Wednesday, March 9, 2016

AEF Spring 2016 #2--Rothbard's "Toward a Reconstruction of Utility and Welfare Economics"

It has been several years since I first read this article as an undergraduate.  When I reread it for this session, I was glad to see that it still holds up.  The same cannot be said for Cordato, he thinks that Rothbard makes several mistakes.  

To begin, Rothbard states that valuation is the "keystone" of economic theory.  Cordato disagrees.  He says that action is the keystone, not valuation.  Is this difference real or is it just one of semantics?  Rothbard clearly agrees that Human Action is the purposeful use of means to arrive at preferred ends.  Cordato clearly agrees that the Austrians have a unique perspective where all valuation is subjective.  The Austrians differ from the mainstream on both of these fronts.  The mainstream does not think that action is important, and it also does believe (sometimes implicitly if not explicitly) that some values are objective and not subjective.  So I am not going to argue which is more important.  I am not going to argue that they are equally important.  However, I will argue that each is important and critical to the Austrian perspective of economics.

Rothbard begins his argument with his perspective on Demonstrated Preferences.  Since we live in a world of scarcity, we must choose.  When we choose, we are demonstrating our preferences.  Rothbard uses this technique in Man, Economy and State to build his Law of Demand and Law of Supply.  (When I teach my foundational economics courses, I also follow this approach.)  When we use preference rankings and choices, we are able to conclude that as people use scarce means to achieve ends (as they define them), the people will "work down" their preference scale.  Simply put, they will do the thing that yields the most happiness first and the next most second, and so forth.  From this line of reasoning, we are able to deduce the Law of Diminishing Marginal Utility.  If we flip the preference scale around and look at it in terms of opportunity costs, then we can deduce the Law of Increasing Opportunity Costs.  Rothbard is following the same reasoning that Böhm-Bawerk first put forth in 1886.

In the article, Rothbard laments that Samuelson has beaten him to the punch by appropriating "Revealed Preferences" before him.  "Demonstrated Preferences" was the second-place choice.  Rothbard credits Mises for making a point of difference between revealed and demonstrated preferences, and that is is the difference between constancy and consistency.  "Consistency means that a person maintains a transitive order of rank on his preference scale (if A is preferred to B and B is preferred to C, then A is preferred to C).  But the revealed preference procedure does not rest on this assumption so much as on an assumption of constancy--that an individual maintains the same value scale over time." Cordato added that in the model of Perfect Competition there is no time and thus all preferences are constant over infinity. 

In Rothbard's section on "Utility Theory," Rothbard stresses how utility cannot be measured.  Furthermore, notions such as "Total Utility" are also meaningless because it assumes that utility is additive.  If I eat one candy bar and then a second am I really adding those two utilities together?  If we stop to think about it, what would it mean to add them together?  

During this discussion, Cordato made the interesting quip that there is no such thing as a "sunk benefit."  

As always, it seems that we run short of time when we finally get to the "good stuff."  (I actually have made the suggestion that we start the discussion at the end of the paper and move forward.)  So when we got to Rothbard's section on Welfare Economics, time was scarce.  (Yes, that was a pun.)

Cordato listed several problems that he has with Rothbard's reconstruction of welfare economics.  We discussed them (briefly), but I will just list them here:

  1. A person can only demonstrate preference, not disutility.
  2. A person cannot demonstrate his opportunity cost.
  3. As a result from points 1 & 2, we cannot demonstrate profit.
  4. Finally, all judgements of social improvements are ex post, but in Rothbard's model they are all ex ante.
We certainly tried to chew through these points, but time was short.  Nevertheless, I invite anyone and everyone to make comments on these points.


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