The Grilled Cheese

Let me ask you a question: have you ever wondered why star athletes go for the biggest contract, even when that team has no shot at winning? Me too, but I think I finally understand why, and it has to do with the strange things going on with money.

Money (dollars in the US) has two main functions. First, it is a unit of currency, traded for goods and services. Second, it is a measure of the value of every aspect of life; how happy we are, how healthy we are, how good we are, and more. In technical terms, it is a measure of utility. On one level, that we use dollars as units of both currency and utility makes a lot of sense. We spend currency based on how much goods or services are worth to us (just another way of saying how much utility they provide us), so why not use units of currency to describe utility? And in a world where everything can be measured precisely, this method might just work.

But we don't live in that world, and we never will. And even if we did, some things are simply impossible to buy or sell: you can't buy your parents, you can't sell your neurons, and you can't purchase friends off the Wal-Mart shelf. And as long as some things remain outside of the realm of currency, then fall solely into the realm of utility. This might not be a big issue. Couldn't we learn to distinguish between the two uses? Maybe, but there is one difference between currency and utility that makes all the difference. 

It has to do with scale. Since currency is a theoretical construct, separate from the physical world, it operates on a linear scale: the amount of stuff a dollar can get you is always the same (not counting inflation, of course). But utility is a direct representation of our physical world, and in our physical world we face diminishing marginal utility. In other words, more stuff is good, but not quite as good as the last stuff. After a certain point, making one more friend is not going to add as much to our happiness as the last friend we made. 

We are so used to dealing with dollar amounts and currency sums that they are more prominent in our minds than the utility they represent. And we are not very good at translating currency into matters of utility. This is especially true when the utility-granting goods or services are far outside our experience, like when dealing with large sums--it's not easy to imagine what $50 million really means in terms of utility. Therefore we often forget about the utility side of things, only taking currency into account. And because currency is on a linear scale, we forget about the diminishing returns to the utility aspect of money, which leads us to take too much money and not enough of the things we want but cannot buy.

This has been a complicated post. So complicated that I've had to rewrite it four times so that it makes sense to me. Let's recap:

1. Money has two functions: currency and utility
2. There are many things in this world that can only describe with utility since they can neither be bought nor sold.
3. Currency operates on a linear scale, while utility faces diminishing returns
4. Currency is more salient than utility, so we often base our financial decisions on matters of currency over utility
5. We are not good at translating currency into utility
6. And so we often don't take diminishing returns into account in our financial decisions
7. Therefore we can end up with too much money and not enough of the things we really want but can't buy

Coming up, I want to talk about what this might mean for the field of economics.