Subjective Value Theory

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Autolykos replied on Fri, Oct 19 2012 9:30 AM

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It seems clear to me that not all preferences are revealed in action, only the highest preference at the time. In other words, as you say, a person is acting to relieve his most urgently desired end at any given time. Nothing can then be directly observed about his less urgently desired ends. However, acting to relieve one's most urgently desired end does imply some relative ordering of ends. Action itself implies this. One must have a most desired end in order to act at all.

Let's say there's a person who feels indifferent between two or more ends, and he preferred those ends over all others. This person won't be able to choose between his multiple most desired ends. However, he is acting in trying to choose between them. This implies that he does have a single most preferred end, namely to choose between the ends that he feels indifferent about.

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mikachusetts replied on Fri, Oct 19 2012 11:23 AM

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Fephisto,

The law of diminishing marginal utility doesn't require either form of ordinal preference ranking that you're talking about. All it says is that each additional unit of a good will be used to satisfy a less urgent end -- whether that end is B or A or C or X shouldn't matter.

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Smiling Dave replied on Fri, Oct 19 2012 11:43 AM

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1.

If I understand the Austrian treatment of indifference theory, it's, basically, that "Preferences are revealed only in action", and thus, indifference theory is illogical.

No. http://mises.org/daily/4223 The problem is something else.

2. I think it is important that we are on the same page about the following point. I may be belaboring the obvious, but bear with me.

We don't have to know a person's preferences for him to actually have them. Tree falls in the forest and nobody there doesn't mean it didn't fall.

Here's a quote from Mises in Theory and History, Chapter 1:

It may happen that the judging individual considers both things or conditions envisaged as equal. He is not concerned whether there is A or B. Then his judgement of value expresses indifference. No action can result from such a neutral disposition.]

Mises is expilicitly saying a person can actually be indifferent, even though this indifference will result in no action. The tree fell, although we will never know it.

When Rothbard wrote about preferences revealed only in action, he was talking about what we know about a person's thoughts. But whether we know them or not, he has them.

You may enjoy these articles about this fascinating subject:

http://smilingdavesblog.blogspot.com/2011/05/caplan-on-public-goods.html

http://smilingdavesblog.blogspot.com/2011/05/caplan-and-welfare-economics.html

http://smilingdavesblog.blogspot.com/2011/05/more-on-caplan-and-welfare-economics.html

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Fephisto replied on Fri, Oct 19 2012 12:10 PM

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I'll get to your replies tomorrow, but I made a mistake at the end there:

"Which, poses a problem, since the proof of the law of marginal utility in the Austrian economic theory requires a _weak_ from of ordinal preference rankings."

That should be _strong_.

Edit: Thus, by the same logic of the critique of indifference curves, Austrians can only claim a _strong_ form of ordinal preference rankings. should read _weak_.

Somewhere in there I mixed up what I had defined as weak and strong.

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Adam Knott replied on Fri, Oct 19 2012 2:15 PM

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Fephisto:

Thank you for your contribution. Here is a correct version of your question:

If I understand the Austrian treatment of indifference theory, it's, basically, that "Preferences are revealed only in action", and thus, indifference theory is illogical.

However, at any given point in time, Austrians can claim to make a ordinal (not cardinal) ranking of preferences. I can understand how, given objects A, B, and C we can determine that, say, the most preferred good is, say, C; because this would be exhibited by the individual's action. However, this individual's ordinal ranking could proceed as either C,B,A or C,A,B; i.e., we do not know whether A is preferred over B, because at a given point, the person can only exhibit his most preferred end (he can not perform both heterogenous actions simultaneously). Thus, by the same logic of the critique of indifference curves, Austrians can only claim a _weak_ form of ordinal preference rankings.

Which, poses a problem, since the proof of the law of marginal utility in the Austrian economic theory requires a _strong_ from of ordinal preference rankings.

May I ask, would you be able to provide a clear and succinct explanation why the proof of the law of marginal utility requires a strong form of ordinal preference? That would be very helpful in the discussion.

Here are some things that may help you explain the above paradox.

