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Just a quick thought: I don't see why this notion of indifference can't be incorporated into Austrian-school economics as another imaginary construction (akin to that of the evenly rotating economy).
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branding. :P
By "branding", do you mean the fact that this notion of indifference wasn't developed by an Austrian-school economist?
I haven't taken intermediate micro, which is where I understand most work with indifference curves takes place, I've never really seen the need for indifference curves. I don't (currently) see utility theory as very important beyond some basic essential aspects, and I just feel that the Austrian "utility list" view makes so much more sense.
I also like Rothbard's basic critique of indifference curves which was just that it very rarely actually applies, and it's impossible to be purely indifferent because at some point you have to make an arbitrary decision and choose one or the other or else you're making the worst choice of choosing neither. Nonetheless I see no basic problem with indifference curves, nor do I think they're really wrong. Perhaps Hayek's own words here are indicative of the fact that they are more useful than I currently feel.
This isn't exactly news... I think I may have commented on it before and there is a literature on Hayek's sympathies with Walrasianism and GE theory. Many in the Mises-Hayek dehomogenisation debate have emphasised this which is why Hayek did not share Mises' strong conclusion that economic calculation is impossible in principle (since a social planner can solve Walras' equations), but only in practice(as he claimed the information was too dispersed and never centralised).
To offer my own 2 cents, I don't think the proper distinction between these 2 theoretical frameworks has ever been properly stated. First both approaches are ordinal (Bob Murphy is correct when making this point), but how they are ordinal differs importantly. The praxeological approach starts with ends/purposes ordinally ranked and derives from this when means-end relations are uniform among the ends achievable between means considered (e.g. the marginal and submarginal and supramarginal ends require the same number of means to be achieved, e.g. 1 egg can make an omlette or a boiled egg) the principle of diminishing marginal utillity where marginal utility is understood therefore as the value of any of n units of a means that is equivalent to the value ranking of the nth most valued end. Thus marginal utility is an ordinal concept this way. On the other hand the value of a totality of means does not enter the picture is no considered at this level, unless considered separately in which tradeoffs between these as marginal units is being considered (though I think Rothbard is dangerously flippant in dismissing scenarios with marginal units and totalities of means in MES). There is no equivalence of rankings taken (or required in this framework), so ordinally ranked ends are ranked 1st, 2nd... nth, etc. Also as Nozick seemd to take great pride in pointing out there is an indifference concept used in the Austrian definition of a good that is entirely subjective definied from the view of the actor and not technologically as units that are viewed as perfectly substitutable to achieving the actor's ends in his circumstances.
OTOH, the neoclassical framework, while ordinal is so in an entirely different way. One takes "bundles"(totalities of possibly heterogeneous goods) as being ranked ordinally by an individual forming a set satisfying completeness and transitivity requirements in accord with a binary " weak preference relation" (usually), and explicitly can allow for equivalent ranking of bundles (not always employed, like for lexicographical preference sets nobody cares about) . When these along with other often auxiliary properties (such as convexity for dMRS) are satisfied, then these ordinal rankings along with equivalences can be represented by a cardinal utility function. So total utility of each bundle is an ordinal ranking in this framweork, while marginal utility becomes an unavoidably cardinal concept in this framework with dMU becoming a merely conventional assumption as opposed to a theorem derived from an understanding of ordinal ranking of ends implied and expressed by action. Furthermore, it becomes no longer a necessary part of this framework or a necessary assumption since only dMRS is required to obtain sensible results, and as Hicks admitted in 1939, is an entirely "rabbit out of the hat" assumption.
That being said I can understand the appeal of the neoclassical approach. one can very cleanly do some simple maths (or geometry) and get results that seem quite solid and intiutively satisfying and expressive of tradeoffs in a metaphorical way (coming from a mathematical background myself, I do confess I've sometimes have had heuristic frustrations with Austrian treatments though I agree with their principles. That being said I think there are some interesting results for commercial valuation that can be derived mathematically using the Austrian approach to the subject, though I shall save discussing that for another day). However, the assumptions usually employed along with it have no necessary truth (like globally convex and intransitive preferences over n dimensional goods spaces) though this is often assumed or glossed over. On the other hand, you can't derive it from the same type of fundamental considerations of Action Menger/ Mises used to derive the Austrian version of dMU and thus solidly refute things like the Diamond-Water paradox.
@Neodoxy, I'm sorry I didn't get back to you regarding your article. I've read through it. I'm off work for a few days and will try to send you my comments soon (unless you've already published).
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The article has not been published. I've gotten really sidetracked with school and life and I'm also undergoing something of an ideological economic crises at the current time. Nonetheless I'd really appreciate your opinions, although be warned that there are several other parts to the article "series" I would like you to look over if you do have the time.
Thanks
This isn't exactly news... I think I may have commented on it before and there is a literature on Hayek's sympathies with Walrasianism and GE theory.
It's a 30 year old interview. I never claimed it was "news". I had just never heard the annecdote about Hayek introducing indifference curves to Hicks. If you've heard it before, well...
Furthermore, it becomes no longer a necessary part of this framework or a necessary assumption since only dMRS is required to obtain sensible results, and as Hicks admitted in 1939, is an entirely "rabbit out of the hat" assumption.
