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Ordinal Preference (MES)

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Smiling Dave: Rethinking your original question, I think we can all agree that every person can say about something "I like it"  or "I dislike it" or "I am indifferent to it". "Disutility of X" then means "that aspect of X that I don't like."

We could say that, and that might be what Mises means. But to be clear, that isn't how I am using the term--which is perhaps more akin to what you might call "opportunity cost." I think my concept is more relevant to the ordinal nature of praxeology. 

Not at all. The efficiency is very much in play, but not the disutility. You did not mention at all what happens when B starts getting more efficient. Does B like or dislike working the efficient way more than the inefficient way? You did not say, and with good reason. Because it doesn't matter.

I think I answered this in my reply to Aristippus. Efficiency is contingent on disutility. Let's say that I can catch 2 fish per hour with my fishing pole. Then I discover that I can catch 4 fish per hour if I swim in the water and use a harpoon. But the water is so painfully cold that I would prefer to spend 2 hours fishing with my pole on dry land to 1 hour fishing in the water with my harpoon. In this case, the productivity gain (I don't think I would call it efficiency) provided by the harpoon does not decrease the price of the fish. And it is indeed because I (and presumably others) dislike it more.

Corporations making profits have nothing do with the disutility of labor. And having access to land etc. where others do not does not guarentee a profit. A profit comes from meeting the needs of consumers.

Of course they have to be able to sell their goods. I grant that and should have made it clearer initially.

I don't follow. What is your disproof of the law of comparative advantage? If B can make 4 stacks in an hour, and A can only make 2, what is the logic that says B should not be doing the stacking for them both? And if A catches 2 fish an hour, but B only one, why should A not be doing the fishing for them both?

If A stacks and B fishes, after an hour we have a fish and a stack. If we reverse, after an hour we have 2 fish and 4 stacks. Which method is the recipe for wealth?

Yes, I should have put that differently. It does create more wealth in terms of use-values for society. However, it doesn't ensure profits--i.e. it doesn't ensure that others will spend more time working for you than you work for them. Your increased productivity for a given good also doesn't ensure that it will increase the amount of use-values distributed to you.

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I am convinced that you are merely describing particular examples of opportunity cost.  What you have ended up with is simply a restatement of the Classical cost of production theory of price formation, but this time with a specific focus on the psychic costs of disutility.  Rothbard answers you (Man, Economy, and State p. 360; emphasis is mine):

This is not to deny, and the Austrians never did deny, that
subjective costs, in the sense of opportunity costs and utilities
forgone, are important in the analysis of production. In particular,
the disutilities of labor and of waiting—as expressed in the
time-preference ratios—determine how much of people’s energies
and how much of their savings will go into the production
process. This, in the broadest sense, will determine or help to
determine the total supply of all goods that will be produced.
But these costs are themselves subjective utilities, so that both
“blades of the scissors” are governed by the subjective utility of
individuals. This is a monistic and not a dualistic causal explanation.
The costs, furthermore, have no direct influence on the
relative amount of the stock of each good to be produced. Consumers
will evaluate the various stocks of goods available. How
much productive energy and savings will go into producing
stock of one particular good and how much into producing
another, in other words, the relative stocks of each product, will
depend in turn on entrepreneurial expectations of where the
greatest monetary profit will be found. These expectations are
based on the anticipated direction of consumer demand
.

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I meant that even after time off for consumption, they sometimes choose not to work. Must be because it is unpleasant.

Or maybe they just value resting quietly more than they value working. I still do not see how preference alone is not enough, so that disutility must be brought into the picture.

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I agree--it is a restatement of a Classical theory of price formation. I'm not sure if I understand that Rothbard quote correctly, but it doesn't seem to contradict what I'm saying.

Andris: Or maybe they just value resting quietly more than they value working. I still do not see how preference alone is not enough, so that disutility must be brought into the picture.

Yes, exactly what I was trying to say (though I later used disutility in a different sense).

