Home > Micro, Uncategorized > More on Diminishing Marginal Utility (or: This is Why Austrian Economics Drives Me Crazy)

More on Diminishing Marginal Utility (or: This is Why Austrian Economics Drives Me Crazy)

For those who are new to this blog, I am a pretty staunch libertarian, free-market kind of guy.  So naturally, there was a point in my life when I gravitated toward Austrian economics.  But the thing that really drove me away was when I realized what they believe about utility, especially “diminishing marginal utility.”  There are quite a few things that I think Austrians are wrong about (hyperinflation and Cantillon effects for instance) but the utility thing was special because it is a case where the confusion is plainly obvious if you really understand the mainstream model of consumer choice.

Of course, I figured I would just explain this to them and we would all live happily ever after.  Needless to say, that never seems to work.  But at this point it has become sort of my white whale: convincing an Austrian–just one Austrian–that diminishing marginal utility is nonsense.  Then recently I stumbled upon this paper by an Austrian, on Mises.0rg, in which an Austrian explains exactly what I have been trying, in vain, to explain.  So, what the hell, might as well give it one more try.

Here is a rough outline of the debate.

1.  Austrians claim that utility is inherently ordinal and that cardinal utility is nonsense.

Mainstream economists agree (at least officially) and have a model in which utility is purely ordinal but Austrians don’t realize it because it doesn’t look ordinal to them.

From my first year graduate text:

Toward the end of the nineteenth century, perhaps initially from introspection, the concept of utility as a cardinal measure of some inner level of satisfaction was discarded.  More importantly, though, economists, particularly Pareto, became aware that no refutable implications of cardinality were derivable that were not also derivable from the concept of utility as a strictly ordinal index of preferences.  As we shall see presently, all of the known implications of the utility maximization hypothesis are derivable from the assumption that consumers are merely able to rank all commodity bundles, without regard to the intensity of satisfaction gained by consuming a particular commodity bundle . . .

. . . To say that utility is an ordinal concept is therefore to say that the utility function is arbitrary up to any monotonic (i.e., monotonically increasing) transformation.

2.  Austrians don’t seem to believe in assuming things that can’t be proven to be necessarily true logically.

To this end they selectively reject whatever hypotheses mainstream economists arrive at because they all require some set of assumptions.

3. The one thing that Austrians feel comfortable claiming that they can prove logically without any assumptions whatsoever (except that people act) is the “law of diminishing marginal utility.”

In order to arrive at this conclusion logically, they construct a framework with “means” and “ends” and postulate that a person will always use a good (means) for the highest valued use (end) first and therefore, as they get more of the good, the value of the marginal use falls and thus you get diminishing marginal utility.  However, this is not a conclusion which logically must be true.  It is, rather, the result of an assumption which Austrians don’t notice that they are making.  McCulloch is somewhat unusual among Austrians in that he realizes this and pointed it out in 1977.  This is why the paper caught my attention.  Now that we know an Austrian said it, can we all agree that this is the case?

[See pp. 251, 252 (you can thank Mises.org for copy/paste protecting the document....)]

McCulloch1

McCulloch2

 

Notice particularly the line: “Bilimovic argues as if these are valid deductions from a rank-ordering on W, but that is not the case unless we assume that the wants are unrelated.  So there you have it, an Austrian saying exactly what I have been trying to say.  But then, having said that, he goes on to assume that “unrelatedness” and continue to deduce the law of diminishing marginal utility based on that assumption.  This wouldn’t be that annoying if he didn’t then say this:

Note that the Austrian principle of diminishing marginal utility is a theorem, rather than an assumption as with Gossen, Jevons and Walras. [p. 255]

Okay, it’s a theorem, but it is only a theorem in the sense that it follows directly from the assumption of unrelatedness of uses.  In other words, in no way does it represent something that logically must be true.  It is just something that is true if the assumptions made to get to it are true.  And we know that that assumption need not be, and probably usually isn’t, true.  This doesn’t make the theorem meaningless but it does make it no different from all of the conclusions of the mainstream model which Austrians like to claim are useless….

And what’s more, the assumption made here is more restrictive than those typically made in the mainstream model of nonsatiation, substitution and quasi-convexity.  So, essentially there is no intellectual reason to cling to this means-ends framework and the notion of diminishing marginal utility.  Frankly, I don’t even understand what Austrians think the significance of diminishing marginal utility is.  If I had to guess, I would suspect that they might say that it implies downward sloping demand (and in some cases upward sloping supply) curves, and that is sort of true but the mainstream model does it much better.

It is diminishing marginal value that implies downward sloping demand.  Value, meaning the willingness to trade-off one good for another.  For this to be diminishing, you only need to have the ratio of the marginal utilities (the marginal rate of substitution) diminishing.  It is possible for this to be the case even if there is increasing marginal utility of both goods.  Now, it is true that diminishing marginal utility of all goods will give you diminishing marginal value, so in that sense, diminishing marginal value does imply downward sloping demand curves.  But you don’t need to go that far.  All it takes is quasi-concavity.  That is why the mainstream model assumes quasi-concavity and not diminishing marginal utility, because it is the smallest assumption required to get the type of refutable implications that the model gets.  So let’s review.

1. Diminishing marginal utility is an assumption.

2. It is more restrictive than the assumptions in the mainstream consumer choice model.

3. Therefore, the mainstream model is better.

This follows logically, therefore you can’t question it.  If you don’t see the logic, I will just dismiss you as someone who clearly doesn’t understand logic.  See what I did there?  But seriously, Austrians, this is an intervention.  I’m telling you this for your own good because I love you, I love the things that you love like free markets, property rights and individual liberty, and I want what’s best for you.  The mainstream model is just a better version of your model.  It’s that simple.  Let me put snarkyness aside for a moment and try to explain why.

