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.

Austrian Economics Forum Fall 2015 Recap

After quite the hiatus, I suppose that I should try to get back to blogging.  

North Carolina State University is the location for the open to the public campus club: "Austrian Economics Forum."  Since its founding the idea was to promote the development of Austrian Economics from the Graduate-Student level and above.  This year we have decided to open it up to include undergraduate students and any other interested parties.  The idea is to go back and start filling in the foundations.

In an attempt to get back to the roots I presented several lectures. The first was on October 16, 2015. Here is the link: Dr. Paul F. Cwik 10-16-2016 NCSU - Menger & the Early Austrians  



(The preview picture, which was automatically edited by this cite, clearly thinks that I was excited about this point on the Methodenstreit.)

In this talk I cover the four most significant contributions made by Carl Menger.  I also take a look at Eugen von Bohm-Bawerk and Friedrich von Wieser. I present a little of who they were and I explore their most important contributions to the science of economics.  Additionally, I add some important points made by Philip Wicksteed, William Smart and David I. Green.

The second lecture that I presented took place on November 1, 2015.  Here is the link to that lecture: Dr. Paul F. Cwik on Austrian Capital and Interest Theory  



In this lecture, I build on the first lecture.  I begin with Bohm-Bawerk's review of others' ideas on Capital and Interest.  Then we build his positive theory and compare it with John Bates Clark.  In addition to this, I also look at the way in which the Austrians view interest rates (based upon the subjective notion of time preference) and compare it with the mainstream view, which is based upon both subjective and objective factors.

I then build the Structure of Production and stress the importance of not only capital substitution, but capital complementarity.

The third lecture was a presentation of the Austrian Theory of the Business Cycle, which builds upon the first two lectures.  At some point in the near future, it will be posted to Youtube and I will link it here.

A Very Marxist Movie

With utter and complete disregard of the Oscars yesterday, I watched a movie....

I watched one of the most Marxist movies I have seen in a long time.  Fortunately, it was also a terrible movie.  It's called, "In Time" (2011) with Justin Timberlake and Amanda Seyfried.  I won't get into anything that a normal movie critic would look at like acting or cinematography; I'll concentrate on what I know--economics.

The story takes place in a dystopic future.  Normally, I love dystopic movies because usually they are about an oppressed people who throw off their chains and fight for freedom.  While this movie is about an oppressed people, who throw off their chains, it is a world in which the Marxist vision of capitalism is alive.  The rich are parasites that feed off the poor and that system must be overthrown.

So here is the premise of the movie...

People have been genetically modified so that they stop aging at 25 years, what you look like at age 25 is locked in.  (Amazingly, everyone is gorgeous.  I don't remember 25 like that, but I guess my memory has faded with age.)  When one reaches 25, numbers on your left arm light up and start counting down from 1 year.  If they reach zero, you die.  Fortunately, time can be added and subtracted.  As a result, time has become the medium of exchange.  Literally, time is money!

In a classic Marxist perspective, society is divided up into distinct "Time Zones" or socio-economic classes.  The ghetto (zone 12) is populated by the poor who labor day-to-day barely scrapping by, whereas in the rich district of New Greenwich, the rich live idle lives.  In fact since they have all the time in the world (again literally!) they are accused of not actually living at all.

The "hero" explains that prices rise for no apparent reason.  The cup of coffee's price was 4 minutes, but then jumps up to 5 minutes the next day.  A bus ride was an hour, but now has a price of 2 hours.  As a result, the hero's mom is (in a tragic and supposedly heart-wrenching scene) the first shown to die when time runs out. Actually, I didn't feel all that bad, mostly because the movie was terrible.  Or is it because I am not a Marxist?  hmm...

The plot moves forward when the "hero" helps a rich guy slumming it.  His name is Henry.  Henry is tired of living and is contemplating suicide even though he has over a century on his clock.  The movie shows its true Marxist colors in the following exchange between Henry and the "hero" Will.

Henry Hamilton: For a few to be immortal, many must die. 
Will Salas: What the hell is that supposed to mean? 
Henry Hamilton: You really don't know, do you? Everyone can't live forever. Where would we put them? Why do you think there are time zones? Why do you think taxes and prices go up the same day in the ghetto? The cost of living keeps rising to make sure people keep dying. How else could there be men with a million years while most live day to day? But the truth is... there's more than enough. No one has to die before their time. If you had as much time as I have on that clock, what would you do with it? 

The point is that the population is increasing and so prices (from an assumed Central Planner) rise to reduce the surplus population. The result is a transfer of time (wealth) to the rich.  And so the rich get richer by stealing from the poor.

However before Henry kills himself, he gives the "hero" over 100 years.  Our "hero" then goes to the capital to experience the life of the idle rich.  He gains even more years by playing poker and meets Amanda Seyfried.  After romancing her, the cops come along and accuse him of stealing the rich guy's time.  After the usual escape and chase action found in Hollywood movies, Timberlake and Seyfried's characters decide to get back at the rich.  They use guns (Oh Hollywood!) and start robbing banks.  They redistribute the time to the poor who, of course, selflessly share this time with everyone else who is poor.  They then emigrate out of their zone and cross into the rich zone, thus collapsing the system.  

And if that simply isn't enough Communist preachiness for you, then there is the coupe de grace.  As the "heroes" are robbing the banks, there are a few moments when they ask if robbing the banks are wrong.  The answer is: no, this is not wrong.  They ask, "Is it stealing if it is already stolen?"  Yes, all the rich ever do is steal their wealth.  Yes, Proudhon lives, "All property is theft."  

If this is the sort of movies that Hollywood insists on making, you can see why I skipped the Oscars.

One last note, this movie lost money in the US.  It was budgeted at approximately $40 million and brought in $37.6 million.  So do they simply make it for ideological reasons?  No, because, according to IMDB, Non-US Income was $103.2 million.  Now what does that tell you?  Your guess is as good as mine.