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So you're saying that the cost of production theory is the best way to understand price formation?  Also, it must be said that Ricardo's formulation is more extensive than yours since he incorporates costs other than disutility.  So you might as well just throw away the pure disutility idea and go back to Ricardo (or Marx, as it were).

Rothbard's point is that (emphasis in the original) "Factor payments are the result of sales to consumers and do not determine the latter in advance.  Costs of production, then, are at the mercy of the final price, and not the other way around."

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So you're saying that the cost of production theory is the best way to understand price formation?  Also, it must be said that Ricardo's formulation is more extensive than yours since he incorporates costs other than disutility.  So you might as well just throw away the pure disutility idea and go back to Ricardo (or Marx, as it were).

How can there be costs other than disutility?

Rothbard's point is that (emphasis in the original) "Factor payments are the result of sales to consumers and do not determine the latter in advance.  Costs of production, then, are at the mercy of the final price, and not the other way around."

I don't mean to suggest that the price is determine by the actual cost that the seller spends on producing the commodity. Rather it is determined by the disutility of production that it saves the buyer from (along with corresponding evaluations from the seller). It would indeed be absurd to say that the price of a commodity is determined by something that happened in the past.

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How can there be costs other than disutility?

Opportunity cost in general.  I can engage in activity A which brings about a psychic profit, but I could have been engaging in activity B which might have brought about an even greater psychic profit.  This has no necessary relation to disutility, which is just the part of action which in itself does not bring about psychic profit, and therefore is necessarily engaged in purely with a view to a further end.

Rather it is determined by the disutility of production that it saves the buyer from (along with corresponding evaluations from the seller)

My point is that this is ultimately just one aspect of opportunity cost.  Even in your own framework why would you say that it's just disutility and not opportunity costs overall?  This, however, would still not address the question of consumer demand: what should be produced and in what quantities.

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Opportunity cost in general.  I can engage in activity A which brings about a psychic profit, but I could have been engaging in activity B which might have brought about an even greater psychic profit.  This has no necessary relation to disutility, which is just the part of action which in itself does not bring about psychic profit, and therefore is necessarily engaged in purely with a view to a further end.

Ah, I see. I have not been using disutility in that sense. I am using it more along the lines of what you mean by opportunity cost. But the more I think of it, opportunity cost is really a misnomer. Cost normally refers to the physical item one gives up. But when a producer gives up his product in a trade, he doesn't really incur an opportunity cost since generally he wouldn't have ever spent any time using the product anyway. He only incurs an opportunity cost in producing the product.

My point is that this is ultimately just one aspect of opportunity cost.  Even in your own framework why would you say that it's just disutility and not opportunity costs overall?  This, however, would still not address the question of consumer demand: what should be produced and in what quantities.

Right, I am just giving a theory of price and not of supply and demand. We need to know the price of a product before we can know how much to produce or buy.

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He only incurs an opportunity cost in producing the product.

Weren't you talking about production (more specifically, autarkic production vs. production for interpersonal exchange)? In order to trade he must have produced something with which to trade.  Let's say that in order to obtain the good he wants to trade for, he could either make it himself or trade for it.  Now you seemed to be saying that the option he chose depended on the disutility of the two options, but really it is a matter of overall opportunity cost.  This is because by producing the good himself, he foregoes producing a good for trade.  The point was that, through interpersonal exchange per the law of association,  by engaging in his most productive activity he gains the most - and that by engaging in any other activity, he suffers an opportunity cost.  Of course, his 'most productive activity' cannot necessarily be known without considering the end of trade - consumer demand.

I am just giving a theory of price and not of supply and demand

Come again?  Price reflects supply and demand.

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Now you seemed to be saying that the option he chose depended on the disutility of the two options, but really it is a matter of overall opportunity cost.  This is because by producing the good himself, he foregoes producing a good for trade.  The point was that, through interpersonal exchange per the law of association,  by engaging in his most productive activity he gains the most - and that by engaging in any other activity, he suffers an opportunity cost.  Of course, his 'most productive activity' cannot necessarily be known without considering the end of trade - consumer demand.