1. Means/ends is pointless.

The means/ends framework adds nothing.  It only makes it easier to confuse yourself and others.  Economics is about choosing between scarce alternatives.  That means we need alternatives, and we need preferences over those alternatives.  That’s it.  If you are choosing quantities of two goods, all we need to know (by which I mean assume) are your preferences over different combinations of those goods.  It makes no difference why your preferences are what they are or what “ends” you are applying the goods too.

The only thing the means/ends framework accomplishes is to take the case where a consumer has preferences over combinations of the good and make it into a two-stage problem where the stages are essentially identical.  Instead of just saying “they have certain preferences over combinations of the good” you say “they have certain preferences over different ends and the goods can each be used for different ends in different ways.”  But the only thing that matters is their preferences over the different combinations of goods because that is the decision we are trying to model.  So you try to logically deduce what those preferences look like based on what you assumed about the preferences over “ends” and the connection between the ends and the means.  Then you claim that what you are saying about their preferences over combinations of goods is not an assumption, it follows from logical deduction.  But it only follows logically from the (possibly implicit) assumptions you made about their preferences over ends and the connection between ends and means.  You just buried the assumptions one stage deeper.  But this gives you nothing, it makes it needlessly complicated.  The only thing this accomplishes is it makes it easier for you to apply false reasoning in connecting the two levels by implicitly assuming something that is not necessarily true, deceiving yourself into thinking that it is necessarily true because you don’t notice that you are assuming it, and then believing that you have proven something which you haven’t.

So why not get rid of all of that nonsense and just say that people have preferences over different combinations of goods?  I think there are two possible Austrian answers to this.  One is that this is methodologically unacceptable because we are not allowed to make assumptions about people’s preferences that aren’t objectively and immutably true.  But the Austrian making this argument must not have been reading carefully because that is what you are doing anyway and the assumption you are making is more restrictive than the one I am making.  The other argument is that then we wouldn’t be able to sit around and talk about how ridiculous mainstream economics is because then our model would be exactly like theirs. (Okay, so maybe a little snarkyness.  A fish has gotta swim.)

2. You need more than just action.

Nothing follows logically from the single axiom that people act.  Their preferences matter.  Since we can’t observe preferences but only action, there is nothing we can say about those preferences that must be true a priori.  If you can’t say anything about those preferences that can’t possibly not be true, you can’t say anything about action period.  If you try, you will just end up assuming something without realizing it.  A careful and responsible approach to modeling action must be very explicit about what it assumes and try to cut those assumptions down to the smallest, simplest, most realistic and least restrictive assumptions possible for the model to “work” and tell you something interesting.  This is what the mainstream model has done and–I can’t stress this enough–our assumptions are less restrictive than yours!

3.  Continuous quantities!

First of all, discreet quantities are not more realistic.  Gasoline, flour, tap water, electricity, labor, cheese, ground beef, and a million other goods are actually measured in continuous quantities.  But more importantly, the consumption of any good properly understood, should be modeled as consumption per some unit of time.  So it’s not the number of cars you buy on a given day on the horizontal axis of the “cars” market, it is the average cars you use up in a year or something like that which is a rate and is inherently continuous.  But even more importantly, it makes everything so much easier and more sensical to use continuous quantities.  I sometimes wonder if you are purposely sabotaging yourselves by forcing yourselves to work with a model that is so unmanageable that no worthwhile conclusions can possibly be drawn from it.  It doesn’t have to be that way.

4.  It really is ordinal utility.

Just because we use a function to represent preferences doesn’t mean they are cardinal.  The numbers have no significance in the model beyond identifying which bundles are preferred to the one in question, which ones it is preferred to and which are neither (in which case the person is indifferent between them).  That is all the numbers mean.  You can plug in any function that preserves the rank ordering and you will get the same results.  This is something we are aware of and are careful about (at least some of us are).  Representing ordinal preferences this way allows us to apply a much higher degree of logic to the problem in much simpler ways than your framework.  This, is a benefit not a drawback.   Typically, we don’t even assign numbers or even a function we just say let there be some function which conforms to the minimum necessary assumptions mentioned above.  The fact that we put an actual function to it with numerical values in order to teach undergraduate students does not make the underlying model cardinal.

So there it is.  If you acquiesce on these points, you arrive at the standard mainstream model.  This has been an Austrian intervention.  Sure it’s one guy doing an intervention on a whole gang of people who all act as a mutual support group for each other, and yes, that does seem to run counter to the established rules for interventions.  So maybe it’s wishful thinking to expect it to be successful.  But that doesn’t mean I can’t waste my life trying.  Maybe if I can get through to one person, and then he can get through to one person, one day all of us true, old-school, ordinal-utility types will be able to band together and have an intervention with the Scott Sumners of the world when they say things like this (good grief!):

As an aside, I believe about 90% of all negative and positive utility in life occurs during dreams, as the feelings tend to be more intense than during waking hours.  (We forget most dreams.) It is only the bigotry of awake people (who control the printing presses) that privileges waking life.

 

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  1. Tom Brown
    July 2, 2014 at 9:02 pm

    Mike I’m glad you’re revisiting this subject… I did a tag search on “Austrian” here a few days back and enjoyed the posts you had…. but the reason for my visit today was to ask a question:

    Where’s the best place to find a chart of the price level (P) vs year which compares a theoretical model of P to empirical data? Here’s two examples of what I mean for Canada and for Japan. Those both use the same model, by the way, and the author (Jason) of the model also created a related pair of curves for the interest rates in those two countries (and others). He’s trying to compare his model results with professional examples but he can’t find any professional examples (he says when he does a Google image search for “price level model” he only finds his own plots (again he’s looking for model results vs empirical data)!). Do you have any idea where he should he be looking?

    Thanks!
    (I’m curious to see how his results compare with others!)

