Demand Functions and Utility Functions: A Critical Examination of their

Meaning

Pig
STOR

E. H. Phelps Brown
Econometrica,Vol. 2, No. 1 (Jam, 1934), 51-58.
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D E M A N D F U N C T IO N S AN D U T I L IT Y F U N C T IO N S :
A CR ITICAL EXAMINATION OF THEIR MEAN ING
By E. H. PHELPS BROWS
Based upon a paper read before the meeting of the
Econometric Society, Paris, October, 1932

THE statistical derivation of demand functions has now become a

familiar part of econometric procedure: passing beyond the rough esti mates and unfulfilled projects with which it began, it has been im plemented in a large number of statistical studies. In most of this work
the functions have been defined in terms of real price; but in the studies
of Professors Fisher and Frisch certain methods have also been de vised which proceed directly to "the measurement of marginal utility."
The critical discussion which this work has occasioned has been con cerned in part to ask how far the methods used can yield results of
the kind sought, and in part to ask what kind of result it is that should
be sought. It is with the second question that this paper is concerned.
The paper begins by giving reasons for believing that the measure ment of marginal utility must not be conceived as a measurement of
satisfactions; it then considers the formulation of an index of disposi tion
which will embody the essential principle of the marginal utility function
without being exposed to the same philosophical objections ; and finally
it examines the properties of the real price function in com parison with
those of the proposed index.
I
Were it possible for economists to build their work upon the doctrine
of psychological hedonism, they would have no difficulty in defining
an index of the consumer's disposition ; but when they are aware of
the objections to thinking of man as "a pleasure-machine," the task
becomes more difficult. A solution which has gained some acceptance
has been to substitute for pleasure or happiness the more colourless
term satisfaction, and to say that in speaking of satisfaction the econ omist offers no doctrine of the determination of human actions, but
refers only to the observable fact that in order to acquire certain ob jects men are willing to make payments which fact entitles us to con sider the degree to which a consumer thinks different objects worth
paying for, or in a word, the payworthiness of different objects to
him. When the economist speaks of utility, it is this payworthiness
that he should mean. That the consumer does hold an object worth
payment, may be explained as the philosopher or psychologist may
wish, and to this the economist is indifferent ; enough for him to be
51

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ECONOMEDRICA

able to compare different objects of a consumer's choice in respect of

their payworthiness.' The same position has sometimes been expressed
by means of a distinction between the quality of a desire, and its
quantity or force; different actions may be viewed very differently by
psychologist or philosopher, but the economist can make quantita tive comparison of the force of different motives. 2 From such a position it
follows that we are entitled to conceive of a quantity of satisfaction, and
to define the index of a consumer's disposition towards an object as a
function relating the rate of consumption with the quantity of
satisfaction derived. Let us now examine the objections to which such
a position is exposed.
The statement that men are willing to pay in order to acquire cer tain objects, is incontestable; but the meaning of the utility or payworthiness of different objects to the consumer is far from clear. It
may, in the first place, mean the common quality which commodities
have of attracting the consumer ; but such a meaning gives us no
grounds for conceiving of a quantity of payworthiness; different ani mals have in common the property of eating, but there is no sense in
speaking of a quantity of eatingness. In the second place, however, a
reference to the common quality of utility or payworthiness may assert
the presence in all the consumer's actions of a common property, the
force of his desire; and interpreted in this sense the argument coincides
with the second form of explanation set out above, in which we dis tinguish between the quality of a desire, ethically or psychologically
considered, which may be different in different cases, and its force,
which is qualitatively the same in all. Now the fact that this form of
explanation cannot be expressed without a reference to desire or mo tive, shows that it involves a departure from neutral territory; and
because of that departure, the economist now finds himself faced with
the question, whether or not it be the quantity of this force of desire
that determines the consumer's action. If he answer no, then he is as1 It is this, I think, that Marshall has in mind, though his form of expression
lays him open to the objection that he asserts every human action to arise from
the desire for satisfaction: "It is clearly not the part of economics to appear to
take a side in ethical controversy: and since there is a general agreement that
all incentives to action, in so far as they are conscious desires at all, may without
impropriety be spoken of shortly as desires for "satisfaction," it may perhaps be
well to use this word instead of "pleasure," when occasion arises for referring
to the aims of all desires, whether appertaining to man's higher or lower na ture." (Principles, 8th edn., i, ii, 1, note.)
"Thus measuring a mental state, as men do in ordinary Life, by its motorforce or the incentive which it affords to action, no new difficulty is introduced
by the fact. that some of the motives of which we have to take account belong
to man's higher nature, and others to his lower." (Marshall, Principles, 8th edn.,
1, ii, 1.)
2

