Three things to remember about neoclassical utility theory

1. Utility and preferences are two different things: utility functions represent preferences.
2. Preferences are subjective.
3. Statements about welfare is really a sort of ethical or philosophical endeavor, not a scientific one.


I think these clear up some of the advantages that Jason Kuznicki attributes to "Austrian Utility Theory". I don't meant to denigrate Austrian views of utility. They are thoroughly neoclassical views, after all - and what I'd argue is that they are pretty comparable to mainstream neoclassical views.

Kuznicki begins: "To my mind, the Austrian school’s account of utility is (1) true (2) completely different from mainstream economists’, and (3) very interesting." I would say that the Austrian school's account of utility is (1.) true, (2.) almost exactly the same as mainstream economists, and (3.) very interesting.

He writes: "There’s no such thing as a hedometer, a device to measure utility, and without it we are thrown back on rank order. Each of us judges our own desires in a sort of footrace in our minds. Austrians strongly insist on ordinality, and it seems obvious to me that this is correct."

If you read an Austrian on utility you'll often get an answer like this and an initial claim that the mainstream thinks utility is cardinal and Austrians distinguish themselves by claiming it is ordinal. This is part falsehood and part improper comparison. It's true that the mainstream uses the word "utility" to describe a cardinal magnitude. But the important thing to remember is that if you stop there you're making an improper comparison. For the mainstream neoclassical, utility functions simply "represent" ordinal preference relations. So what Jason calls "utility" for the Austrians is what most of the rest of the profession calls "preference relations". This is often obscured because undergraduate textbooks gloss over the point - it's not a particularly important distinction unless you're neck deep in micro theory. Even easier graduate textbooks will only refer to it in passing. But higher level material maintains a very sharp distinction between ordinal preference relations (which is really what the Austrians have in mind) and cardinal utility functions. When talking about "the mainstream" Austrians often jumble this together. Utility functions are only acceptable if they maintain the critical characteristics that preference relations have to maintain. And it should be obvious that nobody thinks preferences or welfare is cardinal because an early exercise (even for undergraduates) is to show that you can monotonically transform utility functions.

Kuznicki says that the mainstream "grudgingly" came around to this. I don't know a whole lot of the history of thought on this, but I have my doubts about whether "grudgingly" is the right word. I read a little Jevons on this and see no signs that he ever say utility functions as doing anything other than representing preferences. It wouldn't surprise me if there were some early guys that actually thought "utils" had independent meaning and you could count them up, but if it ever characterized the "mainstream neoclassical view" that's news to me. You've got to remember that Menger, along with Jevons, is that father of the mainstream neoclassical view, so it's doubtful that Austrians ever thought anything different from the rest of us on this. Ragnar Frisch puled together modern formal treatments of preference relations in the 1920s, so certainly this was the established mainstream view by then. There's nothing grudging about it. We don't need to be grudging - it's just the way it is: preferences are ordinal.

Kuznicki then moves into utility-monster type stuff. Again, since mainstream economists view preferences as ordinal and magnitudes of utility as essentially meaningless and entirely incomparable to each other, none of this is as problematic for the mainstream as he suggests and the issues here are pretty familiar.

As I've said in the past, though, this does pretty much put welfare analysis outside of the realm of science and into the realm of ethical or policy judgement. That doesn't mean that welfare economics is wrong - it just means that we need to be aware that there's an implicit assumption that as far as mainstream economists are concerned, thou shall not suffer a utility monster to live.

Utility monsters do nothing to disrupt the mainstream neoclassical treatment of the scientific study of human exchange behavior.

Moving on, Kuznicki writes: "The comparison with the mainstream approach is sharp: Mainstream economists often build first-approximation models that assume perfect knowledge, then try to add the imperfections later."

Again I think this is a misconception. All preferences (and therefore all utility functions) are subjective. That means that it is not "perfect knowledge" that is being assumed, even if a mainstream economist tells you they're assuming perfect knowledge. Since preferences are subjective, what that implies is that agents facing a choice have some subjective view of the different trade-offs. "Perfect knowledge" is even brought up because "completeness" is one requirement for well-behaved preference relations. Complete preference relations imply some subjective ordinal assessment of every option available. It doesn't have to be accurate in an objective sense, and presumably heuristics could fill in the gaps for our frail minds. Completeness is not as objectionable an assumption as it is often treated, and certainly no one is assuming that agents are "omniscient" in an objective sense.

I think the discussion of transitivity also takes Austrian claims on the matter for granted. Kuznicki writes:

"The Austrian account of utility also handles intransitivity of preference both elegantly and well.

When declared preference is intransitive — that is, when actors say that preference A beats preference B, and preference B beats preference C, and preference C loops around and beats preference A — the problem is not, in fact, that their preferences are intransitive. It’s that to express an intransitive preference is easy, but to act upon it is impossible. One can always express intransitive preferences, just as one may always write intransitive inequalities using mathematical notation. But to act on an intransitive preference would require a time machine and/or some fairly weird assumptions about causality, identity, and multiple universes. Time doesn’t loop in the real world, so expressions of intransitive preference are always merely expressions."

He's right, but again this is pretty much how mainstream neoclasical economists talk about it. They would say that acyclicity holds if and only if a set of preference relations is maximizable. It's the exact same point. There's nothing particularly Austrian about this.

There is one thing in Kuznicki's post that I can't really speak to and that's this idea (allegedly Austrian - I believe him I've just never come across it myself) that we don't seek happiness, we seek to remove unease. That may indeed be a distinct viewpoint but I can't really figure out why that's an especially important distinction to make.

Generally speaking, in discussions of utility theory, a good rule of thumb is not to take everything an Austrian says about the difference between Austrian and mainstream approaches for granted.