1) The law of marginal utility as typically formulated is not identical to the pure notion of preferring A to B as you outline it in your example. The law of marginal utility as typically formulated applies only to those situations in which the actor possesses a "supply" of identical units. The law applies to cases where the actor increases or decreases his supply of identical units by one unit. The pure notion of preferring A to B does not depend on the notion of a supply of identical units. The notion of preferring A to B is more universal than the law of marginal utility as typically formulated. Thus, we have to make this clear in a discussion which compares concepts from the law of marginal utility with concepts from the simple notion of preference.

2) Regarding indifference, I think it is important to realize a distinction between what we may call "routine" actions and "deliberative" actions.

Critiques of Misesian/Austrian economics as well as misunderstandings of it, often define "actions" as that subset of conscious conduct that is preceded by a process of deliberation between alternative courses of action. However, this conception of action is inconsistent with (at least) Mises's conception of action. In Mises's conception, the fundamental distinction is between physical or chemical reaction on the one hand, and conscious conduct on the other hand. Mises outlines no third class of conduct that stands between physical processes and conduct that is preceded by a process of deliberation between alternative courses of action. Thus, a fleshing out of the Austrian concept of action requires that we classify as actions a larger range of conscious conduct than is generally assumed.

If someone is deciding between two courses of action, this "deciding" is an action. In Austrian theory an actor who decides between two courses of action is not indifferent, he is performing the action of deciding.

Note: A definition of action that is an improvement on the "deliberative action" definition is that provided by David Gordon:

"Any conscious behavior counts as action--an action is anything that you do on purpose."

(An Introduction to Economic Reasoning, p. 18)

3) It is also important to realize that the essential characteristic of action is conduct or behavior aiming at a goal. If I try to figure something out, this attempt at figuring something out is an action since it is a conscious activity aiming at a goal. And thus there are "mental" actions:

"Some "actions" don't seem to involve physical movement, e.g., thinking" (Gordon, p. 19)

"Thinking is an action, a mental "doing," as it were." (Gordon, "The Philosophical Origins of Austrian Economics")

"...thinking [is] itself an action, proceeding step by step from the less satisfactory state of insufficient cognition to the more satisfactory state of better insight" (Human Action)

These Austrian insights show that when we address the notion of indifference, we have to realize that when the actor decides between two alternatives, or hesitates to make a choice because he fears making the wrong choice, or postpones making a choice for some reason, these are all conscious "doings" and thus actions. An actor can never be considered indifferent in a general sense merely because he is doing one thing and not another.

"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)

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xahrx replied on Fri, Oct 19 2012 2:55 PM

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"However, at any given point in time, Austrians can claim to make a ordinal (not cardinal) ranking of preferences. I can understand how, given objects A, B, and C we can determine that, say, the most preferred good is, say, C; because this would be exhibited by the individual's action. However, this individual's ordinal ranking could proceed as either C,B,A or C,A,B; i.e., we do not know whether A is preferred over B, because at a given point, the person can only exhibit his most preferred end (he can not perform both heterogenous actions simultaneously). Thus, by the same logic of the critique of indifference curves, Austrians can only claim a _strong_ form of ordinal preference rankings."

I think you're missing the overall point; marginal utility is taught using that version of ordinal preference as you term it as a pedagogical method, not because that's an actual representation of reality. In reality we don't know and can't know what a person's ordinal preference rankings are, however we know they do have preference rankings; they may be strong or weak, fleeting or etched in stone, and are always limited to what that person knows and chooses to consider given any potential transaction. We'll never know any of that. The top preference for any particular decision is just the only one that will ever be demonstrated and so the only one that can be known in a historical context. The logical demonstration of how marginal utility works is kind of like a supply and demand graph. It's not like we actually know what the demand for any given product will be if the price goes up or down a specific amount, but the graph is drawn to demonstrate conceptually how the relationship works.

i think you're making one of the major mistakes of most modern economics, which is to think these graphs and thought experiments are actually reality. They aren't. They help us understand reality by placing it in a setting of ceteris paribus and other qualifications which simply can't be held constant for the world at large. If it were possible to apply the necessary qualifications to the world we could run controlled experiments and economics would be an empirical science. But we can't, so it isn't.