I'm not sure what you mean when you say Hicks "admitted" it was a rabbit out of the hat assumption. Do you mean he thought the assumption was arbitrary? That's how it sounds. And it is certainly how wikipedia spins that one-line quote (not suprisingly in the "Austrian" portion of its article on Marginalism). http://en.wikipedia.org/wiki/Marginalism
But it actually is not true. Hicks clearly states later in the same paragraph you are quoting that it is dMRS is a good starting assumption because it is the "simplest" at our disposal and "its accordance with experience seems definitely good". I would have to agree. https://webspace.utexas.edu/hcleaver/www/368/368hicksVCutility2.htm
As Hicks notes earlier in the chapter, if dMRS didn't hold, you wind up with kinky indifference curves, which wouldn't conform with our experience. Specifically, he says that "if there are kinks in the curves, curious consequences follow, such that there will be some systems of prices at which the consumer will be unable to choose between two different ways of spending his income." So the dMRS assumption rules out theoretical oddities that we don't really observe in the real world.
Hicks doesn't mention this, but we could have continious indifference curves that exhibit increasing MRS through out. That is theoretically possible, but those also don't conform with our real-world experience. Why? Because increasing MRS would imply corner solutions where consumers spend all their income on a single good. I don't know of too many people who behave that way. So no matter how you slice it, dMRS is a pretty good starting point because it is simple and conforms to much of our experience of how humans behave, exactly as John Hicks says. There is nothing arbitrary about it.
On a less substanative note, I would be tempted to go further and say that you (and wikipedia) totally mischaracterize the metaphore Hicks is making. You said that Hicks called the assumption of dMRS a "rabbit out of a hat". I disagree. If you read the 2 paragraphs surrounding the quote, you will see that he is saying it is the economic LAWS (like consumer responses to price changes i.e. the shape of demand curves) that can appear to be magic or "rabbits out of a hat". But, he says, there really isn't any magic about these laws. Economists put the rabbits into the hat through the assumptions they make (like dMRS).
At least, that is the way *I* read the passage. But I am not going to try and argue over the best way to interpret a 70 year old metaphor. I will just wanted to throw it out there that you may want to re-read that chapter. The more substanative point is that no matter what Wikipedia says, John Hicks didn't think there was anything magical or arbitrary about the dMRS assumption.
@NEO: Well, in undergrad econ, indifference curve analysis is basically just used to show why demand curves typically slope downward by graphically showing how utility is maximized subject to some fixed income and fixed prices. And in this context maybe the value scale approach is just as attractive because it will get you to the same answer. But the utility maxinimization framework is much more useful than that.
For example, try moving to a context where you don't take income as fixed so that a person not only has to decide how much to consume but how much to work/produce. The problem is not that much harder in the context of utility maximization. The only thing that has changed is the constraint. In the value scale approach, it is apparently not so easy. You can see this by checking out a couple of articles from the early 2000s (i think from the QJAE) that were dealing with whether one can derive back-ward being labor supply curve! This is a theoretical point that was settled in mainstream econ decades ago. Yet it is apparently still up for debate in some Austrian circles.
And I don't think I've even seen a Rothbardian economist try to model some aspects of the production-consumption decision. For example, say you produce bubble gum, which you sell to earn income and that you use the income to buy goods including bubble gum. If the price of bubble gum increases, do you chew more gum or less or the exact same ammount? What factors does the answer depend on? Good luck trying to answer this with value scales.
But don't take my word for it. Google around. See how many papers you can find where the author uses value scales for something other than just illustrating the shape of a demand curve for a normal good. :P For an approach that is clearly better than utility maximization it doesn't get very much use.
Of course, I don't want to hijack my own thread with a discussion about value scales, especially since I am no expert on them. I just wanted to suggest you give it time before you make up your mind. Value scales may seem a lot easier for simple questions. But there are many more interesting questions out there than just "how does quantity demanded changes with price".
If the price of bubble gum increases, do you chew more gum or less or the exact same ammount? What factors does the answer depend on?
Are you making more money, or less, or the exact same amount?
If you are making more, you might eat more. If the same, but since gum has risen in price, then it's more expensive for you to chew gum [both because of increased costs of production, probably, and certainly because you are eating into the profits more], so you'll eat less. If you make the same or less, then of course you will eat less gum, too. You cannot afford to anymore.
All that is if we ignore value scales. If gum is at the very top of your scale, and life is not worth living without five packs a day, which is what you are chewing now, then no matter what happens, you will not chew less. If we think about heroin to a heroin dealing addict, this might be a real life situation. If the N+1st piece of gum is below some other want on the value scale, and a pair of shoes is more important than that extra piece of gum, then you will chew the same amount [not more] even if you are making more [if the extra money only allows for things higher on the scale than the N+1st piece of gum].
Of course, all this assumes that your scale of values has not changed. If the higher price means you are losing money, then you may be more stressed, and may need more gum chewing comfort, moving piece N+1 higher up the scale. If you are making more money, and now hang around with a more snooty crowd that disapproves of public gum chewing, then you will chew less. Even if you are making the same, and prices have not even changed, but you find your teeth rotting from all that gum chewing, you might chew less.
Nice to know indifference curves give all this info, and more. I never knew.
