The author of The Bitcoin Standard has not understood the principle of decreasing marginal utility

GIOVANNI BIRINDELLI, 7/8/2019

Wow, what a mistake! It came completely out of the blue in an otherwise truly wonderful book!

In The Bitcoin Standard, the author Saifedean Ammous writes:

The marginal utility of money does in fact decline, as evidenced by the fact that an extra dollar of income means a lot more to a person whose daily income is $1 than one whose daily income is $1.000.

A characteristic of Austrian economists is that often they tend to repeat always the same things. This is due to the fact that economic laws remain the same across space and time (they are universal, eternal and immutable) and to the fact that the modern economic and monetary institutional structures continue violating these laws systematically.

This rather gross mistake on nothing less than the principle of decreasing marginal utility, made by an economist who is familiar with Austrian economics (i.e. with economic science), demonstrates that some things are never repeated often enough.

In fact, the principle of decreasing marginal utility does not imply that “an extra dollar of income means a lot more to a person whose daily income is $1 than one whose daily income is $1.000”. Not at all. On the contrary, it implies that an extra dollar of income means a lot more to a person if her daily income is $1 than if the same person’s daily income is $1.000.

In other words, we can say that an extra dollar of income means a lot more to a person whose daily income is $1 than one whose daily income is $1.000 only if other conditions are considered equal. However, “other conditions being equal” in this case means “the person being the same”. Utility cannot be compared among individuals for the simple reason that each individual is different from another: he has different tastes, priorities, preferences, he has a different history, a different mind, etc.

This logical fact per se is enough to see the mistake. However, for better clarity, this mistake can be observed also via an example. If it was true (i.e. if it was an economic law, as the principle of decreasing marginal utility is) that an extra dollar of income means a lot more to a person whose daily income is $1 than one whose daily income is $1.000, then it should also be true that an extra dollar of income means more to a person whose daily income is $50 than one whose daily income is $500. However, this is clearly false (as it is in the more extreme case described by the author, but in a less extreme example it may be easier to see why).

In fact, let us suppose that John, who earns $50 a day, manages to satisfy his Nr. 1 priority, which is spending time with his children teaching them economic science and bitcoin. In addition, he manages to afford to do other things which for him are important (even though less important in order of priority) such as fishing and reading books. Finally, let us assume that, after having afforded himself all these pleasures, he manages to save 5$ a day.

On the other hand, let us suppose that Claire does not have children nor a family of her own and that her top 1 priority is owning a Lamborghini sports car in a certain time-frame. In order to be able to get it, after giving up everything she can (time with her friends, quality of housing, travels, insurances, etc.), she must earn 501 a day during that time-frame. However, she earns only 500$ a day.

In this simplified situation, which in different and more complex forms is not unusual (especially today with the “happy negative economic growth” myth), $1 a day is more important for Claire (who earns $500 a day) that it is for John (who earns $50 a day).

The very logical possibility of such a situation, which constitutes an exception to the ‘principle’ of decreasing marginal utility as intended by the author (and by many others, unfortunately), makes such ‘principle’ no such thing but only a statistical phenomenon. However, the principle of decreasing marginal utility is a principle: more precisely, an economic law. Such law states that, for a person, the utility of a certain good (or of money) decreases as the quantity of the good which is available to the same person increases. This law, as all economic laws, has logically no possible exception whatever.

This particular mistake in relation to the principle of decreasing marginal utility is not an imprecision but a systemic error, for two reasons: first, because this principle is at the very foundations of economic science; second, because it implies a confusion about what an economic law is.

The practical implications of this mistake are serious: progressive taxation, for example (with all that follows), is built on top of it.