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Fephisto replied on Sun, Oct 21 2012 11:19 AM

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Well, I ended up discussing this with a friend (from whence my question originally came (he originally convinced me that the law needed a strong form), and ended up solving my question.

tl;dr: the law of marginal utility is only talking about the nth v. n-1st goods. Action can determine a preference between two objects (nth v. n-1st). Thus a weak form of a subjective value theory (SVT) is all that's really needed.

Knott: What I was originally thinking was the following. If marginal utility says that successive units of a good is applied to 'less urgent' ends, i.e. less-preferred ends, then I would have to be able to rank all of those possible ends. E.g., if 3 eggs goes to end C, 2 eggs to end B, and 1 egg to end A; the law would imply A>B>C.

In particular, a lot of the examples in both Human Action and MES use an individual with a strong form of SVT, which, to answer your question Knott, is why I thought that the strong form of SVT would be needed.

SmilingDave:

I wrote a bunch of stuff--and then I saw that you were more replying to my comment about indifference theory--as opposed to the law of marginal utility. (That said, thanks for the links, which will be useful for thoughts on indifference theory)

Final note:

http://wiki.mises.org/wiki/Law_of_marginal_utility should probably be improved a bit...

(final final note: I read you other posters' responses--don't have much to say, sorry :U)

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Adam Knott replied on Sun, Oct 21 2012 6:42 PM

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Fephisto wrote:

A) the law of marginal utility is only talking about the nth v. n-1st goods. Action can determine a preference between two objects (nth v. n-1st). Thus a weak form of a subjective value theory (SVT) is all that's really needed.

B) What I was originally thinking was the following. If marginal utility says that successive units of a good is applied to 'less urgent' ends, i.e. less-preferred ends, then I would have to be able to rank all of those possible ends. E.g., if 3 eggs goes to end C, 2 eggs to end B, and 1 egg to end A; the law would imply A>B>C.

*******

Fephisto:

I'm not sure you've solved the problem. Because the law of marginal utility as typically formulated does indeed entail the expression "less urgent" (or "less valuable" or "less utility," etc.) as you indicate in B and you've removed reference to that notion in your solution A above. If you've solved the problem, you should be able to insert the phrase "less urgent" or "less valuable" or "less utility" in A above, applied to a situation where the actor's supply of homogeneous units changes from n to n-1.

Would your friend be willing to post on the forum why he/she believes that the law of marginal utility requires a strong form of subjective value theory?

*******

Here is what I believe to be the essential problem. I will be using Mises's conception of the law of marginal utility, Human Action, 3rd rev.

Mises conceives that those things are valuable to us that we choose to do or choose to obtain or attain.

"The assignment of orders of rank through valuation is done only in acting and through acting." (p.120)

What Mises means is that the value assigned to object X is assigned by my acting in regard to it; either my doing X, or attaining X. My statement to Bill that I value X, or that I plan to do X or plan to obtain X in the future doesn't count as "valuing" X for Mises in the scientific sense.

"What counts is a man's total behavior, and not his talk about planned but not realized acts." (p.13)

"...this overlooks the fact that the scale of value [the plan] is nothing but a constructed tool of thought. The [actual] scale of value manifests itself only in real acting." (p.102)(bracketed added for clarification)

In regard to the law of marginal utility, this sets up a problem. If value is assigned to something by my doing or utilizing that thing, then, strictly and rigorously speaking, I can only compare the values of things I have done or utilized. When we say that X weighs less than Y, what we mean is that we have weighed X and we have weighed Y. In the same vein, when in the law of marginal utility we that X is less than Y in some sense, this must mean that we have subjected both X and Y to the same process and then compared the results. If X is valued less than Y, then we can only say this if we have "valued" both X and Y and compared the results, and as Mises conceives things, we can only value X and and value Y by choosing or doing both X and Y.

This explains why Mises struggles with the law of marginal utility in Human Action.

For example, Mises writes:

If the supply decreased by the loss of one unit, acting man must decide anew how to use the various units of the remaining stock. It is obvious that the smaller stock cannot render all the services the greater stock could. That employment of the various units which under this new disposition is no longer provided for, was in the eyes of acting man the least urgent employment among all those for which he had previously assigned the various units of the greater stock. (p.122)

Note that Mises does not begin with the statement that the actor has employed one unit, but instead begins by writing that the actor's supply "has decreased" by one unit. This denotes a situation in which an actor has a supply that decreases by one unit by our assumption, but not by an act on the part of the actor.