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Yeah I was referring to "news" in the sense I think it's been brought up here and elsewhere before, but no matter.
Fair point on Hicks, apologies for the overstatement. He is referring more generally to these types of starting assumptions(like dMU, dMRS) in that starting section as appearing like "rabbit out o the hat" assumptions. Yes the continuous dMRS/convexity means that you can get the utility hypersurface to make unique tangencies with a flat hypersurface and thus derive unique solutions to a constrained maximisation problem. I admit this has an intuitive "feel" to it, but it seems to be an assumption that may seem harmeless and intuitve considering tradeoffs between bundles of 2 goods at the 2 goods level where we can draw indifference curves but far more brave (along with transitivity), to hold across all tradeoffs globally for an N dimensional goods space of bundles (though it is necessary to yield tractable results). Furthermore, the lack of problems with kinks is only a byproduct of the fact that you are solving to find a consumer's demand with prices "given" under "perfectly competitive" conditions for which dMRS yields problems in yielding solutions as soon as this flat hypersurface assumption is dropped. Now I admit this might be justified (as it usually is) in the sense that it is a good approximation(though there is experimental work that suggests the price taking assumption is innacurate even for large double auction and posted offer auction markets) and allows you to get your work done.
I guess what bothers me with this sort of thing is that the assumptions are not truly adopted because of allgedly making "intuitve" sense as is claimed in cases like the above, but rather that they help yield nice, determinate solutions to calculus based optimisation problems. Hence e.g. for the profit maximisation problem of a perfectly competitive firm though CRS is the only assumption that makes physical sense (in terms of thermodynamic laws), it is neatly dropped for DRS since you can then get unique tangencies with a flat isoprofit line/surface and a determinate solution.
Also, I do agree with you about that there is an embarassing lack of progress made by modern day "Austrians" in advancing the framework to deal with these basic types of questions that you allude to. Perhaps it could be because there were so few "Austrians" for a long time until quite recently (and the vast majority of modern day "Austrians" are laymen), or it could be as Klein has pointed out a socilogical problem that most self described "Austrains" have spent most of their time writing on quasi-philosphical issues or fashionable things like ABCT, as opposed to what he labels "Mundane Economics." Or perhaps it could be that the "value scale" framework is unavoidably sterile :P. (which is difficult for me, since I've been too anal retentive about the way assumptions have been utilised in the neoclassical approach to have been satisfied with it either)
I haven't taken intermediate micro
Waht???
If you are making more, you might eat more....All that is if we ignore value scales. If gum is at the very top of your scale, and life is not worth living without five packs a day, which is what you are chewing now, then no matter what happens, you will not chew less. If we think about heroin to a heroin dealing addict, this might be a real life situation. If the N+1st piece of gum is below some other want on the value scale, and a pair of shoes is more important than that extra piece of gum, then you will chew the same amount [not more] even if you are making more [if the extra money only allows for things higher on the scale than the N+1st piece of gum].
Now, on to more substantive matters. Absk, thanks for the thoughtful comment. I just have a few questins.
Could you elaborate why you think CRS is the only assumption that makes sense? I mean, from a short-run perspective (where at least one input is fixed), I don't see how you could avoid DRS in at least some circumstances.
But beyond that, econ grad students are forced to deal with production functions that display global DRS and CRS. I've never seen one dropped for the other. Check out Reny and Jehle's Microeconomic Theory. You will find plenty of examples.
Perhaps it could be because there were so few "Austrians" for a long time until quite recently (and the vast majority of modern day "Austrians" are laymen), or it could be as Klein has pointed out a socilogical problem that most self described "Austrains" have spent most of their time writing on quasi-philosphical issues or fashionable things like ABCT, as opposed to what he labels "Mundane Economics.
Agreed.
Peter Leeson (my favorite breathing Austrian economist) also made this point a few years back. I think he had a list of 10 things Austrians should avoid. And I'm pretty sure one of them was "don't write any more articles on methodology!!"
Well, in a rather fundamental sense, every act of (physical) production is one of transformation from one form of matter and energy to another, in which energy must balance on both sides and cannot be created or destroyed (interesting historical note: Sadi Carnot, the French Engineer who developed the initial formulation of what would become the first law of thermodnamics was inspired by an analogy from double account book keeping). Hence since ultimately what goes in production from both input and output have to balance in a physical sense, this also means that if we change the scale, the ratios of input to output should not change and should be scale invariant, else we would have a violation of the first law of thermodynamics. An example with a fixed factor would not be a violation of CRS or the first law, but an illustration rather of the Law of Returns, since you would not be changing scale as factor proportions would not be kept constant. In fact I think every supposed "observation" of DRS or IRS is from not properly taking into account implicit inputs that were not prior considered explicit controllable factors at the initial scale of production, but upon a change of scale, the limitations of which in relation to their changed proportion to every other input were revealed, thus making them just applications of the Law of Returns. Incidentally, Cobb Douglas production functions are another pet peeve of mine, given that they are supposed to be exemplary of illustrating the Law of Returns' application, imply infinite marginal productivities as the differentiated (w.r.t) factor tends to zero! A physicallly nonsensical "production function" if there ever was one.