    • Free Radical
      July 2, 2014 at 9:39 pm

      Thanks Tom. I’m not sure I can help with your search. Most academic economic models focus mainly on qualitative relationships. There was an era of “hydraulic” modeling but it didn’t go very well. It turns out that there are a lot of things that are very difficult to observe/measure. That being said, there are probably such models out there but I am not really aware of them. I am, as you may recall, a relative newcomer to the monetary realm. I know the Fed has internal models (and probably central banks) but as far as I know these are not publicly available. Also large financial firms probably have models but they are probably also usually proprietary. If there is anything in the academic realm (and let’s face it, there probably is), it will most likely take a bit of searching to find it. The best tool for this is googlescholar but it can be annoying if you don’t have a university behind you because a lot of stuff is behind pay walls.

    • Free Radical
      July 2, 2014 at 9:51 pm

      One more thing to keep in mind that is probably worth mentioning. The analysis of most economic models usually doesn’t go from building a complete, fully calibrated model to comparing that model to the date. Typically, you develop what you might call a “qualitative” model, one which predicts qualitative relationships between variables and then you go measure the relationships between those variables using regression analysis. Usually when this is done, it is to test a small number of hypothesized qualitative relationships. However, in doing that, their models generate a certain “fit” to the date, usually measured by the R-squared. In a sense, this means that the regression technique is “calibrating” the model to get the best fit. So in that sense, you can think of it like a predictive model, but usually that isn’t really what they are going for, they are just trying to test a more narrowly defined hypothesis like “when the money supply increases, the price level also increases” or something like that. Of course, the better the model fit, the more compelling the evidence regarding their hypothesis is so they try to make them fit as well as possible (with Occam’s razor in one hand of course). But like I said, this means you probably have wade through some pretty thick manuscripts to get a sense of what is out there.

  2. Tom Brown
    July 2, 2014 at 10:43 pm

    Mike, thanks for the thoughtful and detailed response. That gives me a taste of how these kinds of things are approached in the econ world. I asked the author a question playing devil’s advocate, saying essentially “Why is your model better than fitting a quadratic (assume the parameter to data point ratio is equally low)?” He had a good response.

    BTW, I noticed that Noah Smith hits on the Austrian theme today too:

    http://noahpinionblog.blogspot.com/2014/07/resist-austrian-brain-worm.html?showComment=1404339313265#c2377082538776629749

    Plus, you might not appreciate this, but I directed MF (at Sumner’s) yesterday to one of your previous posts, telling him that you had quoted him (I didn’t tell him it was critical). I was very surprised to see today that he’d written me a concise but thoughtful response in which he reluctantly conceded that you made a lot of good points, and he was going to re-think some of his positions……

    ….No, of course I’m joking!! He did have a long response though, which I didn’t bother reading in detail… but I did direct him to this post, so good luck!

    • Free Radical
      July 2, 2014 at 11:03 pm

      lol! You bastard, you had me going there for a second haha. Sadly, the real big underlying defect among Austrians (at least that kid of Austrian which a past commenter would have me call “Rothbardians”) is that they are just too committed emotionally (though they wouldn’t admit it) to defending everything an Austrian ever said or did. They aren’t trying to improve the theory, they think they have it all figured out and they are just pushing it. Obviously, that’s a crappy way to advance a science and that is why when people do improve the theory, as is the case with the mainstream model of consumer choice, they refuse to go along with it. So I know there are many that I will never make headway with but there are always some people on the margins who are not fully committed yet and hopefully I can reach a few of those types and stop them from turning down that path. It sticks in my craw because it is so entrenched in libertarian circles. If you decide you are a libertarian and you go on the internet, it is difficult not to get sucked into that abyss. Honestly, some days I think it is a miracle that I avoided it…(Thank you Eugene Siblerberg)

  3. Tom Brown
    July 2, 2014 at 11:56 pm

    Your use of the word “defending” above made me think of this (which both Noah Smith and Jason Smith referenced recently):

    http://en.wikipedia.org/wiki/Imre_Lakatos#Research_programmes

    I’d never heard of Lakatos or this concept of the research program (of course I’d heard of research programs, but not analyzed as a thing in their own right). Are you familiar with any of that?

  4. Tom Brown
    July 3, 2014 at 12:40 am

    Using that paradigm, it seems MI/Rothbardian style Austrianism might qualify as a “degenerate” research program?

    • Free Radical
      July 3, 2014 at 12:59 am

      Yeah, I am not aware of those guys or what they were saying relative to one another but this line does seem to be relevant to the pop Austirans.

      “Adjustments that accomplish nothing more than the maintenance of the ‘hard core’ mark the research programme as degenerative.”

      I wonder if that is where we got the colloquial “hard-core?” At any rate, I think I agree with most of what was there. I think the Silbergerg guy I mentioned previously was a “hard-core” (haha) falsificationist, but my feeling is that the things economics tries to model are too complicated for a theory to be right all the time. If you observe the theory failing you know some assumption does not hold in the case you are observing but we know that our assumptions don’t always hold so that doesn’t mean it is a useless theory, it just means it can be improved. So in some sense I guess I adhere to a core/auxiliary framework.

  5. Tom Brown
    July 3, 2014 at 12:48 am

    Also I noticed that James Caton has some posts on Austrians:

    http://moneymarketsandmisperceptions.blogspot.com/2014/06/austrian-cycle-theory-and-ecological.html

    For some reason I have sometimes gotten your blogs confused with each other in the past (I realize they are very different!). I see James comment at Sumner’s sometimes.

  6. Major-Freedom
    July 3, 2014 at 1:40 am

    Free Radical:

    Tom Brown has forwarded to me your previous post, to which I responded over at MoneyIllusion, and he also mentioned this latest post of yours here.

    I will attempt to open a dialogue about your writings, and hopefully clarify some things so that your judgment about Austrian economics is less emotion-based than it seems to be (blanket statements that Austrians are emotionally attached is a tell tale sign that you yourself are thinking by emotions, because you wouldn’t otherwise even suspect Austrians are attached to emotions if you were thinking logically).