In the second part of the passage, Mises then writes: "That employment of the various units which under this new disposition is no longer provided for, was in the eyes of acting man the least urgent employment among all those for which he had previously assigned the various units of the greater stock."

Mises now discusses this same unit in terms of the actor's employing it toward some purpose, i.e., in terms of an act on the part of the actor.

What's going on here? We can see the problem if we rewrite Mises's opening sentence:

"If acting man employs one unit of his supply, then acting man must decide anew how to use the various units of the remaining stock."

The problem is that if the law of marginal utility is written in this way, it becomes obvious that we are referring to two actions, and that the value comparison entailed in the law of marginal utility (implied in the expressions "more/less," "greater/lesser," "higher/lower," etc.) is based on the comparison of two actions.

I believe that in his explanation of the law of marginal utility, Mises may be trying to avoid explaining it in terms of two actions because he knows that it is inconsistent with his own theory to compare two separate instances of valuing with respect to their intensity, urgency, etc. The comparison of two different instances of valuing would be a thymological and not a praxeological matter.

If he simply writes "if acting man employs one unit of his supply," which is the simple and uncomplicated expression, this leads to two actions and an explicit comparison of two acts of valuation, something Mises wants to avoid.

Here is another example:

"The satisfaction which he derived from the use of one unit for this employment was the smallest among the satisfactions which the units of the greater stock had rendered to him." (p.123)

Mises writes that the use of one unit provided a satisfaction to the actor and that the units of the greater stock also provided satisfactions to the actor. Then we should be able to write plainly:

"The satisfaction which he derived from the use of one unit was the smallest among the satisfactions which he derived from using the units of the greater stock."

The difference may be subtle, but the implications are significant. In Mises's phrasing, the actor only performs one action; the act of employing a single unit. The same actor derives satisfactions from the units of the greater stock, not by any action of his own, but by virtue of the stock "rendering" satisfactions to the actor. This allows a description in terms of only one act of the actor, and avoids the issue of comparing two acts of valuation directly or explicitly in terms of two acts of the actor.

*******

Consider this explanation of the law of marginal utility by Mises:

There are only two alternatives. Either there are or there are not intermediate stages between the felt uneasiness which impels a man to act and the state in which there can no longer be any action (be it because the state of perfect satisfaction is reached or because man is incapable of any further improvement in his conditions). In the second case there could be only one action; as soon as this action is consummated, a state would be reached in which no further action is possible. This is manifestly incompatible with our assumption that there is action; this case no longer implies the general conditions presupposed in the category of action. Only the first case remains. But then there are various degrees in the asymptotic approach to the state in which there can no longer be any action. Thus the law of marginal utility is already implied in the category of action. It is nothing else than the reverse of the statement that what satisfies more is preferred to what gives smaller satisfaction. (p.124)

Here, Mises attempts a short proof of the law of marginal utility. He writes that the reason there must be intermediate stages or various degrees leading up to the state in which there can no longer be any action is because we assume there is action, which rules out the case in which the actor performs one action and then ceases to act. Here, in using the terms "intermediate stages" or "various degrees" it appears Mises is trying to arrive at a theoretical justification for the notions "more versus less" or "smaller versus larger" in the context of his own theory.

Essentially he reasons that there must be intermediate stages or various degrees because in holding that there is action, we rule out the case in which there is only one action. He doesn't bring up for discussion the assumption that there are two or more actions.

For some reason he never mentions what seems obvious: the assumption that for every instance of the actor's felt uneasiness there is a corresponding action. In his discussion of the law of marginal utility, Mises seems to avoid any explanation that explicitly refers to two or more actions. I believe this is for the reason already given.

Mises is well aware of the idea that in formal praxeology, the assumption of an action implies a corresponding "need" or "uneasiness" and vice versa.

"However, we can never identify the want otherwise than in the action. The action is always in accord with the want because we can infer the want only from the action." (Epistemological Problems of Economics, 1976, p. 80)

"It was forgotten that we are able to infer the need only from the action. Hence, the idea of an action not in conformity with needs is absurd. (p. 149)

Mises realizes that in formal praxeology, to suppose a need (a felt uneasiness) is to suppose an action and vice versa.

