Thursday, 12 February 2009

Utility versus income

Greg Mankiw asks us to spare a thought for the top ten percent of earners who apparently bear the main burden of the economic downturn.

I wish he had figured out how to measure whose utility has been hurt the most, as opposed to just whose consumption has fallen. Unfortunately this is a blind spot of many economists. Poor people simply get more value out of a dollar than rich people. This also means that they are hurt more by a smaller fall in income.

Diminishing marginal returns have been part of economic theory for two hundred years, so I'm not sure why people keep forgetting it.

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