Economics Questions

Re: "A priori quiz"

Malachi — Sun, 04 Nov 2012 23:43:10 GMT

I'm glad you affirm the validity of analytic reasoning.

Re: "A priori quiz"

Fool on the Hill — Sun, 04 Nov 2012 23:17:20 GMT

Exactly, just like you don't have the option to avoid being accosted by men with guns when being robbed.

Re: "A priori quiz"

Malachi — Sun, 04 Nov 2012 18:27:14 GMT

You dont have the option to avoid being accosted by merchants, as you were already outside, having chosen to brave the risk of agora. You only have the option to trade or refuse to trade.

Re: "A priori quiz"

Fool on the Hill — Sun, 04 Nov 2012 16:59:38 GMT

Yes, and I think if we include the first state in evaluating the exchange then we have to change the first example (voluntary exchange) to not true a priori. I only considered the first example true a priori because I was only considering each person's actions vis-a-vis themselves and not how they affect the other person.

For example, I might not like people coming up to me on the street and trying to sell me things or asking me to donate money. However, if someone does come up to me and I decide to give them money, then I have done so voluntarily. But since I didn't want them to come up to me in the first place, I didn't "profit" from the exchange. The same could be said of products I buy due to advertising that I never wanted to see or products I buy which I thought should never have been produced in the first place.

Re: "A priori quiz"

Andris Birkmanis — Sun, 04 Nov 2012 11:22:31 GMT

If someone holds a gun to me and asks me to turn over my money, then in doing so I prefer the state of affairs expected to result from giving up the money vs. not giving up the money. Coercion doesn't change anything, and therefore both parties still (expect to) "profit."

Interesting observation. Do I understand it correctly? There are three instants of interest:

A and B before any interaction, A has his money.
B points a gun to A, and demands A's money or else.
A gives up money, B leaves with money, A lives (less happily).

What you are saying, both A and B profited from exchange, if we focus on the states 2 and 3. Most people, however, treat an exchange as a more prolonged transaction, involving state 1 as well.

This demonstrates once more, how different people attach different meaning to the simplest of statements.

Re: "A priori quiz"

Fool on the Hill — Sun, 04 Nov 2012 04:06:12 GMT

1. Whenever two people A and B engage in a voluntary exchange, they must both expect to profit from it.

True a priori if profit means that each person prefers the state of affairs expected to result from exchanging vs. not exchanging.

2. Whenever an exchange is not voluntary but coerced, one party profits at the expense of the other.

Not true a priori if we are using the same definition as above. If someone holds a gun to me and asks me to turn over my money, then in doing so I prefer the state of affairs expected to result from giving up the money vs. not giving up the money. Coercion doesn't change anything, and therefore both parties still (expect to) "profit."

3. Whenever the supply of a good increases by one additional unit, provided each unit is regarded as of equal serviceability by a person, the value attached to this unit must decrease.

Not true a priori.

4. Of two producers, if A is more productive in the production of two types of goods than is B, they can still engage in a mutually beneficial division of labor.

Not true a priori. In addition to the reason others have mentioned, it is also possible that both parties would simply prefer to not divide the labor.

5. Whenever minimum wage laws are enforced that require wages to be higher than existing market wages, involuntary unemployment will result.

Not true a priori. Nothing compels employers to fire employees just because their wages have increased.

6. Whenever the quantity of money is increased while the demand for money to be held as cash reserve on hand is unchanged, the purchasing power of money will fall.

Not true a priori. People set prices. Nothing compels them to raise prices just because there is more money in circulation.

Re: "A priori quiz"

AJ — Sat, 03 Nov 2012 03:08:56 GMT

I read the thread, and although Friedman makes two errors - it's not the 4th tire that will be used but the set of four tires, and of course logic must trump evidence - I have to wonder what use it is to hold constant for unit size, that is, to say that DMU only applies to uses of a prespecified set of units (in this case individual units of tires). After all, isn't the question we would like to answer ultimately whether the actor desires *to acquire* the fourth tire more or less than he desired to acquire the third one? If we speak of "diminishing utility of each additional unit a good to an actor," this is obscured, but if we speak of "an actor's diminishing desire to acquire each additional unit of a good" (which seems from a praxeological perspective identical) it seems clear that DMD (diminishing marginal desire) does not hold. Are DMU and DMD really different?