In his attempt to prove the law of marginal utility, he refers to the notion of intermediate stages, but it is not clear what these intermediate stages consist of. The problem is that if we try to clarify the nature of these intermediate stages by explicitly writing "intermediate stages of valuing" or "intermediate stages of dissatisfaction" or "intermediate stages of utility" this will introduce the notion of several actions unambiguously, and lead to the question of comparing the values of several actions.

Finally, there is another praxeological issue with the law of marginal utility. In Misesian praxeology, the categories of action are to be understood as cateories that apply to each and every action. As Mises writes:

"There is no action in which the praxeological categories do not appear fully and perfectly. There is no mode of action thinkable in which means and ends or costs and proceeds cannot be clearly distinguished and precisely separated" (p. 40)

"The teachings of praxeology and economics are valid for every human action..." (p. 21)

"And for every concrete action all that is rigorously valid which is categorically established with regard to action in general." (p.198)

Mises also writes:

"Thus the law of marginal utility is already implied in the category of action." (p. 124)

This seems to mean that the law of marginal utility is to be conceived as applying to each and every concrete action in the sense indicated in the passages above. The problem is that the law of marginal utility as explicitly formulated applies only to those actions in which an actor possesses a supply of homogeneous units and either attains an additional unit or employs one of his possessed units. There are many actions that do not fit this description.

Writing in The Economic Point of View, Kirzner distinguished between the economics of Mises and that of Robbins. Kirzner wrote that whereas Robbins conceives that economics has to do with a recognizable pattern of allocation of resources on the part of the actor, Mises's praxeology is wider and more fundamental because Mises's action, as opposed to Robbins' economizing, does not depend on a recognizable pattern of allocation, but is based on the more fundamental notion of conduct directed toward a purpose. (p. 161-162)

Along the same lines, action that entails relinquishing one unit from a homogeneous supply, or that entails adding one unit to it, is less universal than action aiming at a goal generally. This implies that the law of marginal utility as typically and historically formulated is not a praxeological law since it doesn't apply to each and every action. What the law of marginal utility describes is not clearly and precisely distinguishable in each and every action.

If the above reasoning holds, this means that the law of marginal utility as historically formulated is thymological in nature. This is consistent with what has been argued above because the comparison of two instances of valuing taken from two separate actions is a thymological and not a praxeological matter.

"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)

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Andris Birkmanis replied on Mon, Oct 22 2012 3:58 PM

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I can understand how, given objects A, B, and C we can determine that, say, the most preferred good is, say, C; because this would be exhibited by the individual's action.

Even this is not given. Humans prefer ends, while actions are means. You have to understand the human's beliefs and reasoning in order to infer his ends from his means.

If X opened the door leading to a tiger and not the door leading to a girl, it does not mean he prefers the tiger to the girl.

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Fephisto replied on Wed, Oct 24 2012 1:39 PM

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Knott:

Pfffffffffffffffffffffffffffffffffffffffffffffffffffffft, wrote a bunch of stuff, came to a certain point, deleted it all.

(might I say before I continue on the rest of this, that you did some pretty superb citationing there)

I think you're right in that what I said before was bogus.

Also, I think you hit at what my issue is/was:

The problem is that if the law of marginal utility is written in this way, it becomes obvious that we are referring to two actions, and that the value comparison entailed in the law of marginal utility (implied in the expressions "more/less," "greater/lesser," "higher/lower," etc.) is based on the comparison of two actions.

I believe that in his explanation of the law of marginal utility, Mises may be trying to avoid explaining it in terms of two actions because he knows that it is inconsistent with his own theory to compare two separate instances of valuing with respect to their intensity, urgency, etc. The comparison of two different instances of valuing would be a thymological and not a praxeological matter.

However, I have trouble with what you end with:

If the above reasoning holds, this means that the law of marginal utility as historically formulated is thymological in nature. This is consistent with what has been argued above because the comparison of two instances of valuing taken from two separate actions is a thymological and not a praxeological matter.

If this is the case, the the law of marginal utility is not something of the apodictic science of economics and human action; but rather of the art of business and I don't see how it has any unction in being in a book on economics.