E. H. PHELPS BROWN

53

serting that the consumer may choose A although his desire for A is
of less force than his desire for B, and this is evidently inconsistent with
the proposal to measure the consumer's desire for A from his payments
for it. If on the other hand the economist answer yes, then he is assert ing that all the consumer's actions are determined by a motive of one
and the same kind: for by the force of a desire he now explicitly means
its power to prevail and issue in action, and since this force is quantita tively comparable in its several instances, it must in those several in stances be one and the same in kind. Here, then, the economist is left
under the necessity of asserting that every action of the consumer is sues from a motive of the same kind ; and this I believe must be his
ultimate position in whatever way he try to justify the contention that
we can conceive of satisfaction quantitatively. But such a position evi dently lies within the realm of philosophy, and is contestable.
It is perhaps worth passing notice, that it is the treatment of all
demand as arising from the desire for satisfaction, which compels the
economist to introduce the "law of diminishing utility." If it is satis faction that I seek from all that I buy, then why should I ever buy
more things than one? To explain the fact that consumers do buy a
diversity of objects, it is then necessary to assume that each commod ity
yields satisfaction at a diminishing rate. But this "law of diminish ing
utility," thus conceived, is a very dubious psychological generaliza tion.
Resort to it is none the less compulsory for those who hold that "all
incentives to action . . . may without impropriety be spoken of shortly
as desires for 'satisfaction'."
So far in criticism. But now let us note that the impulse to treat
satisfaction quantitatively arises from the fact that in the study of
demand we have such abundant quantitative expression of human
choices ; and nothing that has been said precludes us from using this
material to form quantitative indexes of human behaviour: our argu ment shows only that we must not try to establish a correspondence
between quantities in the pricing system and supposed quantities in
the realm of thought and feeling. Nor is it only that we may use the
data of the price-system to construct the type of index which, like
the birth-rate, is descriptive of human behaviour, but makes no at tempt to penetrate into motivation: we are at liberty to posit upon the
fact of choice a function such, for instance, that any movement by
the consumer from one arrangement of consumption to another that
he prefers to the first, shall be associated with an increase in the nu merical value of the function. At this point we touch on the treatment
of the utility function by the mathematical economists ; with the find ings of the present section in mind, let us go on to examine the scope
and significance of this treatment.

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II
In the last paragraph it was suggested that the mathematical econ omist can define a function of utility such, for instance, that for two
assortments of goods as between which the consumer is indifferent it
shall have the same numerical value, and that if the consumer prefer
assortment A to assortment B, it shall have a higher numerical value
for A than for B. But the significance of such procedure may be made
clearer, and the necessary limitations of the index so defined may be
emphasized, if we consider a more elementary statement of the hy pothesis upon which it is based.
This hypothesis is in general terms, that the distribution of a con sumer's outlay arises from judgments of equivalence at the margin.
If, more particularly, a man is now consuming butter and oranges at
certain rates per month, and we offer to give him freely either half a
pound of butter or 3: oranges per month, then we assume that we can
by experiment find a value for x such that the consumer is indifferent
which form the gift shall take. From this it follows that if we hold his
consumption of oranges constant, and vary the rate at which he con sumes butter, we can obtain a scale showing how many oranges he
considers the equivalent of a marginal increment (half-pound) of but ter, at each of a number of different rates of consumption of butter.
The process may be repeated with other goods than butter and we
may now further assume (a) that marginal increments which the con sumer judges equivalent to the same number of oranges, will be judged
by him equivalent to each other; (b) that if the marginal increments
are sufficiently small relatively to the existing rate of consumption, an
increment which is judged equivalent to n oranges will be judged
equivalent to a parcel of two increments each of which is judged
equivalent to n/2 oranges. But next, we need no longer assume the
consumer to be actually obtaining the good which we use as the basis
of comparison: the process can in hypothesis be carried through equally
well with a good which the consumer does not now know but which he
would be glad to have if it were known to him. From this again it is
a short step to specify no particular good as our basis of comparison,
but to write only for each actual good studied ip =f,(q,) .4
The generality of this expression must not hide from us the limitaFor examples of the procedure which is here so roughly indicated, see Bewley:
Mathematical Groundwork of Economics, Introduction; and Frisch, ``Sur un Pro b-

Rine di Economie Pure," Norsk Maternaiisk Farenings Skrifter, Eerie i y No. 16.
The exposition here given will be recognized as having much in common
with that given by Prof. Irving Fisher in his Mathematical Investigations in the
Theory of Prices and Exchange. Professor Fisher does treat of total utility and
consumer's rent, but compare Pt. II, c. iv, "Utility as a Quantity."

