I can't remember what its called. Neoclassicals argue that you can find out if a good is worth producing by figuring out what the most amount of money people will pay for it is. If the aggregate $$$ is more than it costs to produce, then there is a benefit to producing the good.
Obviously the slight of hand is equating greater $$$ with benefits, and you can argue the impossibility of interpersonal comparisons and aggregations of utility. Fine.
I think there are a lot of other problems with the thought experiment though. Ask - what is the most you'd pay to avoid having your television stolen? Whatever the replacement cost is! So this method causes us to conclude that we're all equally averse to theft, when we are perfectly capable of demonstrating elsewhere that we actually have different preferences.
Also consider - what is the most you'd pay to get $100? $99. Since the cost of producing a Ben Franklin is less than $100, we should be printing money for a while. Obviously this is a net-bad, but that just reveals that we can't only look at what individuals are willing to pay to get something.
Though maybe I'm badly misunderstanding this thought experiment.
i'd say so.
EIT: Though maybe I'm badly misunderstanding this thought experiment. i'd say so.
Lol
Ignore the problem of nonmonetary benefits. It's not designed to handle that situation.
It works (assuming equal effective demand) because everyone can use dollars to communicate how much they value something. Should iron be turned into crowbars or pipes? Well, people will pay $1000 for pipes but $500 for crowbars, so clearly pipes are more important (at this point--diminishing marginal utility etc.) So it solves the problems of interpersonal utility evalutaitons and utility aggregation (unless some people like money for it's own sake, but assume that away).
As for your television example, could you elaborate? You imply a counterexample, but you don't provide one. If people want more or less of a service, they can pay more or less for it.
As for the money example, people would be willing to give up $100 to get $100, as long as it involves no expenditure of time or effort. Usually you can ignore that stuff, but since money is the standard of value, all of a sudden you're trading equals for equals rather than subjectively worse things for subjectively bettter things, so you have to look to other things to explain this situation.
You didn't go into detail much so I don't know how much of this explained what you want to know.
i think coase's got it.
Ambition is a dream with a V8 engine - Elvis Presley
Coase: It works (assuming equal effective demand) because everyone can use dollars to communicate how much they value something. Should iron be turned into crowbars or pipes? Well, people will pay $1000 for pipes but $500 for crowbars, so clearly pipes are more important (at this point--diminishing marginal utility etc.) So it solves the problems of interpersonal utility evalutaitons and utility aggregation (unless some people like money for it's own sake, but assume that away).
Coase:As for your television example, could you elaborate? You imply a counterexample, but you don't provide one. If people want more or less of a service, they can pay more or less for it.
Coase:As for the money example, people would be willing to give up $100 to get $100, as long as it involves no expenditure of time or effort. Usually you can ignore that stuff, but since money is the standard of value, all of a sudden you're trading equals for equals rather than subjectively worse things for subjectively bettter things, so you have to look to other things to explain this situation.
Right. The most everyone would pay to avoid losing a telvision set is the cost of a new television set. This implies that everyone has an equal aversion to theft, but in reality that could be contradicted if people chose to purchase different levels of security.
I'm still lost. Why would people choose to buy greater levels of security for no additional benefit, or lower levels of security when there is still more net benefit to be gained?
Thats the point. This isn't a comprehensive test. You have to fall back and apply some ulterior standard to figure out that printing $100 over and over again is bad. What is that standard? Why don't we just use that?
The comprehensive standard is "whatever is welfare-maximizing." For most cases this partial test works as a measurement of an action's net benefit because the money price is usually very accurate in terms of the social cost of an action. In cases where this does not hold true, you look for replacements (externalities would be an example). Unfortunately, due to all those bloody knowledge problems there isn't one comprehensive test (well, you wouldn't even need a test).
It works (assuming equal effective demand) because everyone can use dollars to communicate how much they value something. Should iron be turned into crowbars or pipes? Well, people will pay $1000 for pipes but $500 for crowbars, so clearly pipes are more important (at this point--diminishing marginal utility etc.)
Well this ignores the fact that, at least in monetary economies, goods are basically always exchanged for money, and that money, as well as consumer and producer goods, is also subjectively valued.
For example, suppose that individuals A and B both desire commodity X, and that individual A is willing to pay $2, while individual B is only willing to pay $1.50. Now does this necessarily mean that individual A values commodity X more than individual B? No, absolutely not. It could very well be the case that their demand for money varies, that individual A values money less relative to individual B (even if their incomes and time preferences are identical; there is a liquidity preference). So measuring the willingness to pay does not resolve this issue unless the monetary unit is valued equally amongst all individuals (an untenable assumption).
Money prices only reflect the subjective valuations of the marginal pair, determined by the last capable consumer/producer and the first excluded consumer/producer. This means that there are many who value the product above the given price (typically known as consumer surplus), and even more who didn't value it enough to purchase it at that given price. So prices do not, in anyway, "measure of value."
Marginal utility, for the Austrians after Bohm-Bawerk, merely implies the desire to employ economic good X for various needs. I may want good X for activity a,b and c, and after c, I may no longer value it all (marginal utility entirely collapses). Thus, prices aren't the "average measure of value" either, since each individual desires product X for different uses--both qualitatively and quantitatively (the rate by which marginal utility diminishes varies from one individual to the next).
Simply put, value can never be measured; it is only graded (making inter-personal utility comparisons impossible, in fact nonsensical). This perfectly demonstrates how nuanced differences in price and value theory yield entirely different conclusions.
