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The Inadequacy of Friedman and Savage’s Critique of Diminishing Marginal Utility

William Coleman ()

No 676, CEPR Discussion Papers from Centre for Economic Policy Research, Research School of Economics, Australian National University

Abstract: In a well-known paper Friedman and Savage (1948) advocated a utility function in which the marginal utility of wealth is increasing in wealth above some critical level of wealth. In order to win a reception for this novel conception of the utility function Friedman and Savage took some pains in the first part of their paper to try to shake the grip that the 'law of diminishing marginal utility ' had on the mind of their fellow economists. To that end they criticised a classic 'elemental argument' in favour marginal utility being diminishing in wealth. Friedman and Savage's attempt to reconcile the rich man's avoidance of pain with increasing marginal utility is inadequate. We find that the 'elemental argument' that concludes in favour of diminishing marginal utility - on the basis of a comparison of rich and poor - is valid.

Date: 2012-11
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