    But rather than get dirty with all that stuff, I will do what I always do: point by point analysis. Take it for what you will.

    1. It does not appear that your understanding of the law of diminishing marginal utility, at least derived via praxeology, is correct. A crucial component that you seem to have left out of your thinking is that it is not the physicality of the good(s), but the subjective judgment of the good(s) that matter. What this means is that if you were to consider one good A, and think “I will use A to achieve goal A*”, then if you were to then consider a set of two A’s, I can tell you that the law of diminishing marginality would be misused if you believe that the law suggests that with two A’s, you must or will or should use the first A to achieve A* and use the second A to achieve A**. You just have to keep in mind the foundation of praxeological logic. It is crucial that you keep in mind the first judgment of value, the one with only one A. If it is true that one A is used to achieve A*, then you have to take a snapshot, if you will, of the valuation. Given that valuation is true, then the law suggests that only an additional good of the exact same serviceability, will be used to achieve a lower ranking value.

    It is certainly possible that having two A’s instead of one will be used to achieve a goal even higher ranked than having one A. Imagine identical looking bricks to construct a house. One brick and two bricks and 100 bricks might all be ranked lower than the sum of 5000 needed to build a home. These bricks are of course not “unrelated.” This is what McCulloch had in mind, and it is a perfectly valid point as it stands, but it doesn’t refute the law, because here, each brick is NOT of equal serviceability.

    The law is not a prediction. It is a necessary relation between concepts. If I have one unit of a good A, and I use it to achieve A*, then the law suggests that if I instead had two units of A, and they are of equal serviceability, then the second A MUST be used to achieve a lower ranked goal, because we have already stated that A is used to achieve A*. The logical necessity is borne (in part) out of making a statement about A and A*. It is a contradiction to say “A is used to achieve A*, and A might not (or is not) used to achieve A*.”

    Another way of saying this: Saying “Given one unit of A is used to achieve A*” is also a statement about a particular serviceability of A. That has to kept constant if you then consider more units of A. The seeming counter-examples you have in mind are all examples of simply logically contradicting that. The law of marginal utility is not so penetrating that it can stop you from contradicting yourself.

    One of the easiest traps to fall into is trying to use logic by way of concepts abstracted from action. When that is done, then NO statements necessarily logically follow from any premises. For a good explanation of this, see Lewis Carroll’s “What the Tortoise Said to Achilles”.

    2. Regarding your discussion on the means and ends framework. Lots of unnecessary confusion here that appears to be a result of trying to shoehorn in neoclassical modeling into means and ends as structured praxeologically. You assert that “the only use” of means and ends is for consumers in a two stage model. Oh really? Would I intrude upon your proselytizing If I were to point out that your attempt to debunk the usefulness of means and ends, can only be coherently understood to be what you seem to want people to believe it is, which is an attempt to achieve a goal (show that means and ends is not useful) by using scarce means (your PC, your body (fingers, etc), your office, etc)? You just behaved for all to read in a means and ends activity.

    I think where you are going off track is again by interpreting an Austrian argument as a prediction. No, Austrian econ doesn’t concern itself with what specific ends are being sought after, nor with what means are chosen. It only concerns the form, not the content. The form of action is means and ends. You just showed that to be the case (not that it is a proof per se) in your attempt to debunk it. Means and ends are categories of action. They are not empirical predictions of specific content.

    3. You claim that nothing follows from the single axiom that humans act. Oh contraire. What you believe is a “single” idea is actually multilayered. Action is not monistic. It is actually dualist. This understanding requires years (no exaggeration) of philosophical inquiry to grasp (you need to study the history of philosophical thought, particularly the Idealist movement, the Materialist movement, and formal logic is a must). The short and sweet of it is this: Action is a self-reflective activity that by way of a single activity, reveals a thinker and that which is thought. This duality is the origin of praxeological deduction. You have to understand that even thinking of the “single” axiom of action is itself a dualist phenomena. True Austrianism is Praxeology, which is a solution to the dilemma of Kantianism which is Idealism in the pejorative sense (i.e. How can anyone claim to know that what is true for the mind must, by virtue of that, make it true for external reality?).

    4. It is easy as cake to dismiss your prattle on continuous quantities. All we have to do is look at you never bringing back a roast beef to the butcher because it was two atoms short of an exact pound, or changing your asking price to $20.00000000000005 because there is an atom of mercury on it. Gee whizz. Even our money is discrete. Not even the HFT traders use continuous quantities. They use what, 4 decimal places, at the most? Discreteness in economics is not only common sense, not only obvious, but holy cow even a five year old can understand obvious. Do you even know continuousness even means? If you claim that continuous quantities matter in economics, then you are claiming that infinitesmally small quantity changes are factors taken into account when acting. When was the last time you cared about an atom of iron flying off your car on the highway? Or fractions of a penny? Continuous means infinitely small quantities. OK, enough about that.

    5. No, designating number values to preferences does not allow for a more logically rigorous analysis of utility. All it does is translate one language into another. Is English more useful than German? If there is a way to directly translate all the words, then no. But are there concepts in cardinal utility models that cannot be explained ordinally? Not that I am aware, but I don’t see you offering any suggestions.

    • July 3, 2014 at 1:55 am

      “you wouldn’t otherwise even suspect Austrians are attached to emotions if you were thinking logically”

      Any person thinking logically would say that austrians are attached to emotions as that is a factual description. It is especially obvious in your case.

      • Free Radical
        July 3, 2014 at 3:00 am

        yeah, I don’t know how he doesn’t see the circularity of the argument….

      • Major-Freedom
        July 3, 2014 at 3:35 am

        Philippe:

        No, it is not a factual description. Thinking logically would enable one to understand that Austrian economics is wertfrei. It only deals with the deductions from human action, and in relation to thymology, which deals with the specific motivations of specific actions in the historical sense, tells us a story of what happened and why.