Edited
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
I can't see where anyone said that average value was equal to price. but the argument above makes wonder how long it has been since some posters cracked their micro textbook. esuric is right prices are not measures of average value, but no one ever ever said they were. instead, neoclassicals argue that prices would be equal to the marginal value. and marginal value is defined as the marginal utility from good x divided my the marginal utility of income (the marginal rate of substitution between the good and income). and this makes sense because if your marginal value exceeded the cost of additional unit of something, you would benefit by consuming an additional unit of it (until, as you move down the marginal value curve, the price of the addition good is equal to the marginal value).
as marginal utility is subjective (and hence so is marginal value), neoclassicals would agree that prices reflect subjective valuations. and i would note there is really nothing in theory that dictates the marginal utility be the same across individuals. so for all the "nuanced differences" esuric is laying out, i don't see any that conflict with neoclassical choice theory as it actually exists. Neither do austrians like hayek (who had a great admiration for neoclassical choice theory see below):
It is indeed the great contribution of the pure logic of choice that it has demonstrated conclusively that even such a single mind could solve this kind of problem only by constructing and constantly using rates of equivalence (or "values," or "marginal rates of substitution"), i.e., by attaching to each kind of scarce resource a numerical index which cannot be derived from any property possessed by that particular thing, but which reflects, or in which is condensed, its significance in view of the whole means-end structure. In any small change he will have to consider only these quantitative indices (or "values") in which all the relevant information is concentrated; and, by adjusting the quantities one by one, he can appropriately rearrange his dispositions without having to solve the whole puzzle ab initio or without needing at any stage to survey it at once in all its ramifications. http://www.econlib.org/library/Essays/hykKnw1.html
It is indeed the great contribution of the pure logic of choice that it has demonstrated conclusively that even such a single mind could solve this kind of problem only by constructing and constantly using rates of equivalence (or "values," or "marginal rates of substitution"), i.e., by attaching to each kind of scarce resource a numerical index which cannot be derived from any property possessed by that particular thing, but which reflects, or in which is condensed, its significance in view of the whole means-end structure. In any small change he will have to consider only these quantitative indices (or "values") in which all the relevant information is concentrated; and, by adjusting the quantities one by one, he can appropriately rearrange his dispositions without having to solve the whole puzzle ab initio or without needing at any stage to survey it at once in all its ramifications.
http://www.econlib.org/library/Essays/hykKnw1.html
but that is all i want to say on the matter. for more info on neoclassical choice theory, use the google machine. :)
Good thread.
"I'm not a fan of Murray Rothbard." -- David D. Friedman
Sieben: EIT: Though maybe I'm badly misunderstanding this thought experiment. i'd say so. Wow that is the best answer ever. Thanks for taking the time and energy to grace me with such a detailed and thoughtful response. Your's in christ, Sieben. his trolling back fired on him :P My Blog: http://www.anarchico.net/ Production is 'anarchistic' - Ludwig von Mises | Post Points: 5
his trolling back fired on him :P
My Blog: http://www.anarchico.net/
Production is 'anarchistic' - Ludwig von Mises
EconomistInTraining:i'd say so.
Coase: I'm still lost. Why would people choose to buy greater levels of security for no additional benefit, or lower levels of security when there is still more net benefit to be gained?
Coase:The comprehensive standard is "whatever is welfare-maximizing." For most cases this partial test works as a measurement of an action's net benefit because the money price is usually very accurate in terms of the social cost of an action.
Coase:In cases where this does not hold true, you look for replacements (externalities would be an example). Unfortunately, due to all those bloody knowledge problems there isn't one comprehensive test (well, you wouldn't even need a test).
If I'm understanding this correctly, the argument that if the money earned is greater than the money spent on costs (i.e there is net revenue earned at the price), then there is a "benefit" for producing the good, because a profit can be earned. This is true. The whole edifice of Austrian production theory (or at least Rothbard's) is based off of Marginal Value Product analysis and interest rate discounting. A marginal value product of a factor is the additional (or forgone) value obtained from the additional (or forgone) output of an addtional (or forgone) factor of production. In the catallacy, this value is represented as marginal revenue accuring to a firm when it takes away/hires an additional factor. Due to time preference, the MVP is discounted by the interest rate.
A higher marginal value product for one factor in one industry relative to another (meaning that whether due to a higher price or higher MP in that industry, higher revenue is earned due to the factor) means that that factor better satisfies consumers in that industry than if it was employed in the lower MVP industry. The higher MVP comes from the fact that consumers are voluntarily choosing to spend more (whether by higher prices or greater volume from elastic demand) relative to other options. They are "casting their vote" for goods in this industry to be produced instead of in another industry where they would spend less (meaning they would be less satisfied). They have chosen to allocate their money stock in a way that satisfies them most, if it didn't satisfy them the most, they would change their spending habits and potential DMVPS/profit opportunities would change accordingly. They are better served by this new arrangement which is why the entrepreneur earns a profit initially when producing in this line of production, because the factors were underpriced in relation to their true DMVPS. Holding everything else constant, as new entrepreneurs enter this line of production and bid up factor prices/increase the supply of the product, the return will be driven down to the pure interest rate (what the entrepreneurs discounted their factors by).
As Rothbard puts it:
"What function has the entrepreneur performed? In his quest for profits he saw that certain factors were underpriced vis-a-vis their potential value products. By recognizing the discrepancy and doing something about it, he shifted factors of production (obviously nonspecific factors) from other productive processes to this one. He detected that the factors' prices did not adequately reflect their potential DMVPS; by bidding for, and hiring these factors, he was able to allocate them from production of lower DMVP to production of higher DMVP. He has served the consumers better by anticipating where the factors are more valuable. For the greater value of the factors is due solely to their being more highly demanded by the consumers, i.e., being better able to satisfy the desires of the consumers. That this the meaning of a greater discounted marginal value product. " (p. 511)