What I really, really want (and how badly)
One of the cool functions of money is that it allows us to express our preferences in a remarkably refined way by means of our willingness to pay — but it is not always that simple
Preferences are a relatively recent phenomenon. Even our not-so-distant ancestors didn’t bother much about them. Preferences are only relevant when there is choice, and when there are trade-offs to be made. They didn’t have Netflix, a vast range of breakfast cereals, or numerous clothing brands. Mostly, they took what they could get, whether that was food (as long as it was nutritious), a cave for shelter (as long as it was fit for purpose), or a mate (as long as you could produce offspring together).
But once our even-less-distant ancestors had come up with some form of sophisticated society, choice emerged, and they had to start making trade-offs. And money allowed them (and us now) to express which of those choices they preferred, and what they were willing to sacrifice for it, without having to resort to ever more complicated bartering combinations (what is the exchange rate between hares and loaves of bread today?)
Willingness to pay (and its counterpart, willingness to accept) have become the way in which we measure relative preferences, within and between people. What we are prepared to pay is at the very least an indication, and often a genuine measure of the utility we expect from what we get. If we go to the bakery and are prepared to pay £1.50 for a croissant and £3.00 for a loaf of bread, it makes sense to conclude that the bread gives us twice as much utility as the croissant. Likewise, if, in an auction, the top amount we are willing to pay for an original 1969 vinyl copy of The Beatles’ Abbey Road album is £30, and someone else keeps bidding until the price reaches £90, we can assume that the other buyer will be getting three times as much utility out of it than we would.
But this idea that willingness to pay is a sound indicator of utility seems to have its limits.