I may give Jehle and Reny a try some day, I've scanned through the early sections of the book before and got the feeling it would have been a lot more tolerable than Mas-Colell. In retrospect I should perhaps have used it last year than trying to digest Mas-Colell (an intolerably written book IMO), and in the end just using far more useful course notes.
On Pete Leeson. I read that blog post of his too. I sympathised with it a bit but I'm not sure if I'm fully in accord with his approach or that of others at GMU which also doesn't seem to be trying to work out/elaborate the logic of the Austrian approach to price theory but rather to do mostly applied neoclassical economics with an Austrian "flavour"/emphasis(Not that that's at all a bad thing). This was the article of Klein's I was vaguely alluding to earlier in any case: http://mises.org/journals/qjae/pdf/qjae11_3_1.pdf
Interestingly that article reads a bit as an underhanded shot at some of the work by the GMU guys in the past 3 decades. I guess the implicit potshots go both ways. :P
Oddly, he NEVER mentions that how much gum the gum maker chews may be influenced by the PRICE OF GUM ITSELF. Specifically, because the price of gum has increased, the opportunity cost of chewing gum has also increased (you must give up more other goods for each stick of gum).
True enough, didn't think of that.
But Student has it all wrong about opportunity costs. Since there is the same, finite amount of money to be spent, the price of gum rising means the price of everything else has dropped. So the opportunity cost of gum has not increased necessarily. It may have even decreased.
I do wonder about the real world application of indifference curves. Can you show me a prediction that was made using indifference curves, and that came true? Link, of course.
Value scales are important. First, they are true. People actually do like one thing more than another. Second, they lead to important true theoretical insights of predictive value. Be nice to see if the same is true of indifference curves, or are they just useless and pointless knowledge?
@Wheylous
What?
Still waiting on an answer from you, Student.
By branding I meant that it is hard to bill yourself as a truly unique alternative to mainstream economics if you accept and use on of its most basic models.
Austrian-school economics uses the concept of marginal utility just like mainstream economics does - right?
I reviewed indifference curves recently. Wikipedia states:
In microeconomic theory, an indifference curve is a graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. One can equivalently refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1]
This conflicts with the position of Austrian-school economics, which is that it's actually impossible for two or more things to provide the same utility at the same time. So it seems that Austrian-school economics can at most use indifference curves (and the concept of indifference itself) as imaginary constructions.
it is hard to bill yourself as a truly unique alternative to mainstream economics if you accept and use on of its most basic models.
Euclidean geometry has 23 definitions, five common notions, and five postulates. Non Euclidean geo differs in only one postulate, and yet they apply in completely different universes.
It suffices for Austrians to accept Say's Law to overturn most of the mainstream policies [aka what really counts]. Who cares about the technical stuff nobody reads anyway?
If by "Austrian-school economics" you mean Rothbard and friends, then you are correct. They do claim that one cannot be indifferent between bundles of goods.
But, Rothbard is not the beginning and end of the Austrian school.
I don't see why one cannot be Austrian and think indifference curves are a useful. In fact, it seems kind of odd to me that a group of people that claim to believe in "radical subjectivism" can make objective claims about other people's preferences (that is what you are doing when you say people cannot be indifferent--you are making a claim about their preferences).
Anyway, this is one reason for me posting this anecdote from Hayek. He says he was attracted to indifference curve analysis and found it "most satisfactory". Indeed, he even claims credit for introducing the model to John Hicks, who helped establish the use of the model in mainstream econ.
Who cares about the technical stuff nobody reads anyway?
This is an opinion I've suspected for a while people within this "movement" unfortunately hold, but you're the first person I've seen explicitly express it Dave. Indeed, I think the problems with neoclassical economics are precisely of this nature, though the work of both critiquing that paradigm and producing a complete alternative has not been done by Austrians yet (not withstanding the start made by Mises, Rothbard et al). The big problem is that the mistakes made with foundational assumptions lead logically to further mistakes considering the grander picture.
I guess the best I can do for now is provide some anecdotal evidence (this applies indirectly to your comment above too Student) from my own Master's dissertation. The Walrasian theory of value and price taught at a core level to pretty much all economics undergraduates and graduates derives consumer demands following a set of constrained maximisation problems based on a given set of prices with perfect market information and "rationality"(defined in the sense each actor's decision will be based on the optimal solution to this constrained optimisation problem based on perfect information) denoted for each actor based on the type of utility ordinalism I've already described above. Following this exercise the demands can be expressed as functions of prices (the parameters of the original exercise), and a steady state defined when the aggregated demand function/curve intersects a supply curve/function derived using a similar profit maximisation exercise relying on similar perfect information assumptions. The nature of the equilibrium produced is then usually denoted, with Pareto Optimiality/Welfare theorems, along with the very strong assumptions required to produce it. Then based on this caricature/model the deviations produced logically from this model of a market are used to critique and attack it in the form of models of imperfect information, competition etc thus denoting market failures. Thus these alternative market models have a strong reliance on core (perfectly competitive) Walrasian price theoryand do not dispute its underlying logic but only change underlying assumptions.