E. H. PHELPS BROWN

55

Lions which are imposed by the implicit reference to a basis-good, and

which sharply distinguish our index from any wished-for measure of
satisfactions. We are not, for example, entitled to take the unit of the
basis-good as standing for a unit of satisfaction, for in that case we
should find quantities of satisfaction by integrating our index, and such
integr a tion can give only a meaningless result. The index takes such
a form as this: that when the consumer is taking butter at the rate of
3 lbs. per month, he holds a marginal increment of butter equivalent
to 20 units of our hypothetical basis-good, when the rate is 3 lbs. per
month, to 17 units; and so on. If we then attempt to find what is the
total satisfaction derived by the consumer from a consumption of 4 lbs. of butter per month, we obtain a total made up first of 17 units
of the basis-good taken successively inwards from its margin of con sumption, and then 20 units taken successively inwards from the same
margin (for e ach comparison is made with respect to one and the same
rate of consumption of the basis-good); and so on. But this is a com pilation which has no economic significance. While, therefore, we may
use our index to infer whether to a given consumer one position is more
eligible than another, we cannot use it to measure the satisfaction de rived from consumption, or the sacrifice imposed by taxation.
Again, the fact that a consumer's index for a certain good is lower
in one period than in another, does not permit us to say that his taste
for the good has diminished, or that its utility is less to him than be fore." All that we know is that the consumer is willing to give up less of
the basis-good than before to obtain a unit of the good studied, and
this (to use for once the language of utility) may equally arise from
an increase in the utility of the basis-good. In fact the use of such lan guage always goes beyond our evidence: we know only that there has
been a change in relative estimation, and we have no unit of estima tion
common to both periods. If between two periods the index of good A has
fallen and that of good B has remained the same, then we can infer
that the consumer will give up less of B for the marginal unit of A in
the second period than in the first ; but we cannot infer that his taste
for A has diminished, or his taste for B increased. From this it follows
that the significance of our index is in no way impaired if the basisgood be one thing in one period and another in the next. If in one
period our basis-good be 100 units of bread, and in the next 50 units of
coffee, our index is as significant as if in both periods the basis- good were
100 units of bread: for in either case we have in each period a basisgood which forms a common basis of reference within that period but
whose significance within another period cannot be known. This
observation will prevent us from considering the rise and fall of our
index surface as marking changes in the consumer's taste for the

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ECONOMETRICS

good studied; and it will also prove to be of importance when we come

to consider the real price function.
While in these ways our index stands opposed to the function of
marginal utility conceived as a measure of satisfactions, it none the
less shares with that function a property of great significance in the
analysis of prices. Any function stated in terms of price, whether real
price or monetary, is based upon an implicit reference to an existing
array of prices: the price which the consumer will give cannot be
known without reference to his income and to the several prices set
on other goods. It has been the advantage of the marginal utility func tion that it transcends this limitation, and expresses directly the conditions of demand which are among the determinants of the given ar ray of prices, but which equally are consistent with other arrays. This
property our index shares. It rests directly upon the consumer's judg ment of equivalence, and is expressed in terms of the number of units
of the basis-good which, at the margin, he deems equivalent to a
marginal increment of the good studied: and these terms are not de pendent on the prices ruling in the market or on the income of the
consumer)
An examination of statistical work employing the concept of mar ginal utility will show that the procedure in which the function of mar ginal utility is employed remains equally possible if by that function
we understand throughout an index of the kind here described. Phil osophical critics are therefore too hasty if they dismiss such work on
account of the implications either of "measurement" or of "utility."
But statisticians for their part must recognize the limitations of their
procedure, and restrain it from all applications which involve the con cept of a quantity of satisfaction.