But the good that he foregoes producing for trade is the good he would trade for the product he produces himself. The results of the two choices have identical ends. Therefore, the only basis for his choice is in the difference of the two production processes themselves.

While it might be true that he gains the most by engaging in his most productive activity for the moment, my point is that this does not guarantee that the opportunity cost that he incurs is lessened by an increase in his productivity.

Come again?  Price reflects supply and demand.

Not when they're in equilibrium.

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Therefore, the only basis for his choice is in the difference of the two production processes themselves.

Exactly - by which I mean most productive for his ends (with no necessary relation to physical production) - and by engaging in one her forgoes engaging in the other.

my point is that this does not guarantee that the opportunity cost that he incurs is lessened by an increase in his productivity.

Clarify?  Point me to where you discussed this?

Not when they're in equilibrium.

What??

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Jargon replied on Wed, Jul 25 2012 9:02 PM

Aristippus, he has no idea what he's talking about.

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Clarify?  Point me to where you discussed this?

Here:

Let's return to where A can only chop 1 stack of wood per hour and B can do 4. And let's introduce C, who can also chop 4 stacks per hour and catch 1 fish per hour.  In this case, the competition between B and C forces the price down to 4 stack to 1 fish. Now A and C work 2 hours for every hour A works for them.

[...]

This example also shows that simultaneous increases in productivity among competitors of a certain good do not increase profits. Their productivity must also increase in regards to (other) consumer goods. This seems to indicate that specialization is not the recipe for wealth after all. Though it might have seemed for B and C that sticking to wood cutting would be most profitable, improving their skill at fishing turned out to be the better strategy. This might have meant that they took losses temporarily as they practiced and presumably restricted their purchases from A.

Let me put it in a different way. I am determined to get x. There are two ways I can get it. Either I can produce it myself, or I can produce y and trade it for x. Therefore, the opportunity cost for producing x is the production of y, and the opportunity cost of producing y is the production of x. Let's say at the start 1x exchanges for 1y, and that I prefer to produce y. Now suppose that my productivity increases so that I can produce 1y in half the time it took previously. But my competitor also doubles his productivity, so now I have to trade 2y for 1x--requiring the same amount of labor as before. Thus, though my productivity has increased, it has not reduced my opportunity cost. On the other hand, if my productivity of x had increased, then my opportunity cost would have necessarily decreased quite regardless of what my competitors did.

What??

There are three things at play here: the quantity of a commodity produced, the quantity of the commodity demanded, and the price of the commodity. If I were to tell you that a commodity was supplied in the quantity of 100 and demanded in the quantity of 100, what could you tell me about its price? Absolutely nothing. The price could be anything. Therefore, the price doesn't reflect the quantity supplied or the quantity demanded.

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Anenome replied on Wed, Jul 25 2012 9:35 PM
 
 

bitbutter:
They noticed that the person is expressing his value scale for entire classes of goods, he's not considering concrete quantities/units. So on these grounds Rothbard would likely say that the claim is meaningless anyway, since 'steak in general' cannot legitimately be ranked in comparison to 'burgers in general'.

Of course steak in general can be legitimately ranked in comparison to burgers in general when it comes to ordinal preference. Why on earth wouldn't that be the case? It's like saying the best steak I ever had was much better than the best hotdog I've ever had. Quantities have no effect on that ordinal ranking.

 
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Aristippus, he has no idea what he's talking about.

Haha, it's an interesting discussion nevertheless.

Let me put it in a different way. I am determined to get x. There are two ways I can get it. Either I can produce it myself, or I can produce y and trade it for x. Therefore, the opportunity cost for producing x is the production of y, and the opportunity cost of producing y is the production of x. Let's say at the start 1x exchanges for 1y, and that I prefer to produce y. Now suppose that my productivity increases so that I can produce 1y in half the time it took previously. But my competitor also doubles his productivity, so now I have to trade 2y for 1x--requiring the same amount of labor as before. Thus, though my productivity has increased, it has not reduced my opportunity cost. On the other hand, if my productivity of x had increased, then my opportunity cost would have necessarily decreased quite regardless of what my competitors did.