The problem for both sets of models are numerous. There is an unavoidable circularity produced as a consequence of the fact that demand has to be derived from on optimisation based on given prices while the prices themselves are thus based on demands. Hence you cannot explain or account for actual price formation with this approach or even on a basic level how markets made up of ordinary people clear, only explain the maintainence of a hypothetical equilibrium steady state already arrived at only with strong perfect prior information of this equilibrium price vector. Walras himself came up with an ad hoc device to try to account for price formation and salvage this model called the Walrasian auctioneer who "shouts" out prices at which a market can only clear when the same amount can be bought and sold by traders in the market at that price. As nonsensical as this sounds in a 2 good market (the only observed context for this type of institution with mone traded for a bought good on the French Stock Exchange), it becomes even more confounded if you try to think of it as a way of accounting for price formation with n goods using a hypothetical numeraire which is the actual field general equilbrium price theory is applied to, with no necessary tendency toward general convergence should clearing be closer in one market following an announced set of relative prices by a hypoethetical auctioneer (I think Jehle and Reny briefly mention these issues in their textbook too).
On top of that, 5 decades of results from experimental economics starting with Vernon Smith's influential paper in 1962, fly in the face of the strong assumptions required for market clearing/equilibration required by Walrasian General Equilbrium theory. Typically double auction/posted offer auction experiments with small numbers of buyers/sellers in double auctions with no prior information of market conditions or commercial display strong convergence properties toward trading at equilibrium prices within a few periods of "ticker time." These results on the other hand are not difficult to understand at all given an understanding of Austrian School price theory, principally, Bohm Bawerks' theory of marginal pairs (indeed Smith has revealed he was indirectly inspired by Bohm Bawerk's work), which provides a logical/praxeological account for why this convergence takes place. In addition, arguably even more holes have been punctured in the Walrasian account by results from the nascent agent based literature on price formation involving so called "zero-intelligence" agents with only reservation prices (Zi-C agents) or with reservation prices and simple price update rules (Zi-P agents), who yet display narrow trading around and with Zi-P agents rapid convergence toward trading at equilibrium prices. Indeed the logic of the update algorithm for Zi-P agents is very strongly reminiscent of precisely the type of thing we see in Bohm Bawerkian price theory, whereby the fact that supramarginal traders may prefer not to overbid but only at the risk of losing a trade, and otherwise simply copy bids of marginal traders allowing market equilibration and price formation to be organically achieved without perfect prior information and only actors with ordinal, unequal preferences implying reservation prices. Interestingly Zi-P agents and their more advanced simple intelligence variants were found in the early 00's to outperform human traders and have largely replaced them as far as trade execution goes in financial markets. Their consistently efficient performance, in-spite of their sparse "rationality" cannot be accounted for by a Walrasian framework and indeed contradicts it completely if we wish to take that theory's assumptions and implications seriously (indeed on another note, it was only until 2007 before a Game Theoretic Double Auction model with special markup assumptions could predict the result Smith and others have seen in experimental markets since 1962 and been simulated in agent based markets since the 90s).
Now Dave, I would never have realised these implications and connections with other literature had I not engaged in a study of the perhaps seemingly "tedious" technical details of Bohm Bawerk's price theory (even Rothbard, inspite of his commendable sections in MES on production and factor pricing deals with the details of price formation too sparsely), as well much of the modern literature on price formation. Indeed there were issues and basic contradictions with Bohm Bawerk's marginal pairs price theory only recently pointed out and resolved by Egger and Van Den Hauwe (writing in the 90s and 00s). I was able to take Bohm Bawerk's logical account and also produce a generalised, algorithmic version of his price theory accounting for the exceptional cases they point out.
Finally at Student, I think Hayek is an interesting character as regards the popularisation of Walrasian price theory. Like in the above interview it seems he generally views it well, but I think he was a good enough economist to logically see problems with it, as for instance in his essay on "The Meaning of Competition." I sometimes think if he had pursued his logic a bit more thoroughly, he would have been able to see issues with it. Having said that however, though he was aware of Bohm Bawerk's price theory, perhaps part of the reason it didn't develop into a fully fledged alternative approach was the fact that Bohm Bawerk in his treatment of both value and price was actually a utility cardinalist. It took Cuhel and Mises the Austrian ordinalist value theory (Plus Mises I don't think ever wrote explicitly on price formation, assuming far too much characteristically of his readers). On another side note, I would add that I've gained the impression that a lot more people (not necessarily Pos-Keynesians), have realised problems with and do have problems with Walrasian price thoery and are no necessarily "Austrians", so it is fair I think to recognise the issues with this framweork you are defending (though it is taught to all econ. students, and I think has unfortunate consequences when they take it too seriously, contrary to much of modern research).
In any case I've spent far too long writing this, I hope it makes some sense, but in any case that's it I'm done! :P
This is an opinion I've suspected for a while people within this "movement" unfortunately hold, but you're the first person I've seen explicitly express it Dave.
I got it from Mises. Here's the quote, emphasis mine:
...the public's interest in the studies labeled as economic is entirely due to the expectation that one can learn something about the methods to be resorted to for the attainment of definite ends. The students attending the courses of the professors of "economics" as well as the governments appointing "economic" advisers are anxious to get information about the future,
That's what economics is about, or is supposed to be about. How to predict the future. How to attain a definite end. Which is why I asked earlier for a link to a single correct prediction [or even a prediction that was incorrect, something], that mankind has gotten from all those phony models, directly or indirectly.