        Free Radical:

        It is not circular because I do not claim you are arguing from emotion based on something other than your assertion that all Austrians do so. It is seein you make a sweeping pronouncement about an entire group of people, most of whom you haven’t even met, let alone know their writings. Since it isn’t logic or evidence that grounds your claim, it can only be emotion.

      • Free Radical
        July 3, 2014 at 3:50 am

        I didn’t say they all do that, I specifically said that I think there are some who don’t and that they are the reason I write stuff like this. You should really try to read more carefully. Must be hard when you see so much red though….

      • July 3, 2014 at 5:30 am

        “Austrian economics is wertfrei”.

        An obvious lie.

        “It only deals with the deductions from human action”

        An obvious lie.

      • Major-Freedom
        July 3, 2014 at 5:54 am

        Free Radical:

        You made sweeping pronouncents of “Austrians.” You wrote:

        ” Sadly, the real big underlying defect among Austrians (at least that kid of Austrian which a past commenter would have me call “Rothbardians”) is that they are just too committed emotionally (though they wouldn’t admit it) to defending everything an Austrian ever said or did.”

        How is that not a condemnation of all? What, did you think adding “at least” changes anything? All 5000 is “at least 1″.

        Do try to be more careful in your sloppy generalizations.

      • Major-Freedom
        July 3, 2014 at 5:57 am

        Philippe:

        They’re not lies. Not just because I really do think and believe that Austrian econ is wertfrei, but because it actually is.

        The reason you believe it is not wertfrei is because you don’t know how to distinguish the Austrianism from the Libertarianism in people.

    • Free Radical
      July 3, 2014 at 3:27 am

      I think I agree with John that this is a waste of time but I think Tom wants to see us go at it so I will at least go one round. After all, if you want to make the big-time of snarky dudes droning on about economics on the internet, you gotta give the people what they want. I will leave your opening personal comments aside and cut to the chase.

      1. I’m not doing that at all. The mainstream model does not assign any property to the physical goods, it only assigns preferences to individuals which are fully recognized to be completely subjective. I have no idea where you are getting this. Furthermore, you say this:

      ” I can tell you that the law of diminishing marginality would be misused if you believe that the law suggests that with two A’s, you must or will or should use the first A to achieve A* and use the second A to achieve A**. ”

      I don’t know exactly what you mean because I don’t think you defined A** but if it is what I think you mean, then you are saying what I am saying, except that what you are saying you can’t do is exactly what Austrians do to arrive at the law of diminishing marginal utility. That’s the problem. You have to assume what McCulloch calls “unrelatedness” to get to diminishing marginal utility. Are you arguing with him because I’m saying what he’s saying?

      2. This is great:

      ” You just showed that to be the case (not that it is a proof per se)”

      I get it, “Austrian economics is not about making predictions.” So what is it about? Your version of Austrian economics doesn’t do anything because it is philosophical and methodological nonsense. It leads nowhere. You’re trying to prove that you can’t know anything, the irony is almost too much to bear.

      Furthermore, my using a computer for the “end” of convincing people that the means/ends framework is dumb does not prove that it isn’t dumb. My argument does not amount to “people don’t use goods for ends” my point is that it doesn’t matter what the ends are, it adds nothing to the analysis or the understanding of the way people make decisions between scarce goods.

      3. Nothing here is relevant to my point.

      4. It’s not a matter of how finely you can cut the quantities. If you use discreet quantities, what is the proper unit? How small? Whatever you say I can make the same ridiculous argument you just made: “really that’s the appropriate quantity for action? Not an atom more? Or an atom less?” The point is that you make it needlessly complicated with that madness. You take the limit as the size of the discreet unit goes to zero and viola! you end up doing calculus and all of a sudden it’s waaaaaay easier to make a coherent model. You guys (whatever you are) cling to stuff like that because you don’t want a coherent model, you just want to criticize every model.

      Also, you didn’t even address what I said was most important which is that it is the quantity of the good consumed per some unit of time. Time is truly continuous, there is no atom-splitting required.

      5. Ugh, when I read number one I suspected that you hadn’t read/understood a word I said but now I am sure of it. It’s not meant to be an analysis of utility. Utility is just a concept that facilitates the analysis of choice (or “action” if you prefer). And yes, it’s like two languages but that’s exactly my point. It makes no difference if you put numbers to it as long as you adhere to conceptual ordinality which the mainstream model does entirely. No there is no concept in the “cardinal utility model” that cannot be explained ordinally and that is why IT’S NOT A CARDINAL UTILITY MODEL!

      • Major-Freedom
        July 3, 2014 at 5:34 am

        Free Radical:

        I think the reason you are confused about Austrian theory is that you want to rest on your laurels believing you have dealt these death blows, and rather than really understand it, you work from a mainstream foundation to get it, which is like oil and water. Mainstream econ is based on a radically different foundation, and yet it is the foundation that is being debated here.

        In a word, you can’t refute Austrianism unless you assume the propositions are true and then expose contradictions or logical errors. You are going about it backwards. You are assuming mainstream is true, and claiming that Austrianism is wrong because it doesn’t follow from mainstream assumptions.

        You wrote:

        “I’m not doing that at all. The mainstream model does not assign any property to the physical goods, it only assigns preferences to individuals which are fully recognized to be completely subjective. I have no idea where you are getting this.”

        I was not accusing you of “assigning properties to the physical goods.”

        I said that your analysis is based on viewing goods abstracted from subjective valuation, which is to say the goods not the valuations. You believe that the law collapses to a theorem because of an alleged hidden and non necessary assumption that the wants for the goods are “unrelated” with each other. You cite a passage of this. But I was responding to your analysis, not mainstream theory. You said that the law is based on an assumption of “unrelatedness of uses” of a good in numerous supply. Then you went on and ignored the crucial part of the logical relation that requires each good to be of equal serviceability according to the actor. Do you see now how your analysis appears as based on the nature of the good? If it isn’t what you meant, then my apologies for the misunderstanding.

