It seemed like a simple enough question. What do economists mean by ‘utility’? But after scouring the literature I’m more confused than when I began.
The Penguin Dictionary of Economics defines it as: "The pleasure or satisfaction derived by an individual from being in a particular situation or from consuming goods or services." Apparently it’s "the ultimate goal of all economic activity". The dictionary then goes on to quote Jeremy Bentham. And it’s here I begin to get confused.
It turns out that Bentham used the term in an entirely different way. When he wanted to refer to pleasure or satisfaction, he used words like ‘pleasure’ and ‘satisfaction’. For him, utility was something else:
By utility is meant that property in any object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness, (all this in the present case comes to the same thing) or (what comes again to the same thing) to prevent the happening of mischief, pain, evil, or unhappiness to the party whose interest is considered: if that party be the community in general, then the happiness of the community: if a particular individual, then the happiness of that individual.
Clearly, utility is a property of the goods and services people consume, not a mental state. Utility simply means usefulness. As Frédéric Bastiat writes:
Let others lose themselves in definitions. For my part, I understand by utility what everyone understands by this word, whose etymology indicates its meaning very exactly. All that is serviceable, whether it be by nature, by labor, or by both, is useful.
This use of the term isn’t confined to the 19th century. Frank Knight writes:
The power of things to satisfy conscious wants, or quality of being wanted, is utility in the economic sense, which is equivalent to "power over conduct."
Irving Fisher took a similar line. He suggested the term ‘wantability’ as a replacement for utility. This was because he thought the term utility was misleading. The naive public, he wrote, "find it hard to call an overcoat no more truly useful than a necklace, or a grindstone than a roulette wheel."
Fisher also objected to some of the Benthamite connotations of ‘utility’. Some economists wanted to reject Bentham’s assumption that people always pursued happiness, but keep the concept of utility. They preferred to be agnostic about why people wanted what they did. For an object to have utility, it didn’t need to produce pleasure, it just had to be wanted.
Regardless of what stand you take on this issue, there are two complications involved in ascribing utility to objects. First, as William Jevons pointed out in the late 19th century:
… utility, though a quality of things, is no inherent quality. It is better described as a circumstance of things arising out of their relation to man’s requirements. As Senior most accurately says, "Utility denotes no intrinsic quality in the things which we call useful; it merely expresses their relations to the pains and pleasures of mankind." We can never, therefore, say absolutely that some objects have utility and others have not.
The utility of shoe depends on whether it fits. But not only that, it typically has no utility unless it is offered as part of matching pair. For many goods, utility depends on the availability of complimentary goods. A car is not much use without petrol, a computer is not much use without matching software and so on. And some goods are only useful to a person with skills. For example, a book is not much use to a person who can’t read.
So i t turns out that utility is a property of things when they are in certain complex relationships with people and other things. So it doesn’t make much sense to ask whether something has utility, without either spelling out a lot of background information or making assumptions.
The other complication is that people make mistakes about how useful things are. Recognising this, Ludwig von Mises distinguishes between two kinds of utility — subjective and objective:
Utility means in this context simply: causal relevance for the removal of felt uneasiness. Acting man believes that the services a thing can render are apt to improve his own well-being, and calls this the utility of the thing concerned. For praxeology the term utility is tantamount to importance attached to a thing on account of the belief that it can remove uneasiness. The praxeological notion of utility (subjective use-value in the terminology of the earlier Austrian economists) must be sharply distinguished from the technological notion of utility (objective use-value in the terminology of the same economists). Use-value in the objective sense is the relation between a thing and the effect it has the capacity to bring about. It is to objective use-value that people refer in employing such terms as the "heating value" or "heating power" of coal. Subjective use-value is not always based on true objective use-value. There are things to which subjective use-value is attached because people erroneously believe that they have the power to bring about a desired effect. On the other hand there are things able to produce a desired effect to which no use-value is attached because people are ignorant of this fact.
All this seems clear enough. But somehow the term ‘utility’ has shifted in meaning. Instead of referring to the ability to produce pleasure or satisfaction, it became a synonym for pleasure or satisfaction. This is how Daniel Kahneman and his co-authors use the term ‘experienced utility’ in their 1997 paper ‘Back to Bentham? Explorations of Experienced Utility‘.
Kahneman also uses the term ‘decision utility’. Apparently ‘decision utility’ is revealed by choices or revealed preferences. Decision utility may (or may not) refer to the pleasure of satisfaction an individual expects to receive when they consume a good.
Can anyone offer me a definition that isn’t vacuous or circular?