I have to hand it to Keynes. He at least made predictions and had prescriptions. Never mind that he was howlingly wrong and got everything totally backwards. At least he understood what target he was supposed to be shooting at.
But all this stuff you described at length in your previous post clearly has no connection, however remote, to those two objectives. Predict the future, and tell us what to do about it.
absk,
There is an unavoidable circularity produced as a consequence of the fact that demand has to be derived from on optimisation based on given prices while the prices themselves are thus based on demands. Hence you cannot explain or account for actual price formation with this approach...
I don't think I would call it a "circularity" but you are right that the traditional model of perfect competition yields little insight on how (or whether) the market arrives at equilibrium prices. In the model you have consumers that take prices as given and producers that take prices as given. So, if no one sets prices, how are they determined? Supposedly "the market" does this. But in this model, the market is treated essentially as a computer that finds the price vector that solves the system of demand and supply equations.
I would agree that this is not a very satisfactory description of the real market process that determines prices. A few years ago, I would have agreed with Austrians that this was a major problem for mainstream economics.
However, my subsequent readings have only convinced me that this only MAY have been a problem 50 years ago. Today, economists have moved well beyond perfect competition and routinely use game theory and experiments to understand the actual process of price setting. That's basically a large part of what industrial organization is about, where economists study auction theory (which you seem familiar with), price discrimination, imperfect competition in general etc.
Of course, none of this is to say that the model of perfect competition isn't useful. It is an approximization we can use to easily discuss comparative statics. And really it is approximation that is consistant with game theoretic models that try to better describe how competition actually works. Take the Cournot model of imperfect competition for example. If you take this model and start adding more and more players, you will reach essentially the perfectly competitive outcome (P=MC). Cournot himself essentially realized this almost 160 years ago. And undergraduates are taught this today.
On top of that, 5 decades of results from experimental economics starting with Vernon Smith's influential paper in 1962, fly in the face of the strong assumptions required for market clearing/equilibration required by Walrasian General Equilbrium theory.
Why stop in 1962? George Stigler was writing about how the strong assumptions that are required for perfectly competitive equilibrium actually are not required in 1957 (see link below). And both Vernon Smith and George Stigler have won the the Nobel Prize. Are you implying their work has been ignored?
I think it is pretty obvious that mainstream economists have realized for a LONG time that the perfect competition model isn't....perfect. And it is basically that realization that has driven much of micro theory over the past 60 years. That's why I'm suprised so many heterodox folks spill so much ink over the flaws of the perfect competition model. It seems kind of played to death to me.
http://msuweb.montclair.edu/~lebelp/StiglerPerfCompJPE1957.pdf
Student,
I see what you're saying but part of my point was that the issues of imperfect competition models are directly related to those difficulties exposed by the above literature and analytical problems associated with the perfect competition model since the former share the same logical structure but only differ in starting assumptions and essentially share the same theoretical structure (I will comment on Game Theory below). Thus the fact that the market failures predicted by this same (generalised model), when perfect information and perfect competition (in terms of competitior numbers for instance) are not materialised or observed, and do not create the difficulties predicted (as in the example context of price formation above), this is a still fundamental problem for both forms of the same essential theory (whether perfect or imperfect).
Now I am hesitant to paint Game Theory, a very broad field, in the same manner with the same brush as this would also include approaches with evolutionary, bounded and alternative "rationalities" as well as models that go beyond simply generalisations (in terms of logical development from modified assumptions, like Cournot) of Walrasian price theory. I do think as a branch of knowledge it brings to bear its own problems nobody in the Austrian School has yet properly addressed (and I'm not going to be the first unfortunately), given its also very strong concept of actor "rationality" employed in standard game theory, of which I think the Traveller's dilemma offers an interesting reductio ad absurdum puzzle/game that I think could provide an interesting starting point from which further inadequacies with it could be elaborated (I don't think I have the strength in Game Theory to undertake such a project myself, though I think it would make for interesting research). In any case there wasn't even a game theoretic model that was able to reproduce the convergence observed in double auction markets until 2007 (fitted with markup assumptions to do so by Zhan and D. Friedman).
Within the narrow context of price formation (as well as other areas), I think there is a platform for a return of the Austrian School's approach and their core price theory as a distinct alternative to Walras' (my point above was that while Walrasianism is not taken seriously in terms of its underlying assumptions reflecting reality, it's core status in syllabi has a bad effect in instilling the logical structure by which the market is conceptualised). I will say as well, that I have gained the impression following the completion of my research project, that there are branches of modern, non-Austrian economic research paradigms that I don't think necessarily neatly fit within the Neoclassical paradigm as a kind of "unified front" either(it may also be unfair to paint modern neoclassical economics as a unified research paradigm either, but actually more like a conglomerate of somewhat related, somewhat conflicting segments. On another side note, I don't think Vernon Smith for instance shares that much enthusiasm for standard neoclassical price theory, whether perfect or imperfect, as he discusses with Russ Roberts here), and actually do share some unnoticed methodological affinities with the Austrian school. For instance, the key point conveying what can result with price formation via simply zero-intelligence agents as Gode and Sunder did in their influential 1993 paper (the zero intelligence agent based implementation of a double auction market. I do concede a die hard neoclassical, Gary Becker was actually just as much an inspiration for that paper as they reveal as Vernon Smith :P) could be thought of as an example of what Mises called the Method of Imaginary constructions. On another note, I will add that I think the terms "double auction" and "posted offer auction" are a unfortunate and very misleading, since neither institution is an "auction" as is dealt with in Auction theory. "Double-Auctions" are just market institutions in which the practice of buyers and sellers is to spontaneously shout prices back and forth and buy and sell accepting offers in real time like in a stock/commodities market. "Posted offer auctions" are simply markets in which price listing/"shouting" is only undertaken by one side (usually the sellers), while buyers buy based on whether they think they can later get a better deal or a price is less than their reservation, thus characterising the vast majority of real world markets!