        The argument you cited is that by adding a want “a” to both sides of the relation b > c, which is postulated as true (among other basic relations I wn’t repeat), whereas the law states that “thus” ab > ac, in truth this need not be so, because a, b and c might be “related” in such a way that b > c but ac > ab.

        But again, this violates the requirement of equal serviceability. If a is more valuable than b, and b is more valuable than c, then should a and c be more valuable than a and b, then what we have here are actually different goods before and after (defined as subjectively useful to achieve wants). Merely using the same letters doesn’t mean you are talking about the same goods! This is why I am convinced you are focusing on the goods and not the valuations. It is because there is an oversight regarding the valuations. You put wants on a ranked order on paper, then you abstract away from the valuations as you add and change letters, then you go back to wants and conclude that since real wants can differ from what the law allegedly predicts, the law must be a theorem.

        There is a grey area there that avoids the serviceabilities remaining the same (in the deduction, not temporally). What else can avoiding the subjective serviceability imply than basing things on objectifying the wants, i.e. goods in themselves?

        “Furthermore, you say this:”

        ” I can tell you that the law of diminishing marginality would be misused if you believe that the law suggests that with two A’s, you must or will or should use the first A to achieve A* and use the second A to achieve A**. ””

        “I don’t know exactly what you mean because I don’t think you defined A** but if it is what I think you mean, then you are saying what I am saying, except that what you are saying you can’t do is exactly what Austrians do to arrive at the law of diminishing marginal utility. That’s the problem. You have to assume what McCulloch calls “unrelatedness” to get to diminishing marginal utility. Are you arguing with him because I’m saying what he’s saying?”

        I am not sure what that last question is really asking, so I will leave it aside for now.

        For the other more relevant part, no, that is not what Austrians are saying. The law readily admits (figuratively speaking) that it is completely possible that a second A might be valued in such a way that both the first and second A are used together to achieve A***, whereas one A is used to achieve A*.

        Again, the law concerns goods of equal serviceability. It does not predict that when a second physical good A is added to the supply, that one A of the two will be used to satisfy want A* the same as with one A, and that the second A will be used to satisfy a lesser, different want A**.

        It only tells us a logical relation of wants. Whether or not a good in increasing supply will be remain considered as equally serviceable is an empirical question.

        “2. This is great:”
        ” You just showed that to be the case (not that it is a proof per se)”

        “I get it, “Austrian economics is not about making predictions.”

        OK, but did you get that your attempt to diminish the means and ends framework, was itself an example of a means and ends phenomena?

        “So what is it about? Your version of Austrian economics doesn’t do anything because it is philosophical and methodological nonsense. It leads nowhere. You’re trying to prove that you can’t know anything, the irony is almost too much to bear.”

        Woah, let’s back up a bit here.

        I am certainly not trying, nor am I actually, proving that “we can’t know anything.” On the contrary. Austrianism claims a tiny quantity (thus far discovered) of apodictic statements about the form of action. It does not predict what you will do with a second apple, but it does claim that the law of marginal utility will apply. And it will, so long as there is an actor with two apples each of which is of equal serviceability.

        Somewhere in your intellectual development you have become a believer that non-predictive fields of inquiry are sterile and useless. That philosophy leads nowhere. That you need to know what will happen and gosh darn it, you must have some model to do it, and if mainstream econ claims to have a way, then follow it and abandon Austrianism. I get it.

        But Austrians think that forecasts, risk taking and anticipating future demand is the province of entrepreneurs, not economists. Economists using mainstream methods have toiled away in windowless offices for over 100 years, trying to emulate physicists and chemists. And what has it generated? ZERO discovered constants. Zilch, Nada. Not even one. How many have physicists discovered? The affine constant, the speed of light, the gravitational constant. The list goes on.

        Economics is not just a science of which scientific predictions are difficult. Positivist empiricism in economics is abject nonsense. It is a gigantic, embarrassing, veritable self-contradiction that has only been able to last as long as it has because most of the incomes these economists make is derived from coercion.

        “Furthermore, my using a computer for the “end” of convincing people that the means/ends framework is dumb does not prove that it isn’t dumb.”

        That is a logical absurdity. One cannot prove a negative. One can only prove a positive. I can’t prove a non-existent concept.

        If the means and ends framework is dumb, and yet you just utilized such a framework in your argument, then that means your argument is constructed on a dumb framework.

        “My argument does not amount to “people don’t use goods for ends” my point is that it doesn’t matter what the ends are, it adds nothing to the analysis or the understanding of the way people make decisions between scarce goods.”

        It is none of your concern as an economist what I will actually value a year from now. That is the job of entrepreneurs.

        As an economist, you can’t even predict your own future knowledge, and thus actions. How in the world do you expect to be able to scientifically predict the knowledge of people you don’t even know exist, let alone read their minds? You’re engaging in nonsense on stilts.

        I notice you are changing your approach. First you tried to show Austrianism is wrong, and now you seem to be granting it might be true, but useless.

        And what do you mean it adds nothing? I just got you to realize that means and ends are not just applicable to the scenario of two stage consumer choice, but even your action of trying to debunk it. If you are so stubborn that you can’t even accept that it is possible for people to learn that even attempts to refute means and ends are themselves activities of means and ends, and thus helps people to cease contradicting themselves, which is one of the most useful things a person can seek to do, then good lord, what is your bag?

        “3. Nothing here is relevant to my point.”

        Excuse me? How can my explanation that human action is not what you claim it is, “not relevant” to your point? Is this blog for real?

        “4. It’s not a matter of how finely you can cut the quantities. If you use discreet quantities, what is the proper unit?”

        It is determined subjectively by the actor, Einstein.

        Is this thing on?

