Tuesday, November 8, 2011

Bob Murphy on Interpersonal Utility Comparisons

Bob Murphy has a great post on interpersonal utility comparisons here. Bob thinks Tyler Cowen knows all this, but isn't sure if Dan Klein does. Gene Callahan thinks that Dan Klein knows all this and I'm inclined to agree with him. And I'll add that neoclassical, non-libertarian, non-Austrian economists know this too. Hence my post earlier pointing out Hal Varian's notation of the exact same point in a very popular graduate-level neoclassical microeconomics textbook. I certainly know all this. This stuff was settled out 140 years ago at the latest.

I still think Bob is wrong in criticizing Dan Klein, although this may be semantics. I read the question with a little "holding all else equal" at the end, which I think is pretty fair. Presumably we were holding all else equal in Klein's minimum wage question too (which liberals were relatively "unenlightened" on), otherwise we can imagine a lot of what-if stories too. The diminishing marginal utility of wealth is a strong foundation for building up economic science, holding preferences constant, and we should wonder about the economic insights of people who for whom that insight is not instinctual.

I also think that the inability to compare subjective utilities should not grind economics to a halt. We really use utility in two ways: when we think about marginal behavior, and when we think about welfare implications. As long as we are willing to assume a few reasonable properties of utility functions, marginal analysis is legitimate even if interpersonal comparisons are not. That's the role that utility plays for most positive questions.

It's tougher when we get into questions of welfare analysis, because that's where we actually are aggregating total utilities. But these are inherently normative questions anyway, so I don't think it should trouble us too much to add some more normative assumptions about interpersonal comparisons. Definitions of optimality are inherently normative. For example, why should we ethically abhor someone being made worse off? Perhaps it is ethically right that they are worse off - perhaps ethically it would be sub-optimal if certain people were not made worse off. There's also ethical questions of standing. As I've pointed out before in discussions of "temporal autarky", we regularly make the assumption that future generations have no standing in today's decisions. Animals often have no standing either - is that ethically right? People who do not have these social constructions we call "property rights" also don't have standing. This is an ethical assumption too and it has nothing to do with the positive science of human behavior. We also make assumptions about equality. Typically welfare analysis is just about welfare maximization - there's often no assumption that that welfare ought to be evenly distributed. There is no objective reason for this - it's a normative assumption.

When we do welfare analysis we make all these ethical assumptions already. So I don't personally see why we should balk at making assumptions about interpersonal utility comparisons. We seem to feel that making these declarations about optimality, standing, egalitarianism, etc. when we do welfare analysis is useful even though it's normative. I would simply say that imposing a rescaling of personal utilities to enable interpersonal comparisons is a quite legitimate assumption to make in welfare analysis. That's not positive science, but then welfare analysis never was. Welfare analysis is the application of certain economic insights to practical economic problems. And since the solution to those problems has ethical implications, we are certainly within our rights to make normative assumptions in approaching them ("within our rights"... there I go making normative assumptions again!).

That's why I may get a little exasperated when people act like intersubjective utility comparison is lost on me when actually it's not lost on me - I just think it's irrelevant to a lot of what we do in economics.


  1. Just to show that it's nothing personal or unique to Austro-libertarians, Daniel, go hang out at a physics blog and keep saying, "I think what we should do is precisely measure the position and momentum of a subatomic particle." Then when the people there go nuts over your apparent ignorance, say, "Give me a break. I know all about the uncertainty principle. Good heavens people, haven't you read Heisenberg? This was settled decades ago."


    To drop the cuteness: You can't get around the problem by saying "other things equal." This isn't an issue of preferences possibly changing between people, it's an issue of the nonsensical nature of the statement. I'm not saying, "Hey Klein, for all we know, a rich man might get more utility than a poor man from a marginal dollar, because hey maybe he's a miser and the poor guy happens to be a monk with no kids." I'm not saying the statement is sometimes true and sometimes false, and hence (in general) I can't agree with it.

    No, I'm saying the statement is nonsense. Maybe you agree with my methodological views, and maybe you don't, but you can't wave them away by saying ceteris paribus.

    Soooo, back to my original point, it's a bit weird that Dan Klein included a question that anybody who went through my classes either at Hillsdale or Mises, would have been explicitly taught was a nonsense question. Believe it or not, I wasn't setting out to criticize Klein, so much as economics. That's why I said "at this point economics is such a joke that..." I can't believe we are arguing over whether the stimulus was good or bad, or whether we are going to have inflation or deflation, or whether this was a good or bad question. If someone wanted to declare economics to be voodoo, I couldn't object.

