: The Skeptic

And/or the scientist. The trouble is: knowledge is imperfect; and therefore, inconsistent. So the growing gulf between empirical knowledge and knowledge-as-belief creates doubt. The fanatical fundamentalist, at this point, retreats into denial and goes to preach in North Carolina. And the true skeptic casts belief to the wind, and becomes guided by what is known, proven and observable.

Stage 4: The Mystic

From what I understand, the mystic abandons the concept of knowledge in the light of infinity. After all, once what is known becomes inconsistent at the quantum level, you encounter the impossible and realise that you know nothing. Here’s a Socrates quote (for fun): “The more I learn, the more I learn how little I know”.

In this crisis of un-knowability, belief becomes a free choice, not a fact to be accepted or rejected. And moral law metamorphoses into enlightened principle.

And I think that the same principle applies in any field of knowledge. Meaning that economics is no different.

In university settings, conventional economic theory is taught as fact. Once you realise that Keynes, Hayek, Friedman, Ricardo, Smith, Marshall, Marx and Hicks were simply offering their opinions on the behavioural patterns of the social herd, the world opens up.

So here’s the thing, right. That means that everything is up for debate. Even the underlying principles that we take for granted. Like, um, demand theory. One of the foundational, day 1 in Ecos 101, implicit premises of economics.

And as a freely-confessed heretic skeptic, I think that the demand curve is worth a re-consideration. Because what if we have it all wrong?

The Conventional Theory of Demand

Here is a demand curve:

What it’s saying:

1. The higher the price, the less of the product that I will be willing to buy.
2. The lower the price, the more of a product that I will be willing to buy.

So the principle feels intuitively correct, because it sounds logical, I guess? In practical terms, I buy yoghurt for breakfast every day. If the price goes up, I’ll still buy yogurt – although I’ll complain about it. But if the price skyrockets, I’ll switch to toast. So even if the short-term reality seems a bit out of whack, in the long term, yes.

But the question remains: how did that line come about in the first place?

At this point, allow me to introduce:

Marginal Utility Theory

Some definitions:

marginal – an additional

utility – how useful/pleasurable an item is

theory – a sensible concept, commonly misconstrued as either fact or fantasy depending on the sensibilities of the critic.

How it works:

1. My first cup of coffee is life-or-death.
2. My second cup of coffee is good.
3. My third cup of coffee is perfunctory.
4. My fourth cup of coffee is a step too far.
5. My fifth cup of coffee makes my eyelid start twitching.
6. My sixth cup of coffee gives me the shakes.
7. My seventh cup of coffee ends with a hospital visit and a drip.

The next step is to rephrase the question as: “But how much would you pay for each cup?”

If you read an economics textbook, you would know that I’ve actually made a mistake here. Because I’m talking about money, instead of some measure of “satisfaction” or “utility”. So putting money to the side, let’s say that I’m now valuing my life (and the things in it) in terms of some arbitrary measure of satisfaction. Something karmic, that denotes holistic joy or whatever.

But because I’m economist, and economists struggle with anything that’s not pragmatic, I’m going to denominate my scale of delight in “utils”.

So allow me to rephrase the question: “How much is each cup worth to you?”

1. Cup 1: ONE HUNDRED MILLION UTILS! (ie. 3)
2. Cup 2: two utils
3. Cup 3: two utils + resentment (1 util)
4. Cup 4: only if someone buys it for me (zero utils)
5. Cup 5: only if someone brings me a free one and places it on my desk (-1 utils)
6. Cup 6: if you dare me to do it, and pay me (-2 utils)
7. Cup 7: not even if you paid me. Okay maybe. (3 utils)

Which illustrates the idea of “diminishing marginal utility“. That is: the more coffee I have, the less useful I find each additional cup.

A graph:

That line then eventually turns into a demand curve when you start attaching a monetary value to these “utils” (as in: how much will I pay for a unit of satisfaction?) – which I’ll deal with in the next post.

But as a taster, here are the two questions points where I think the theory gets interesting/flakey-round-the-edges:

1. How did I decide that it was three utils for my first cup? It seems arbitrary.
2. And, more importantly, let’s take coffee out of the equation and say that it’s a drink called “xdtasdfx” (that I’ve never tried before). You can’t ask me to utility that. Never tried it, don’t know if I like it, not even sure I can pronounce it.

#ToBeContinued