Tag Archive | Finance

The Marginal Utility of Job Function

A thought popped up my mind while I was in Topics of Money and Finance.

John von Neumann and Oskar Morgenstern explained decision making by using expect utility theory in 1944. A large part of the foundation of their idea lies in the utility function – an alternative way of understanding value of goods in the market after scholars abandoned the Labor Theory of Value favored by Classical and Marxian economists. In essence, the little sticky price tags on the myriad goods in supermarkets depended no on how much it costs to make the goods, but rather on how “happy” consumers are by purchasing them.

I suppose this explains why there are so many differentiated products on the market from a demand perspective. Sure, for the supplier, the enterprise is engaging in competitive behavior and opening up new markets by offering differentiated products. However, from a pure consumer perspective, perhaps all we wanted was variety, for the simple reason that our marginal utility on each “new” differentiated product is higher than the marginal utility on a second unit of any product that we already consume. (I certainly felt this way when I made a point of buying a different flavor of vitamin water every time until I have tried all of them – yes, I probably fell for their marketing tricks, but so have a lot of people I’m sure.)

This leads to my next supposition. What if one can gain more utility by performing different job functions? Suppose you start with network management. You become familiar with the process of managing chapters and keeping correspondence, but the more you do it the less utility you generate by performing the job function. Eventually you become tired of managing chapters and want to try something new. You then move to communications and begin dealing with speakers and invited guests to various events. Similarly, you begin with a high utility but gradually declines as time goes on.

In some ways the utility function would be similar to the learning curve – except the learning curve doesn’t measure how “happy” you are. And happiness matters significantly more in a non-salary-paying world.

But the other side of the story is that you are specializing whenever you spend longer time performing the same task. So there must be a trade-off between utility and value of specialization. In the real world, companies reward specialization by increasing the wage or salary. In a NPO where specialization is not measured by the amount of salary paid, how do we make sure everyone is happy doing the same job over an extended period of time? Each division therefore must figure out ways to reward specialization. Sure, promotion certainly serves as a huge incentive, even in the real world. But the nature of promotion implies that there will be some who are not promoted. For them, their utility must be supplemented, if not sustained, by both tangible and intangible rewards for specializing.

A lot of this clearly is not all that well-thoughtout, so if you have any suggestions, please let me know!

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