Friday, January 09, 2015

Some thoughts on the diminishing utility of wealth

Yesterday, I found this fascinating little article on The Law of Diminishing Marginal Utility. The concept is simple: the utility you get from consuming one unit of product diminishes with each unit consumed. This concept explains a few things for me that had puzzled me before and I'd like to share them with you.

First, let's start with this video. It is most instructive and shows just how incredibly lopsided our economy is in favor of the very, very wealthy. A very small fraction of our population owns the vast majority of wealth, and they also command enormous power through our government to build and maintain that wealth at the expense of everyone else. It's a kind of socialism in reverse. As a result, the difference in wealth from the poorest to the richest is not just exponential, it's hyperbolic.

What is interesting to note here, is that the general philosophy that led to this condition is that a man or woman should be permitted to "earn" as much as he or she wants to earn, up to the sky, literally. This philosophy is known as "trickle-down economics" (I think a better term for this philosophy is "tinkle down economics", if you get my drift).

There is an inherent problem with this philosophy. The law of diminishing marginal utility says that as we consume a product, our desire to consume more diminishes with each unit of product consumed. So I get one TV. I don't need another one. Well, not until I build out the basement. I have a 1500 square foot house. Do I need more room? Not until the kids grow older. But after that, I won't really need more space. And when they move out, I'll be a crusty old codger, but by then, I won't need all that space.

A billionaire can easily satisfy his every basic need. But does that mean he will buy more products? The law of diminishing marginal utility says no, he will not. Even if he buys more expensive goods, he still will not buy more of them because the utility he derives from each additional unit is less than the first, and his willingness to pay the same price for more decreases with each additional unit. In nearly every area of his life, he's had enough of what he wants.

But he has far more money than everyone else, and there are only a few billionaires compared to everyone else. The law of diminishing marginal utility explains why not everyone wants to run a business or become wealthy. Once you have all your basic needs met, then life is a balance between making more money and family, friends and self-care. Most people want a paycheck, so that they can leave work at work and go home to be with the family.

Yet, as someone once told me, the entire economy has been turned around to support business, not employees. If you have the gumption to start and run a business, and you can make it past break even, the odds are good you will not just survive, you will prosper and prosper very well. But if you want to be an employee, the economy is not set up to let employees prosper. The laws and regulations simply will not permit that very easily.

This explains the stagnation of wages for at least the last 30 years, more likely 40 years. This also explains the reason why 80% of the people in this country own at most, 7% of the wealth. the top 20% own 93% of the wealth. The top 1% own 40% of the wealth.

Now think of those people. Are they happier than everyone else? Probably, but it must be tough to know that everyone else hates them. Why would everyone else hate them?

It's not about the money. It's about how the money is accumulated. If the money is accumulated through hard work, we can live with that because humans can only work so long and then they get tired. But given the current structure of our economy, the laws and the subsidies provided to business, that's not how it's going.

Federal and state governments have made enormous interventions in the market to tilt the field towards employers and away from employees. Some call it, "The Conservative Nanny State", a place where government always sides with business and employees be damned. Some others call it "Lesterland" a place where 0.05% of the population commands the right to decide who gets to run for office and win.

Given those two places, it would be hard not to be a focus of hostility for the members of the 1%. This is the other dimension of the law of diminishing marginal utility. If you use your power unwisely, you're not going to be very happy. Each additional unit of power that you buy leads to a diminishing amount of utility, which, in the long run leads to greater dissatisfaction. Despite experience, you try to buy more security, power or whatever, but you don't get the same high as before. This could go on for years before a few billionaires figure it out.

That could translate into unhappiness for everyone else, for if you're not happy with you what you have, and you continue to strive for more, by hook, crook or ladder, that means you're pushing everyone else around - and they're not going to be happy about you if they ever figure out who did that to them.

I note that in the first link at the top of this post, there were comments at the bottom of the article, one of them concerning Warren Buffet, one of the greatest investors alive. Buffet addressed this very concept by saying that at his age, it is more important to have people in your life who love you and like you and want to be around you. He says he knows many of the Forbes 400, people who have buildings named after them, and have built long and storied careers. But no one really likes them.

When you buy power, you're not buying any friends.
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