Re: "A priori quiz"

Graham Wright — Fri, 02 Nov 2012 22:19:32 GMT

@ AJ and Andris,

I think that's what Friedman was getting at when he said "I think that once one takes seriously both how complicated a utility function and how complicated a production function can be, you will discover that if you limit yourself to a priori argument you can't do much, if any, economics."

I think nirgrahamUK and DD5 explained the Austrian way of looking at things very well in that thread. We Austrians are defining "a good" in way that is entirely subjective, and the problem comes when we point to an objective "good" in the real world and try to use our theories to explain it's price.

If we start off being entirely subjective, there is no relationship at all between "4 tyres" and "1 tyre". There are certain ends (like a tyre swing) that can be achieved using 1 unit of the good "1 tyre" and there are certain ends (like a car) that can be achieved using 1 unit of the good "4 tyres". That there is an objective, physical relationship between these two goods does not matter to the subjectivist. The law of DMU applies to both goods separately. We can construct a demand curve for units of the good "1 tyre" and a separate demand curve for units of the good "4 tyres".

The physical relationship between these two goods means that their demand curves are very closely related. I think the proper way of thinking about it is to consider that it is virtually costless to "switch" or "arbitrage" between the two goods, or to "produce" the one good using the other. 4 units of "1 tyre" can be used as a means to "produce" 1 unit of "4 tyres". And 1 unit of "4 tyres" can be used as a means to "produce" 4 units of "1 tyre". Both of these production processes are so cheap that any price disparity between the price of 4 units of "1 tyre" and the price of 1 unit of "4 tyres" will be closed very quickly. Because of this fact, we generally combine the demand curve for units of "1 tyre" and units of "4 tyres" into one demand curve for "tyres". This simplification causes problems when we try to apply the law of DMU to the combined good, rather than each good separately.

The reason I use the word "arbitrage" above is because it's really no different to ordinary arbitrage. We talk about the demand curve for "gold", or price of "gold", but this a simplification because actually each individual gold seller faces a different demand curve. The reason we simplify is because it is very easy to arbitrage between "gold in London" and "gold in Edinburgh", so we don't bother breaking it down that far and just talk about the price of "gold" in general.

Re: "A priori quiz"

Graham Wright — Fri, 02 Nov 2012 21:38:14 GMT

Minarchist:
I suppose that's true for someone who has only one end, and that end is acquiring one unit of chickens. But I was thinking more along the lines of a person who has only one end, and that end is acquiring chickens in general, not a particular number of units of chickens. That is, a chicken-maniac with an insatiable lust for chickens, which will never be satisfied no matter how many chickens he acquires. For this person, no one unit of chickens is more or less valuable than any other, the Nth unit is not less valuable than the (N-1)th unit, since all units go toward achieving one and the same end, and do so equally well.

It seems to me that that is an ill-defined end. An end is always a state of affairs, a particular arrangement of the environment, that the actor has in mind when he acts. "Acquiring chickens in general" is not an end, but an action. The person you're talking about has multiple ends, arranged like this on his value-scale:

...

- Having N+1 chickens

- Having N chickens

- Having N-1 chickens

...

I think the answer to whether the law applies here is the same as whether it applies to tyres or sacks of grain. Because here the actor is not treating each chicken as an interchangeable unit, but is treating N+1 chickens as a whole separate good to N chickens. The (N+1)th chicken is not being used to satisfy an additional end. The actor is switching his use of his N chickens, he foregoes the achievement of the end "having N chickens" and replaces it with an end "having N+1 chickens" which is higher on his value scale. The examples are equivalent, but since this chicken-maniac example is a bit obscure/bizarre, we should concentrate on the much better example of tyres.

Re: "A priori quiz"

Andris Birkmanis — Fri, 02 Nov 2012 07:16:12 GMT

"A set of two boxes" and "a single box" are not things that are considered equally serviceable from the point of view of the actor, so they are different goods (or rather, units of two different goods)

Well, to me it sounds like "the Law of DMU is always true, except when it does not". If you do not like the boxes example, consider another: puzzle pieces. The value of the last piece is vastly higher than that of the first. Or take a pair of socks for that matter (or medieval shoes, which were identical for left and right feet). Come on, even with horses, which are usually the goods in examples - you can use two horses for the job which no horse alone could do.