Okay, I read your post 3 times and I am still not exactly sure what you are saying. :P In my post, I was commenting directly on mainstream economists using game theoretic models to understand price determination. But it sounds like you have problems with these models as well? But that no one has yet fixed these problems you think you've identified?
Well my post above was not specific to answering your remarks about game theoretic attempts to model price formation. To make a short comment, there are a few reasons i'm not enthusiastic about them. They first of all typically employ agent based "rationality" and information awareness to an extent that has been observed (and the conclusions made use of) in the experimental and even more so the zero intelligence based literature as not at all necessary to explain/realise price formation and market clearing in double/posted offer auctions. Secondly, even with these misleadingly strong assumptions they have largely failed to reproduce the basic convergence to market clearing observed in these markets (apart from the exception I mentioned above). They are still part of the paradigm whereby you start off with false assumptions and justify them when you get fits to data (in this case though these largely haven't occured), in turn justify a tractable "model" built from false assumptions as if logical derivations from them can give you real world relevant knowledge/inference.
Student:If by "Austrian-school economics" you mean Rothbard Mises and friends, then you are correct. They do claim that one cannot be indifferent between bundles of goods. But, Rothbard Mises is not the beginning and end of the Austrian school.
But, Rothbard Mises is not the beginning and end of the Austrian school.
FTFY
Student:I don't see why one cannot be Austrian and think indifference curves are a useful. In fact, it seems kind of odd to me that a group of people that claim to believe in "radical subjectivism" can make objective claims about other people's preferences (that is what you are doing when you say people cannot be indifferent--you are making a claim about their preferences).
I'm going to assume that you're being deliberately disingenuous here. The question I have is, why?
Student:Anyway, this is one reason for me posting this anecdote from Hayek. He says he was attracted to indifference curve analysis and found it "most satisfactory". Indeed, he even claims credit for introducing the model to John Hicks, who helped establish the use of the model in mainstream econ.
To take indifference curves - and the notion of indifference itself - as anything more than imaginary constructions requires assuming that utility is cardinal.
It's all he's got.
Come to think of it, though I did mention this earlier I'll mention it again (not sure if it will meet your criteria but here goes). The ZI-P agents developed by Dave Cliff( not an economist if that gives him browny points in your eyes) at Hewlett Packard labs in 1997 (whose algorithm for bid updates I've already mentioned shared essentially the same logic Bohm Bawerk espoused in his theory og marginal pairs price formation), were tested along with a few other slightly more advanced agents against human traders by IBM in 2001 and found overall not only to reproduce the price convergence dynamics of human bidders in stock markets, but also outcompete them in terms of overall bid performance. These agents have gradually and largely replaced trading floor humans over the past five years in liquid financial and commodity markets as far as trade execution goes, and saved the firms employing them a lot of money, thus reaping financial dividends. Does profitable, practical employment of these agents mean anything to you?
Strictly speaking I'm not sure the concept of indifference employed in indifference curves could be accepted in the praxeological framework, since actual indifference is used rather to define the units of supply of a good subjectively, as they are all equally replaceable to achieve an ordinally ranked marginal end in the mind's eye of the actor, which is why all units of the supply share the ordinal value/importance of the marginal end that could not be achieved if the number of units dropped from n to n-1. Hence for an actor "indifferent" between using a lump of margarine or lump of butter to achieve the end of a tasty spread on his slice of bread, these might be viewed as 2 units of the same supply of a good for one actor, while they would be different goods for another not indifferent betweent their perceived means-end relations. What I don't think has yet been properly addressed yet is where there may be overlapping ends that may not be marginal at the moment of a decision but may become so, so for instance, if the above situation holds but in an actor's view butter and margarine share diffeent values as far as means for the end of cooking and frying an egg, then whether both lumps are supplies of the same means would morph depending on which end is marginal for the actor. A perhaps better, less volatile definition might be that 2 objects could only be the same good subjectively if for an actor they could be perceived as equally useful for achieving all conceivable ends they could be used for in the mind's eye of an actor.
They first of all typically employ agent based "rationality" and information awareness to an extent that has been observed (and the conclusions made use of) in the experimental literature.
Secondly, even with these misleadingly strong assumptions they have largely failed to reproduce the basic convergence to market clearing observed in these markets (apart from the exception I mentioned above).
Is this why you bugged me to reply to your post?
This is must be a claim unique to you. This is not why Rothbard or Block or anyone else I've read objected to indifference (they claim it doesn't make sense because indifference can't be demonstrated by action).
