The concept of diminishing utility of wealth is central in economics. Basically it means every additional dollar brings less pleasure than the one before it. More recent theories evaluate each outcome as compared to a reference point, which is usually the status quo.
Imagine you are craving for a glass of water in a desert. You certainly have a very high valuation for the first glass of water and your valuation of next glasses decreases dramatically up to a point where you are no longer thirsty. This is because the reference point—the status quo—is changing. Looking at public perception from this perspective, there seems to be a diminishing marginal satisfaction over the government’s achievements.
Two years ago, when President Hassan Rouhani took office, the Iranian public was seeking the removal of sanctions. However, in the aftermath of the nuclear deal and the lifting of sanctions, the public perception has changed and people want a sudden economic turnaround. As the nuclear deal is taken for granted, the government has a very difficult road to climb. The ever-changing reference point imposes a constraint on the government’s ability to harvest the economic fruit of the nuclear deal. This is because the wisdom of masses does not necessarily appreciate the wisdom of experts. It is crucial to understand this difference and educate the public in this regard, otherwise the authorities will be compelled to embrace populist policies.
As the government has heavily invested in its diplomatic issues, it nurtures too much hope in attracting substantial foreign investments required for achieving the targeted 8% growth target. Perhaps, this is not the right way to boost public expectations. What the public needs is an assurance from the government that it will mobilize all tools needed to return growth, employment and inflation to desirable levels as rapidly as possible.
This is crucial because it gives the public and the markets the confidence in the government’s ability to devise the right policies and use all resources to buffer the economy against any adverse shock and move it on the path of growth, as the country is reinforcing ties with the international community.