If you persist that a set of two items is a different good - fine, I guess we can define it this way. Then we have to understand - is it always the case? Are sets of any size always a different good? Or does it depend on the specific person and his ends? Does this reduce the value of the Law of DMU?

Re: "A priori quiz"

AJ — Fri, 02 Nov 2012 06:53:08 GMT

Graham, that makes sense to me, but then don't we have to allow that one set of objects can be seen as two (or more) different goods by the same actor? It seems to call into question the utility of the DMU if obtaining an additional unit of a good can actually provide higher utility, albeit as something we now will call a different good.

Re: "A priori quiz"

Minarchist — Thu, 01 Nov 2012 22:02:41 GMT

Graham Wright:
A person with only one end is different. Although I would argue the Law of DMU applies even here. He obviously values the first unit of the good that will satisfy his one end more than he values the second unit, because he doesn't value the second unit at all, nor any further units, so the law holds, even here.

I suppose that's true for someone who has only one end, and that end is acquiring one unit of chickens. But I was thinking more along the lines of a person who has only one end, and that end is acquiring chickens in general, not a particular number of units of chickens. That is, a chicken-maniac with an insatiable lust for chickens, which will never be satisfied no matter how many chickens he acquires. For this person, no one unit of chickens is more or less valuable than any other, the Nth unit is not less valuable than the (N-1)th unit, since all units go toward achieving one and the same end, and do so equally well.

Re: "A priori quiz"

Graham Wright — Thu, 01 Nov 2012 21:58:29 GMT

AJ:
It appears that the different answers were due primarily to unclear wording in the original statements

Yep.

except perhaps for #3, where it is additionally unclear whether a set of two boxes used for climbing out of a hole is a different good than a single box used for storage.

What is unclear about that? "A set of two boxes" and "a single box" are not things that are considered equally serviceable from the point of view of the actor, so they are different goods (or rather, units of two different goods). I take it you are alluding to the view of David Friedman on the Law of DMU, as he explained it in the recent thread on it?

I'd be interested to hear whether David Friedman considers any of Hoppe's statements in the OP to be a priori true.

Re: "A priori quiz"

Graham Wright — Thu, 01 Nov 2012 21:48:36 GMT

@ Minarchist,

I may have misunderstood what you originally meant. I thought you were talking about a chicken-maniac, meaning someone who has multiple ends, but all of them can be achieved using chickens. We are in agreement that the Law of DMU applies to this person. A person with only one end is different. Although I would argue the Law of DMU applies even here. He obviously values the first unit of the good that will satisfy his one end more than he values the second unit, because he doesn't value the second unit at all, nor any further units, so the law holds, even here.

Re: "A priori quiz"

Graham Wright — Thu, 01 Nov 2012 21:32:59 GMT

gotlucky:
I think I see our disagreement better now. I still don't think it's necessary to say "expect to". If I steal your TV, I have profited at the time of stealing your TV. I view myself as better off having stolen it rather than leaving your stuff alone.

You cannot assess whether or not you profited from any given decision until you have full knowledge of the consequences of that action. So in the short time between you stealing my TV and it catching fire and burning your house down, you may think you profited, but when you learn more about the consequences of what you did (i.e. you learn that one of the consequences of your decision was that your house would burn down) you realise you actually did not profit, you made a mistake.

If you don't add the words "expects to" then the statement is a denial that human beings (or at least, coercers) ever make mistakes, because it assumes that profiting ex ante (which we do whenever we make a voluntary exchange, or initiate a coercive exchange) always means profiting ex post (which this example shows we don't). Hoppe is certainly not meaning to imply this, but without being specific his statement is open to that interpretation.

More on ex ante and ex post: Murphy, Rothbard, Carden.

I never mentioned money or monetary profits. I was talking about psychic profits throughout. I don't know why you thought otherwise. This is not where our disagreement lies.

I see what you are saying, but I don't think it's necessarily the case that we need to have more of both goods in order to profit.

That is what I take Hoppe to mean when he says "a mutually beneficial division of labor". My point is that in a contrived two-person-two-good society, there is a situation where no advantage can be had by dividing labor, although it is extremely unlikely, and increaingly unlikely as the number of people and the number of goods in the society increases. But the caveat is technically necessary for the statement to be true.

Here is a Mises Daily on the Law of Association (aka Law of Comparative Advantage): Mallick.