Here's Rothbard: http://mises.org/rothbard/toward.pdf
Here's Block: http://mises.org/journals/qjae/pdf/qjae2_4_2.pdf
I don't really know how to respond to your claim except to provide a link to the definition of ordinal utility: http://en.wikipedia.org/wiki/Ordinal_utility
Like I said, is this really why you bugged me to respond to your post? Is the type of convo you wanted to have? That's alright man. I'm cool.
Student:Is this why you bugged me to reply to your post?
No. I "bugged" you to reply to my post because it seemed like you were ignoring it, and I think that's rude.
Now I'll repeat my question: why are you (I assume) being deliberately disingenuous?
Student:This is must be a claim unique to you. This is not why Rothbard or Block or anyone else I've read objected to indifference (they claim it doesn't make sense because indifference can't be demonstrated by action). Here's Rothbard: http://mises.org/rothbard/toward.pdf Here's Block: http://mises.org/journals/qjae/pdf/qjae2_4_2.pdf
I wasn't aware that I had to fall in lockstep behind Rothbard and/or Block.
Student:I don't really know how to respond to your claim except to provide a link to the [sic] definition of ordinal utility: http://en.wikipedia.org/wiki/Ordinal_utility
I don't agree with that definition of "ordinal utility". To assert that the utilities of two goods are equal implies underlying cardinality. As I understand it, the Austrian-school economics definition of "ordinal utility" is such that the utility of one good is either higher or lower than the utility of another good.
Student:Like I said, is this really why you bugged me to respond to your post? Is the type of convo you wanted to have? That's alright man. I'm cool.
Although this seems like quite a red herring to me, I'll bite (for now). What type of conversation do you think we're having, or that I wanted to have?
At the end of my last post I was basically trying to say I don't want to continue our conversation (my questions were rhetorical). If you really think just dropping a convo here is rude, i'll give my reasons for wanting to disengage:
#1. I raise (what I think is) a valid point, then you assert I'm being disingenuous and ask me to explain why rather than address the point I raised? I can't respond to that.
#2. Then you start critiquing the concept of indifference based on your own definition of ordinal and cardinal utilities (I have not seen any Austrian ever say indifference is a cardinal concept or use the terms as you are using them) and want me to participate on those idiosyncratic terms. It sounds like you are basically just redefining the meaning of cardinal utility to include indifference. I guess the goal is that if cardinal means "bad" and you can redefine cardinal to include the concept of indifference that will make indifference "bad". But I don't think redefining common terms really addresses anything important about indfference. So I can't really respond to this comment either.
IOW: Idiosyncartic definitions of established terminology and "when did you stop beating your wife" type questions kinda ruin it for me. So I will let you have the last word on this if you want to respond to either point. Thanks for responding to the thread.
Student:At the end of my last post I was basically trying to say I don't want to continue our conversation (my questions were rhetorical).
I see. Well I'm not a mind-reader.
Student:If you really think just dropping a convo here is rude, i'll give my reasons for wanting to disengage: #1. I raise (what I think is) a valid point, then you assert I'm being disingenuous and ask me to explain why rather than address the point I raised? I can't respond to that.
Sure you can. If my assumption is in error, you can correct it, can't you? The reason I've assumed you were being disingenuous is because I'm sure you can see that there's no contradiction in asserting that people's preferences are subjective, which is itself an objective assertion. But maybe you're not using the same definitions of "objective" and "subjective" that Austrian-school economics uses. If that's indeed the case, then I hope you're not doing so intentionally, as that would constitute proof of intellectual dishonesty on your part.
Student:#2. Then you start critiquing the concept of indifference based on your own definition of ordinal and cardinal utilities (I have not seen any Austrian ever say indifference is a cardinal concept or use the terms as you are using them) and want me to participate on those idiosyncratic terms.
What's wrong with that? Are you saying that you're unwilling to adopt another person's semantics for the sake of argument?
Student:It sounds like you are basically just redefining the meaning of cardinal utility to include indifference. I guess the goal is that if cardinal means "bad" and you can redefine cardinal to include the concept of indifference that will make indifference "bad". But I don't think redefining common terms really addresses anything important about indfference. So I can't really respond to this comment either.
Sure you can. In fact, I think you just have (in a way). But to talk of "the meaning of cardinal utility" is fallacious. There is no such thing as "the meaning" of "cardinal utility" or any other term. "Cardinal utility" may mean something different to you from what it means to me. Rather than simply insist that I'm trying to change "the meaning" of it (which implies that the meaning you're using is right and the one I'm using is wrong, which is a complete non sequitur given the inherently arbitrary nature of meanings), I think it would be better if you explained what "cardinal utility" means to you versus what you think it means to me. Then maybe we can get somewhere. But maybe greater understanding isn't your goal here.
Student:IOW: Idiosyncartic [sic - in both senses] definitions of established terminology and "when did you stop beating your wife" type questions kinda ruin it for me. So I will let you have the last word on this if you want to respond to either point. Thanks for responding to the thread.
I invite you to point out just where I've asked you any "when did you stop beating your wife" kind of question. If indeed I have, then that shouldn't be difficult for you at all.
I'd much prefer it if you didn't run away from this thread so soon, but it's entirely up to you.