        “How small? Whatever you say I can make the same ridiculous argument you just made: “really that’s the appropriate quantity for action? Not an atom more? Or an atom less?” The point is that you make it needlessly complicated with that madness.”

        Oh so that is why the calculus was discovered before discrete arithmetic. It’s because it is…less complicated.

        Dude, discrete economics does not require anyone to objectivity “proper” units.

        If I will pay $50 less for a car because of a tiny dent that you don’t care about, then neither of us are “wrong”.

        “You take the limit as the size of the discreet unit goes to zero and viola! you end up doing calculus and all of a sudden it’s waaaaaay easier to make a coherent model.”

        Hahaha, you mean if we simply contradict discreteness, and assert continuosness, that continuousness miraculously manifests and we now have a “coherent” model?

        What kind of sandbox logic is that?

        You are not proving economic action is based on continuousness. You are just claiming it’s easier to write continuous equations and assume that the infinite number of points between real world actions and choices, are “meh, more or less accurate if we lived in those counter-factual worlds.”

        The problem of course is that what people do and think, and what you scribble on paper trying to “model” people, are two different things.

        People do not behave according to continuous variables. Nobody, as far as I know, makes economic choices on the infinitely small margin changes. They make them at discrete points. How “far apart” those points are is not an objective “proper” quantity. They are decided by the actor.

        Not even mathematicians who work with continuous equations all day act based on continuous variables.

        Ever been in a classroom where the prof writes a successive series of variables, representing a continuous function? Notice how they use symbols such as dots and bars over the numbers to signify “keep doing this without end”? It is because mathematicians are actors who are necessarily constrained to discrete concepts. Nobody has ever written all the decimal places of Pi, and nobody ever will. We cannot act in continuous land. We can only act in discrete land. Deal with it bro.

        ” You guys (whatever you are) cling to stuff like that because you don’t want a coherent model, you just want to criticize every model.”

        No, we just want to criticize bad models like the one you’re peddling out of stubborn spite.

        “Also, you didn’t even address what I said was most important which is that it is the quantity of the good consumed per some unit of time. Time is truly continuous, there is no atom-splitting required.”

        Sigh.

        Time to the economic actor is also discrete. Has your boss ever scolded you for being late by 1 trillionth of one picosecond, but not 1 quadrillionth of the same?

        Have you ever phoned your cable company for it’s incredibly sporadic starting times for your favorite news program that diverge between the gargantuan range of a millisecond?

        Nobody acts in accordance with continuous variables.

        Time is not truly continuous even to the physicist. Ever heard of a Planck unit of time? Sure, you can think you’re modelling a continuous reality, but you can’t act in it.

        5. Using cardinal models still leaves open the question of what a “util” really is.

  7. John S
    July 3, 2014 at 1:45 am

    Nice post. I do remember having similar thoughts while reading the first few chapters of Varian’s “baby” micro text (“Hey, the mainstream does say utility is ordinal, not cardinal!”) But I never thought much of this debate, and I agree that Austrians that insist on pushing this distinction are wasting their time.

    However, I still won’t give up on my “Rothbardian vs. Austrian” crusade :) Strangely, it kind of reminds me of Chris Rock’s “_____ vs. Black folks” rant, i.e. “I love free market Austrians, but damn I hate me some Rothbardians!” All Rothbardians view themselves as Austrians, but not all Austrians would say they’re Rothbardians (esp. among the Austrians who teach at well-known universities), so it’s both inaccurate and unfair to attribute Rothbardian views (e.g., unbridled deflation = jackpot!!) to the entire Austrian school.

    (Tom Brown, re: Noah’s post–Barkley Rosser makes a point similar to mine in the comments. Even Robert Vienneau, a pointed yet thoughtful critic of Austrian econ, finds Noah’s post to be a crude swing.)

    As you say, Mike, the concept of “Austrian economics” *is* firmly entrenched in libertarian circles, and it won’t be dislodged any time soon. So I still feel rehabilitation of the term “Austrian” is more pragmatic than rejection. Anyway, keep up the good work.

    • John S
      July 3, 2014 at 1:49 am

      Uh-oh, buckle your seatbelts, everyone. M-F is in the house. And I don’t mean “Major_Freedom.”

      • John S
        July 3, 2014 at 1:49 am

        Incidentally, Mike, by accident I found this old comment today by George Selgin which pertains to the discussion we had on expectations and regime shifts. I don’t mean to beat that horse; I just found it interesting to see him clarify his views.

        “I’ve never suggested that it makes no difference whether you are starting with an economy used to low NGDP growth or not. Of course, expectations matter; and as Scott has always insisted, a relative to a long-standing 5% growth trend a _sudden_ switch to 0% will be harmful. By the same token, though, were an economy accustomed to 10% NGDP growth, a sudden switch to 5% would hurt.”

        http://www.themoneyillusion.com/?p=7514#comment-39757

      • Free Radical
        July 3, 2014 at 4:19 am

        John,

        That does clarify Selgin’s view quite a bit. I think Selgin has a pretty reasonable stance actually, we’re probably not that far apart. I shouldn’t have been so hard on him (of course I’ve said that already). The internet does weird things to you if you’re not careful.

    • Free Radical
      July 3, 2014 at 2:52 am

      Thanks John. As before, I acknowledge your point and have no disagreement. I fell off the “Rothbardian” wagon because you stopped coming around to correct me haha. But I feel like on this particular issue even the good kind of Austrians have issues. I may be wrong about that though, not sure. And, as before, I’m fine with rehabilitating the word “Austrian” but that’s a big job too. I think a good place to start is with this model. The basic consumer choice model has all the things Austrians are into. It has rational consumers, ordinal utility, efficient markets. What’s not to like? Come on Austrians, embrace the model. Embrace it!