Either way, throw out what I was saying w.r.t. weak/strong SVT altogether. In at least writing up the initial reply, I wrote down what I think I originally wanted to say.

I certainly agree with the following basic notion:

Mises conceives that those things are valuable to us that we choose to do or choose to obtain or attain.

"The assignment of orders of rank through valuation is done only in acting and through acting." (p.120)

What Mises means is that the value assigned to object X is assigned by my acting in regard to it; either my doing X, or attaining X. My statement to Bill that I value X, or that I plan to do X or plan to obtain X in the future doesn't count as "valuing" X for Mises in the scientific sense.

And I feel like this should be all that is needed. To expound on the 'short proof' you mention later

1-at n goods I do/attain X, Y, and Z

2-at n-1 goods I do/attain only X and Y (that this is so is because of all the pedantry involved in defining 'an economically distinguishable unit' that Mises/etc. go into pains describing)

3-Since action implies a positive preference, I prefer 1 to 2 (the following mathematical shorthand is incorrect in some sense, but expresses what I'm trying to say a bit better: X+Y+Z>X+Y iff Z>0 iff action implies a positive preference (the point being that in the end it does not come down to comparing two actions, but comparing the action taken in one case v. not taken in the other case (which is probably why I kept wanting to smuggle in what I defined as weak SVT)))

...I'm now thinking that maybe this is all that's needed? Sorry for jumping around abandoning earlier decisions here, I'm still figuring this out as you can see.

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Adam Knott replied on Wed, Oct 24 2012 9:17 PM

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Fephisto:

Thank you for your reply and compliment. You wrote:

1-at n goods I do/attain X, Y, and Z

2-at n-1 goods I do/attain only X and Y (that this is so is because of all the pedantry involved in defining 'an economically distinguishable unit' that Mises/etc. go into pains describing)

3-Since action implies a positive preference, I prefer 1 to 2 (the following mathematical shorthand is incorrect in some sense, but expresses what I'm trying to say a bit better: X+Y+Z>X+Y iff Z>0 iff action implies a positive preference (the point being that in the end it does not come down to comparing two actions, but comparing the action taken in one case v. not taken in the other case (which is probably why I kept wanting to smuggle in what I defined as weak SVT)))

*****

The way you've written this example is confusing to me because you've supposed two actions above, 1 and 2. Then in your elaboration, #3, you write that it does not come down to comparing two actions. You are saying, in words, in entry #3, that demonstrating the notion of preference does not rely on the comparison of two actions. Meanwhile, you have provided two actions for comparison in #1 and #2.

Here is the problem as I understand it. If we say we are comparing the action taken to the action not taken, there is no scientific basis I know of for choosing any particular concrete action as the action not taken. If I do X, not only do I not do Y, but I also do not do A, B, C, D, etc...

The action not done is no particular action. In doing X, I do not do all conceivable actions except for X.

What is the non-arbitrary basis for saying that in doing X, I don't do Y as opposed to saying that in doing X I don't do R? By our assumption, both Y and R do not happen, as well as an infinite number of other things.

The "strictly warranted" form of expression in this case would be "I did X and no other action" which we can shorten simply to "I did X."

To pick out a particular content from one of the innumerable actions not done, and compare it to the content of the action done, is without scientific basis. And that is why Mises is at pains to avoid introducing, explicitly, mention of a second action in his treatment of the law of marginal utility.

If I do an action with content A, strictly speaking, this does not imply anything about the contents of 1000 not done actions except that they were not the contents of this particular action.

The question is what does doing X (an action) imply or entail, and what doesn't it entail?

"The significant task of aprioristic reasoning is on the one hand to bring into relief all that is implied in the categories, concepts, and premises, and, on the other hand, to show what they do not imply." (Human Action, 3rd rev. p. 38)

Please note that through our discussion I'm trying to show something about an epistemological problem in the theory of action.

In the theory of action as Mises conceives it, value is accorded to those things we do or seek to attain. X has "value" because we do X or seek X in action. X has "value" because it is the content of an action.

This does not imply anything about an arbitrarily chosen content Y from one of many not realized actions.

"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)

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Subjective Value Theory

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