    See if the people there start to sound like us weirdo Austrians in their reactions.

  2. Oops the very last sentence above, should have gone with the part before the "===========". I.e. that last sentence was supposed to finish the physics analogy.

  3. Needless to say I don't think it's like that at all because I've never said we could ever measure anything but revealed preferences.

    My contention is that some people take IUC points and extrapolate that into thinking that the whole enterprise of using utility functions doesn't work. It's simply not true.

    Welfare analysis is impacted by it, but welfare analysis isn't science - it's applied ethics.

    I agree the physics community would balk at that. I'm claiming they're not at all analogous.

  4. re: "See if the people there start to sound like us weirdo Austrians in their reactions."

    You don't need to always appeal to this idea that Austrians are perceived to be weirdos. You know I don't think that (well... some are weirdos... but that's not a function of their Austrianism!).

    If you want to use physics analogies, I see this like a negative Deepak Chopra, in the sense that Chopra tries to validate more claims than he is entitled to with quantum physics. People who make a big deal of IUC try to invalidate more claims than they are entitled too. A physicist will tell Chopra that quantum mechanics defines its own parameters very carefully and that there are limits to what can and cannot be claimed. Chopra cannot take an insight, state it vaguely, and then apply it generally. Similarly, the sorts of people that make a big deal over IUC can't take an insight, state it vaguely, and then declare verboten everything that has to do with utility.

    We can observe revealed preference relations. If we are willing to assume (and maybe you're not willing to assume this, but I think it's safe enough) transitivity and continuity we can do neoclassical microeconomics with these purely ordinal preferences - using utility functions.

    What we cannot do with ordinal revealed preference relations is welfare analysis.

  5. I don't see how welfare economics in itself is normative. It can be a completely positive branch of economics, in the way that Rothbard and other Austrians construct it. Defining an increase in social utility (eg., the Unanimity Rule and Demonstrated Preference) as when everyone involved in an exchange benefits ex ante doesn't involve any normative statements. Thats just based off the logic of human action and people always trying to maximize utility, ex ante. How we apply welfare economics obviously does, but thats besides the point of the actual economic science involved.

    So even though welfare analysis in the sense of us deciding what policy is best involves ethical judgements, the actual economic science of welfare science does not. Positive economics cannot argue that X benefits more than Y, so whenever you make an ethical statement involving IUC (not withstanding that its nonsense, as Murphy pointed above), its not based on actual economic science.

  6. I guarantee you you are going to run into normative questions when you try to put meat on that phrase "everyone involved in an exchange".

    re:"Thats just based off the logic of human action"

    Every time I hear this phrase I throw up a little in my mouth. You're on a collision course with Bedlam, guys.

  7. "I guarantee you you are going to run into normative questions when you try to put meat on that phrase "everyone involved in an exchange""

    Not if you use demonstrated preference ala Rothbard. The people involved in the exchange are the people who are demonstrably acting or demonstrably cannot act (due to force) based on an exchange. In the realm of welfare economics, envy means literally nothing, because it doesn't prevent someone from achieving their most wanted end. People can choose to be Debbie Downers and still maximize utility, ex ante. Nothing is normative about the above statements, its based off of human action. Whether or not we should choose polices that allow individuals to achieve their ends is normative.

    If anyone attempted to make a welfare analysis that does not use interpersonal utility comparisons and normative assumptions, it was Rothbard.

    "Every time I hear this phrase I throw up a little in my mouth. You're on a collision course with Bedlam, guys. "

    Sorry if I sound all high and mighty as another keyboard Austrian wielding the sword of praxeological logic and sounding arrogant (I mean this truthfully). I'm just a little perturbed at your statement about normative welfare economics. My point, along with other Austrians is that welfare economics (along with all economics) is completely positive and value free. Its what you do with it with an ethical system that makes it normative.

    But seriously, am I crazy to say that social utility always increases ex ante under a voluntary setting because humans strive to achieve their most highly valued end first? And if they did not value what they were trying to acheive (either autistic or interpersonal exchange) more than their opportunity cost, then they would not act towards it? And that what humans value the most is revealed by their actions, because if they valued something more, they would act towards that? All of this can be deduced from human action.


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