How do people make decisions? Praxeology gives us the answer.


Values and the law of marginal utility

Let's take an example where Joe wins 100,000 dollars in the state lottery, and he's deciding how to utilize those dollars. Joe desires the following things, in this order and with these prices: a new car (20,000 dollars), a boat (30,000 dollars), add to cash savings (10,000 dollars), take a vacation to Tahiti (40,000 dollars), buy a plane (100,000 dollars), and donate to charity (50,000 dollars).

Obviously, Joe is going to spend his lottery winnings on a new car, a boat, a vacation to Tahiti, and put the rest (10,000 dollars) in savings. Because he's out of money, he forgoes the plane and the charitable donation. The plane-- his first unsatisfied want-- is his marginal utility of 100,000 dollars.

Now let's presume that Joe won 200,000 dollars. Well, he would be able to also buy the plane; in other words, he would be able to satisfy more of his wants. And Joe's marginal utility of 200,000 dollars is once again the first want foregone-- the charitable donation. And if we presume that he won 250,000 dollars, he would be able to make the charitable donation on top of everything else. Joe's marginal utility of 250,000 dollars would be whatever want was next on his list, and that went unsatisfied.

Clearly, the more money that Joe has, the more wants he is able to satisfy. But this applies not just to money-- which is just an exchange commodity-- but to any good, and even to time.

Let's change the scenario now, and put Joe in the position of an unfortunate sole survivor of a plane crash on a deserted island. Joe has been collecting berries. At some point, he has to shift gears and build himself some shelter, or some clothing. Joe juggles these priorities by comparing the marginal utilities of the various options.

For instance, let's say that Joe has just collected his thousandth berry, and he says to himself, "That's enough berries for now-- time to build a hut." The fact that prompts him to alter his behavior to build the hut is that in Joe's eyes, the marginal utility of 1001 berries is less than the marginal utility of a hut.

Further, let's say that the 20th item on Joe's list is to study a philosophy book he'd found in the wreckage of the plane. Because Joe is desperate for survival and only has so much time, he has to continue expending his time fulfilling the higher needs and desires on his list-- for example, continue to collect food, build better shelter, perhaps figure out how to send out a distress signal, among other things.

Let's fast-forward time and now say that Joe has been on the island for a full year. He has a healthy supply of berries along with tools to let him efficiently gather them, has good shelter, and a set of clothes that he's managed to make for himself, and he has a constant SOS smoke signal that he can maintain with little effort. Only now-- after a full year-- is he "wealthy" enough to be able to hit number 20 on his list of wants: the study of philosophy.

But these gains in his wealth can be rapidly reversed; time isn't static, and Joe's surroundings as well as his value priorities are constantly in flux. If a hurricane hits and Joe's house and berry store are destroyed, he's right back to his earlier priorities, and he has to stop his study of philosophy once again.


What is education

Because all living things are in a constant fight for survival, to the degree that a given species can pass its collective knowledge, acquired over many generations and even thousands or millions of years, to its forebears is the degree to which that species has the best chances of long-term survival.

Fortunately, humans can not only pass their survival knowledge on selectively through genetics, but also through written and verbal accounts. This passing on of knowledge, from parent to child, from elder to youth, is called education.

Now let us return to the above example of Joe on his island: in that example, Joe is only able to pursue his study of philosophy to the degree that his survival is assured. The "wealthier" Joe gets-- the more berries he has, the more stable his shelter, the better his SOS signal-- the more he's able to pursue lower, more trivial matters with lower marginal utilities. But in the blink of an eye, his gains could be offset by some unforeseen event or set of circumstances, at which point Joe has to divert his attention once again to more pressing matters.

Put simply: Joe is only able to study philosophy if he's productive and wealthy enough to be able to do so. If he becomes less productive and wealthy, he loses the ability to study philosophy.

Now imagine a society with 50 people, or 100 people, or 1000 people, or a million people-- the exact same principle holds. The extent that a society is productive and wealthy is the extent to which its participants can engage in leisurely and extraneous activities.

How does this relate to "education"? In a society, senior members want to ensure their survival, the survival of their children, and the survival of their culture. As such, they are naturally apt to teach their children the most pressing needs of society until the marginal utility of the teaching is surpassed by the marginal utility of whatever productive work the child is capable of providing.

In any society then, the role of education is to train its members in whatever trade is in the greatest need. If there is a shortage of food, profit-seeking members of the society will see the opportunity and build more farms, while teaching their children just enough about farming for the child to be productive and so contribute to the well-being of the farm and the society. If then there is a shortage of roads, entrepreneurs will build roads, and teach other members of the society ("employees") how to build roads.

In a society, where values and needs are constantly changing, "education" shifts to wherever is the greatest need. And the amount of education is determined by the marginal utility of the education as continuously weighed against the increasing productive capabilities of the student.

Maybe some day a society is so wealthy that it has lots of homes, ample food, and lots of clothing-- the base needs of the society are easily met. It is at this point, and only at this point, that the marginal utility of teaching members of society superfluous things like philosophy, painting, literature, or women's studies will surpass the marginal utility of the society's greatest needs.

And if society's wealth starts to slip, society will revert some of its "education" back to the things that have a more favorable marginal utility-- foregoing women's studies and literature, for example.


How education works in the world today

Today, most countries have compulsory, state-run "education" programs. What is taught in these programs, and for what duration the students are taught, is determined by government central planning "experts". Further, the government subsidizes loans so that people can extend their "education" for an arbitrary amount of time, whether this time extension or the skills acquired actually have any productive use in society.

As we have seen based on the above explanation, the odds of this kind of system leading to people being taught productive skills towards society's most pressing needs are slim-to-none; students are compelled to acquire "education" for an arbitrary number of years, and they are taught not what is needed for a particular trade but what a central planner has deemed appropriate.

This is why, around the world but especially in America where I live, there are shortages, often severe, of people with engineering skills, and people with college degrees in women's studies working cash registers at McDonald's. There is a mismatch between society's needs and the things people are being "educated" in. This is also why, in America if not elsewhere, young people are burdened with tremendous amounts of debt, as the pseudo-third party payer system causes people to "invest" in "education" that has little or no productive use for society.

All of this is a failure of central planning.


How to improve the system

The solution to the problem is to reconnect the naive dreams of having a society full of "renaissance men" with the reality of what "education" really is, as described in great detail above.

There are incremental ways in which this might be done. For starters, constantly adjusting college subsidy levels so that they are proportionate to the number of known job openings in all fields would help to match students with society's actual needs. Another step would be switching to a school voucher system-- this would put market forces in play, whereby parents could choose to send their children to alternative trade schools to prepare the children for the real world, and in a trade where there are actually opportunities.

The ultimate solution would be to simply abolish the state-run schools and allow society to dictate what skills-- "education"-- is passed on, to whom, and for how long, according to society's greatest needs and the law of marginal utility. This would ensure the best possible efficiency of connecting society's members with society's most productive needs.

There is the very distinct possibility that such a solution would be a key component in increasing the general welfare of society to such a degree that-- like Joe on the island once he's acquired enough "wealthy" and prosperity-- the marginal utility of studying superfluous things like philosophy would in fact exceed society's greatest needs, and we would wind up with the civilization of "renaissance men" of which the world's naive progressives have long dreamed.

But until prosperity and accumulation of wealth organically and naturally reaches that stage, any attempts to force this state of affairs prematurely will serve the opposite purpose-- it will set us back and forever prevent us from achieving anything even remotely close to this ideal.