But that is only necessarily the case in your contrived scenario.  What if you and your competitor doubled their productivity of y, while at the same time the producers of x, also in competition with eachother, doubled their productivity in producing x (while my productivity in producing x remains the same)?  The goods still trade at 1:1 but now by trading y for x I can gain double the amount of x than I could if I made it myself!

Therefore, the price doesn't reflect the quantity supplied or the quantity demanded.

How does this even address my initial point about consumer demand?  Goods are produced for a specific distribution.  The price at which they can be sold, therefore, is extremely important in directing production.

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Jargon replied on Wed, Jul 25 2012 9:54 PM

Fool on the Hill:

There are three things at play here: the quantity of a commodity produced, the quantity of the commodity demanded, and the price of the commodity. If I were to tell you that a commodity was supplied in the quantity of 100 and demanded in the quantity of 100, what could you tell me about its price? Absolutely nothing. The price could be anything. Therefore, the price doesn't reflect the quantity supplied or the quantity demanded.

What do you mean by at play here? And those even the things 'at play'. No one has ever simply 'demanded a commodity' or supplied one, meaning no one walks up to the counter and demands the product. Demand is shorthand for 'commodity demanded in exchange for money'. The same is true for supply. And naturally the quantity of commodity is demanded in exchange for a quantity of money. It seems that again you're using and pontificating off of terms you don't understand.

This is a good article: Marginal Pairs

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bitbutter replied on Thu, Jul 26 2012 6:03 AM

It's like saying the best steak I ever had was much better than the best hotdog I've ever had. Quantities have no effect on that ordinal ranking.

Not so. Quantities are certainly involved since you're comparing one particular steak with one particular hotdog. These are concrete units, so it's not a comparison of burger in general with hotdog in general (i dropped the pluralisation to make the point clearer).

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Aristippus: Haha, it's an interesting discussion nevertheless.

I'm glad you think so.

But that is only necessarily the case in your contrived scenario.  What if you and your competitor doubled their productivity of y, while at the same time the producers of x, also in competition with eachother, doubled their productivity in producing x (while my productivity in producing x remains the same)?  The goods still trade at 1:1 but now by trading y for x I can gain double the amount of x than I could if I made it myself!

You're right. It's not true in all cases. My point was merely that it was not necessarily true that one gains by specializing in a particular product. I only had to give one example to prove this point (just as you had to only give one to prove that mine wasn't necessarily true). Now the tricky part is looking at the real world and seeing how each scenario fits.

(However, I do maintain--unless I overlooked something-- that improving one's productivity of x [as long as y doesn't decrease] will decrease one's opportunity cost necessarily.)

How does this even address my initial point about consumer demand?  Goods are produced for a specific distribution.  The price at which they can be sold, therefore, is extremely important in directing production.

Maybe I misunderstood. Certainly the price at which they can be sold is important for directing production. I have been trying to explain how that price is determined.

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What do you mean by at play here? And those even the things 'at play'. No one has ever simply 'demanded a commodity' or supplied one, meaning no one walks up to the counter and demands the product. Demand is shorthand for 'commodity demanded in exchange for money'. The same is true for supply. And naturally the quantity of commodity is demanded in exchange for a quantity of money. It seems that again you're using and pontificating off of terms you don't understand.

Exactly. There needs to be a price to make sense of the quantity demanded. I thought Aristippus was saying something else before, but now I'm not sure that we're really in disagreement.

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My point was merely that it was not necessarily true that one gains by specializing in a particular product.

Who claimed that one always and necessarily gains by specialising in a particular product?

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I was just making the point. It wasn't meant as a reply to anyone.

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