Utility and Value – What is the Relationship?
Terms that are used frequently in decision making include “utility” and “value”. Value tends to be a particularly difficult concept, and in the next few posts we will explore the idea in more depth.
Value is a difficult term because the word itself has different meanings. For instance, “values” relate to your ideas about what is important and good (we will talk more about value vs. values later). But in the economic and decision making context, value remains a hazy concept.
First of all, some things are useful, and some things are not. More specifically, all people at any given time have a multitude of unsatisfied wants. Utility is an object’s capacity to fulfill those wants. A hammer is useful for doing work around the house. However, if you have no projects to do around the house (or perhaps the only project you have to do is painting), there isn’t a match between your unsatisfied wants and the hammer, so it doesn’t have utility for you. As another example: my snow shovel broke recently. A broken snow shovel has no utility as far as I can see.
Additionally, something doesn’t have to be practical to have utility – chocolate can have utility in that it satisfies the desire for eating something sweet. Luxury items have utility in as far as they carry prestige. As long as there is a match between an object and an unmet desire, there is the potential for utility to emerge.
Not all things that are useful are valuable, however. Things that we clearly need for survival, such as water to drink and air to breathe are of the highest utility, but we don’t think of them as having a lot of value. Why is this, and what is the relation of value and utility?
William Smart, an economist from the late 1800s/early 1900’s, wrote on the topic of utility and value. He summarizes the relationship as follows:
“Thus it is that the theory of value lies at the basis of all economic theory. The only goods we “economise” – the goods which alone are objects of economic attention – are the goods which are insufficient, or just sufficient, to meet our wants. Contrasted with these are the “free gifts of nature,” meaning by the expression such things, adapted to man’s use, as are given us by nature in superfluous abundance. As goods which we economise, therefore, are the only goods which we recognise as conditioning our satisfaction, we may say that, while all goods, by definition, have utility, only economic goods have value.” (1)
In other words, when there are unlimited amounts of something, such as water or air, they do not have value in the economic sense, since we don’t have to sacrifice or forego something else to acquire them. Something must have utility, but also be scarce, for it to have value. As Smart puts it:
“To drain a river of a few hundred gallons, or even to drain it all but a few hundred gallons, will not necessarily give the remainder any value. To change utility into value there must be, not only a capability of satisfying want, but a felt dependence of some want on the particular good containing the utility. The relation of value to utility, in fact, may be described as the relation of a positive condition to a capability. As capable of quenching thirst, all water is useful, but it does not obtain any value till some limitation of the available quantity makes it the indispensable condition of a satisfaction.” (1)
Thus we can see the outlines of the concept of value emerging. We all have wants and desires to satisfy, and there exists in the world an abundance of various goods and services to satisfy those wants (i.e., things with utility). When those goods are scarce, i.e., in finite supply, we attach value to them, because in their absence, the want will go unsatisfied. We don’t have to worry about that for things in infinite supply – our wants will always be satisfied relative to the supply, regardless of the utility a thing may be perceived to have. Thus value is roughly a function of utility and scarcity.
In the next post we will dive more deeply into the subjective nature of value and how it can be quantified.
At Collier Research Systems, we can help you understand what has value for your organization. We can help you prioritize and pursue the goals with the highest value, while efficiently using resources. Call Collier Research Systems today to learn more about how we can help, or visit our website: www.collierresearchsystems.com.
(1) William Smart. 1910. “An Introduction to the Theory of Value.” Second Edition.