  8. Tom Brown
    July 3, 2014 at 1:46 am

    :D

  9. Tom Brown
    July 3, 2014 at 2:09 am

    I feel like I may have started a brawl in Mike’s formerly quite and respectful china shop! (mission accomplished… Lol)

    • John S
      July 3, 2014 at 2:18 am

      Yes, but I truly don’t see any good coming out of this. Mike, I’d say don’t waste your time.

      • Major-Freedom
        July 3, 2014 at 5:46 am

        Hmmm, sounds like someone is afraid of treasonous conversion.

    • Free Radical
      July 3, 2014 at 3:02 am

      haha, quiet perhaps, but who are you calling respectful? If I get any more obnoxious I might really become the new “MF”

      • Major-Freedom
        July 3, 2014 at 5:35 am

        It takes years to become as obnoxious as yours truly.

  10. Tom Brown
    July 3, 2014 at 7:47 pm

    “I think Tom wants to see us go at it” … it does seem like that doesn’t it. But it’s more like I just couldn’t resist throwing a match on the pile of oily rags to see if it lights up… I don’t necessarily want to stick around for the fire. But now that you’ve decided to go “one round” I will check it out. Thanks.

    • Free Radical
      July 3, 2014 at 7:54 pm

      haha yeah I don’t blame you. I think one round is all I can take.

  11. Tom Brown
    July 3, 2014 at 10:33 pm

    BTW, I think that Lars Christensen uses a term you might find useful as well:
    “internet Austrian”:

    http://marketmonetarist.com/category/internet-austrian/

    Also I noticed that Noah addressed the GMU point as well:

    http://noahpinionblog.blogspot.com/2014/07/resist-austrian-brain-worm.html?showComment=1404371619493#c4267598180176557894

    • Free Radical
      July 3, 2014 at 11:35 pm

      “Internet Austrian” I like it. Or how about “Major Freekin Austrian”

  12. Tom Brown
    July 4, 2014 at 7:03 pm

    Mike, is this a typo?:

    “But even more importantly, it makes everything so much easier and more sensical to use discreet quantities.”

    Did you mean to write “continuous” there instead of “discrete?”

    • Free Radical
      July 4, 2014 at 7:22 pm

      haha yes! Man that was a particularly problematic one, thanks. I will change it.

  13. July 5, 2014 at 12:26 am

    You showed that, when placed within the neoclassical framework, most – though I would not say all – of the contributions of Austrian economics are superfluous. But there is a deeper structure that I think you are missing. Humans act and make choices. We use utility to model this in the neoclassical framework. We abstract one degree further and replace utils with dollars. I have no problem with this as cardinal utility, when applied to only one individual is ordinal. We can expand the application to multiple individuals as we do with empirical macro, but the theory loses its realism in exchange for usefulness.

    It is here where Austrian economics does have something to contribute, but it cannot do so in an equilibrium framework where consumers optimize their utilities according to the calculus of optimization. Instead, we need to imagine that our consumers are not perfectly knowledgeable. They can only be sure about the ability of ends to fulfill their desires ex post. Ex ante, they are engaged in estimation typically using heuristics. The action taken, as determined by these heuristics are the attempt to achieve a particular end. The estimation may be wholly wrong, and a rational person will adjust his or her action ex post, but will still be subject to the framework with which he or she interprets reality.

    See my post: http://moneymarketsandmisperceptions.blogspot.com/2014/06/austrian-cycle-theory-and-ecological.html

    • Free Radical
      July 6, 2014 at 10:58 pm

      Jim,

      I’m not sure what you mean by this:

      “We abstract one degree further and replace utils with dollars. I have no problem with this as cardinal utility, when applied to only one individual is ordinal. We can expand the application to multiple individuals as we do with empirical macro, but the theory loses its realism in exchange for usefulness.”

      I don’t know of anyone “replacing utils with dollars.” We certainly often measure value in dollars but that is something entirely distinct from utility (this is a concept that Austrians struggle to appreciate). That of course, is not a further degree of abstraction, if anything, you could say it is one degree less of abstraction (value is a real quantity and, to some extent, can actually be observed/measured). I don’t know what you mean when you say you have problem with this as cardinal utility because it is not cardinal utility, it is purely ordinal.

      Now regarding this:

      ” Instead, we need to imagine that our consumers are not perfectly knowledgeable. They can only be sure about the ability of ends to fulfill their desires ex post.”

      You are conflating two issues. If you want to study consumers who have imperfect information go right ahead. That doesn’t require a different framework. Of course, then you can make absolutely anything happen, depending on how you make their information “imperfect.” But you won’t really be doing anything different. They will still maximize their percieved utility function. What you are saying is something like “their preference rankings aren’t what they would be if they had perfect knowledge about the ability of the goods to satisfy their various desires.” That is actually clinging to a cardinal notion of utility. The point is that it doesn’t matter why their preferences are what they are. It could be because they are terribly confused about what the goods in consideration do. But the fact of the matter is that their confusion still results in some set of preferences. We are not trying to explain why preferences are what they are, we are just saying “let people have some preferences and let them conform to some very basic assumptions.

      Whatever you try to assume about their preferences over ends and the connection between means and ends and the consumer’s misperception about that connection, it will just end up resulting in some rank ordering of different bundles of goods and that is what matters for their decision making. If you think you can say something interesting about the specific way that people make mistakes, go right ahead, but just saying that they make mistakes is not in any way a criticism of the mainstream model. And for that matter, the means/ends framework is not any more appropriate for dong this, you can just say “their perceived utility function is X and their real utility function is Y” where the Y is how they would rank bundles if they had perfect information. Any set of preferences which could be generated by the means/ends approach could be represented in this way.

  14. July 6, 2014 at 8:37 am

    You mention that you disagree with Austrians on hyperinflation. Could you explain what I have wrong or provide a better explanation of hyperinflation?

    http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html

    • Free Radical
      July 6, 2014 at 11:03 pm

      Vince,

      I’ve been off the grid for a few days but I will take a look soon.

  1. July 8, 2014 at 3:08 am

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