In
In the light of the foregoing considerations, we have now to examine
the significance of the real price function, in which as yet most statis tical studies of demand have been expressed.
The real price function can be conceived in a form closely analogous
to the index as here defined, but in one essential respect the analogy is
incomplete. The likeness appears in that we may take as our basis-good
the total real income of the consumer or consumer-group, and real
I here assume that the consumer's attitude towards each of the goods studied
is independent both of the several amounts of other goods that he may be ob taining and of such amounts in conjunction, i.e., of his real income. This assump tion
is arbitrary; but it greatly simplifies the exposition, and its removal does not
vitiate the conception of an index of disposition which the exposition is de signed to
establish.
5

E. H. PHELPS BROWN

57

price then appears as a quantity of the basis-good, the quantity namely

which is deemed equivalent to the marginal unit of the good. studied.
We have seen moreover that the significance of our index is not affected
by changes from period to period in the basis-good, so that the real
price function will not be vitiated by similar changes in the amount of
real income. The real price function therefore might be considered as
a particular case of the general form of our index, were it not for a
difficulty which has already been mentioned, a difficulty to which price
functions are exposed but from which our index is free. This is as fol lows.
Any price function can be valid only so long as it be the sole
such function considered at the time: for each price function represents
the changes in price that will be associated with changes in the rate
of consumption of a good, when the price of every other good is held
constant. 6 We therefore cannot consider two such functions at the
same time, for each supposes the constancy of a price which the other
supposes to vary.
It is the neglect of this limitation which vitiates Marshall's argument
on the redistribution of output between industries of increasing and
decreasing return (Principles, 8th. edn. v, xiii, 4) ; this argument would
hold only if, apart from many other assumptions, we could assume
that the price of each product could change without altering the price
demand function for the other. That this assumption leads to a wrong
conclusion is shown by the following alternative treatment, in which
no use is made of a price function of demand. Let us suppose that in
the position of market equilibrium the community is buying i units
of the good of increasing returns, I, and d units of the good of decreasing returns, D; and let the point (i, d) be inscribed in a graph where
and D are measured by equal intervals along the horizontal and ver tical axes respectively. Then the indifference curve passing through
(i, d) will be convex to the origin. Now the form of the transformation
curve which passes through (i, d), and which shows what output of
either good is made possible by a given reduction in the output of
the other, is indeterminate: for while the relinquishing of successive
equal increments of D sets free successively smaller increments of productive resources, the application of successively smaller increments of
resources can yield successive equal increments of I. But if we assume
that (i, d) is a point of stable equilibrium, we exclude the possibilities
Even this definition of the price function can hold only for the i m p a c t of
price or quantity changes, and not for the resulting equilibrium: for if the de mand for the good studied be not of unitary elasticity, a change in its price
will cause changes in the quantity of money expended on other goods, with con sequent effects upon their prices.

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that in the region of

d) the course of the transformation curve lies
beyond or on the indifference curve. We are then left with the possi bility that in the region of d) the transformation curve yields points
which lie between the indifference curve and the origin. But any such
point records an arrangement of consumption less eligible than that
recorded by d). Marshall's argument, however, escapes this re futation, if we understand it to rest upon the possibility that the trans formation curve which applies to a sustained change in demand is different from that which applies to the impact of an experimental and
unsustained change.

We are faced, then, with a seeming paradox. On the one hand the
real price function may be considered as a case of our index; on the
other hand, any price function refers to a particular context of prices,
from which it cannot be separated without risk of self-contradiction.
But the explanation of the paradox lies in the definitions of real in come and real price. Since there will not in general be a homogeneous
unit of real income or real price, these concepts are usually defined only
to be equal to the quotient of a figure of money divided by a priceindex. Now as we suppose variations in the price of the good studied,
we must in theory thereby imply variations in the price-index, and
with these, changes in the basis-good and the unit of real price. Not
only, moreover, does the basis thus change as we move from point to
point in the demand function for one good, but it changes in different
ways in the demand functions of different goods: variations in the
price of butter will affect the basis in one way, variations in the price
of bread will affect it in another. No two real price functions can there fore
be strictly comparable, that is, capable of being considered simultaneously.
Thus the real price function comes near to being a case of the index
of disposition, but is marked off from that index by a limitation which
is of potential importance: even though for statistical purposes it may
sometimes be safely neglected. While philosophical considerations
make our index of disposition preferable to the utility function, the
index of disposition shares with the utility function an advantage in
economic analysis which makes it preferable to the price function.
New College,

Oxford