Saturday, January 12, 2013

A post on Buchanan that will probably piss some people off

I don't think his note "Order Defined in the Process of its Emergence" is as good as a lot of people say it is, and I never have.

The first half (and I literally mean that - the first two and a half paragraphs of the five paragraph note) are fine.

My problem starts with this sentence:
"By implication, individuals are presumed to carry around with them fully determined utility functions, and, in the market, they act always to maximize utilities subject to the constraints they confront."
Well, no, not really - and we've been over this ground on this blog before. I believe Grant McDermott has chimed in with a few posts on this too. We say things like this sometimes just because it's an easy thing to say, but what everyone really means (and what's actually written in the intermediate-and-above textbooks) is that people have preferences and if these preference have certain fairly reasonable properties we can represent them as utility functions.

This is a minor point in most cases (which is exactly why we say things like that to students), but this is where the trouble starts. He continues:
"This emphasis is misleading. Individuals do not act so as to maximize utilities described in independently existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post (after the choices), in terms of "as if" functions that are maximized [<< I do think this sentence is a good one]. But these "as if" functions are, themselves, generated in the choosing process, not separately from such process. If viewed in this perspective, there is no means by which even the most idealized omniscient designer could duplicate the results of voluntary interchange. The potential participants do not know until they enter the process what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know, unless, of course, we are to preclude individual freedom of will."
I think what he says after my annotation is wrong. The potential participant makes choices on the basis of preferences that exist before the "process" (in this case, the market process - but of course Buchanan considered a much wider range of processes than just the market process). That's the whole point of talking about revealed preferences. The process reveals preferences that already exist. Indeed, we enter the market because we have preferences and needs that we want to satisfy and the market is a pretty good place to satisfy them.

This would all be nitpicking just like the utility function/preference relation distinction is usually just nitpicking. It becomes a little more than nitpicking with his concluding paragraph:
"The point I seek to make in this note is at the same time simple and subtle. It reduces to the distinction between end-state and process criteria, between consequentialist and nonconsequentialist, teleological and deontological principles. Although they may not agree with my argument, philosophers should recognize and understand the distinction more readily than economists. In economics, even among many of those who remain strong advocates of market and market-like organization, the "efficiency" that such market arrangements produce is independently conceptualized. Market arrangements then become "means," which may or may not be relatively best. Until and unless this teleological element is fully exorcised from basic economic theory, economists are likely to remain confused and their discourse confusing."
I don't think noting that preferences are revealed - and not generated - in the market process is teleology. The fact that I come to the market with purposes (satisfying myself by exchanging based on my and my trading partner's preferences) doesn't mean that the market itself has purpose (like generating a separately defined efficiency).

There's also a problem with contesting this view of a separately defined efficiency. It is separately defined ("independently conceptualized", as Buchanan says) based on our preferences and the resources available. People who like this note from Buchanan think he's taking a valiant strike at objectivism and standing up for real subjectivism (is it radical subjectivism? You'll have to ask Pete Boettke - I'm never quite sure what that's supposed to mean). I disagree. Preferences are subjective. We are calling a certain sort of coexistence of many people's subjective preferences "efficient". There's no sense in which this "independently conceptualized" efficiency is not subjective - it is wholly dependent on subjective value.

What's more if we say we like the market because it's a means of achieving this independently conceptualized efficiency (that is my position) we are making a claim about our own subjective value. I like the idea of preferences being satisfied in this way. It's something that I place value on. It's not good because it's something that an omniscient planner would work out. It's good (in my view, according to my preferences) because I value people satisfying their own preferences.

So contra, say, Sheldon Richmond on this note, it's not "some external objective". It's a subjective preference that we classical liberals have for peoples' preferences being satisfied.

That's the consequentialist argument, of course. I value this thing we've named "efficiency" and I support the market as a means to that end - as an institutional mechanism for satisfying peoples' pre-existing preference relations.

There are other deontological arguments too - and they are good arguments as well.

As many of you probably know I don't like the diminution of the utility maximizing description. In the Richmond link, above, he talks about how this is "impoverished" and non-spontaneous. Nonsense. I have certain preferences. These may change. These may even be suppositions on my part that are startled into a different set of preferences when I try something and end up not liking it. And I pursue these preferences in ignorance. I often have to guess or be alert for new information in my quest to satisfy these preferences. My brain correlates patterns I'm not even aware of that gives me intuitions sometimes to act on. But these are all things that a preference-satisfying individual does precisely in an effort to satisfy his preferences.

Add some modeling assumptions like completeness and transitivity (which - if we're just playing with models - are quite reasonable), and I'm a utility maximizing individual. That's admittedly a bit artificial, but only a bit. The utility-maximizing individual is artificial for the purposes of calculus - but I'm not sure it's really "impoverishing".

There's certainly nothing "impoverishing" about the preference-satisfying individual.

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