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- Utility Maximization, Choice and Preference
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- Toward a Reconstruction of Utility and Welfare Economics | Mises Institute
Hence, economics, in contrast to physics, can derive absolutely valid substantive truths about the real world by deductive logic. The axioms of physics are only hypothesized and hence subject to revision; the axioms of economics are already known and hence absolutely true. The suggestion has been made that praxeology is not really scientific, because its logical procedures are verbal "literary" rather than mathematical and symbolic.
Utility Maximization, Choice and Preference
In praxeology, on the contrary, the axioms themselves are known as true and are therefore meaningful. As a result, each step-by-step deduction is meaningful and true. Meanings are far better expressed verbally than in meaningless formal symbols. Moreover, simply to translate economic analysis from words into symbols, and then to retranslate them so as to explain the conclusions, makes little sense, and violates the great scientific principle of Occam's Razor that there should be no unnecessary multiplication of entities.
The crucial concept of the positivists, and the one that forms the basis for their attack on demonstrated preference, is that of "operational meaning. An explanatory law must be framed so that it can be tested and found empirically false. Any law which claims to be absolutely true and not empirically capable of being falsified is therefore "dogmatic" and operationally meaningless — hence, the positivist's view that if a statement or law is not capable of being falsified empirically, it must simply be a tautologous definition.
And consequently, Sweezy's attempted reduction of Fisher's sentence to a meaningless identity. Sweezy objects that Fisher's "each man acts as he desires" is circular reasoning, because action implies desire, and yet desires are not arrived at independently, but are only discoverable through the action itself. Yet this is not circular. For desires exist by virtue of the concept of human action and of the existence of action. It is precisely the characteristic of human action that it is motivated by desires and ends, in contrast to the unmotivated bodies studied by physics.
Hence, we can say validly that action is motivated by desires and yet confine ourselves to deducing the specific desires from the real actions. It has, however, been preempted by Samuelson for a seemingly similar but actually quite different concept of his own. The critical difference is this: Samuelson assumes the existence of an underlying preference scale that forms the basis of a man's actions and that remains constant in the course of his actions over time. Samuelson then uses complex mathematical procedures in an attempt to "map" the individual's preference scale on the basis of his numerous actions.
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The prime error here is the assumption that the preference scale remains constant over time. There is no reason whatever for making any such assumption. All we can say is that an action, at a specific point of time, reveals part of a man's preference scale at that time.
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There is no warrant for assuming that it remains constant from one point of time to another. However, as Mises has pointed out, constancy and consistency are two entirely different things. Consistency means that a person maintains a transitive order of rank on his preference scale if A is preferred to B and B is preferred to C, then A is preferred to C. But the revealed preference procedure does not rest on this assumption so much as on an assumption of constancy — that an individual maintains the same value scale over time.
While the former might be called irrational, there is certainly nothing irrational about someone's value scales changing through time. Hence, no valid theory can be built on a constancy assumption. One of the most absurd procedures based on a constancy assumption has been the attempt to arrive at a consumer's preference scale not through observed real action, but through quizzing him by questionnaires. In vacuo , a few consumers are questioned at length on which abstract bundle of commodities they would prefer to another abstract bundle, and so on.
Not only does this suffer from the constancy error, no assurance can be attached to the mere questioning of people when they are not confronted with the choices in actual practice. Not only will a person's valuation differ when talking about them from when he is actually choosing, but there is also no guarantee that he is telling the truth.
The bankruptcy of the revealed-preference approach has never been better portrayed than by a prominent follower, Professor Kennedy. Says Kennedy: "In what respectable science would the assumption of consistency that is, constancy be accepted for one moment? The abandonment of truth for the sake of a spurious usefulness is a hallmark of the positivist-pragmatist tradition.
Except for certain auxiliary constructions, it should be clear that the false cannot be useful in constructing a true theory. This is particularly the case in economics, which is explicitly built on true axioms. The revealed-preference doctrine is one example of what we may call the fallacy of "psychologizing," the treatment of preference scales as if they existed as separate entities apart from real action.
Psychologizing is a common error in utility analysis. It is based on the assumption that utility analysis is a kind of "psychology," and that, therefore, economics must enter into psychological analysis in laying the foundations of its theoretical structure. Praxeology, the basis of economic theory, differs from psychology, however. Psychology analyzes the how and the why of people forming values. It treats the concrete content of ends and values. Economics, on the other hand, rests simply on the assumption of the existence of ends, and then deduces its valid theory from such a general assumption.
If psychologizing is to be avoided, so is the opposite error of behaviorism. The behaviorist wishes to expunge "subjectivism," that is, motivated action, completely from economics, since he believes that any trace of subjectivism is unscientific. His ideal is the method of physics in treating observed movements of unmotivated, inorganic matter. In adopting this method, he throws away the subjective knowledge of action upon which economic science is founded; indeed, he is making any scientific investigation of human beings impossible. The behaviorist approach in economics began with Cassel, and its most prominent modern practitioner is Professor Little.
Little rejects the demonstrated preference theory because it assumes the existence of preference. He glories in the fact that, in his analysis, the maximizing individual "at last disappears" which means, of course, that economics disappears as well. The errors of psychologizing and of behaviorism have in common a desire by their practitioners to endow their concepts and procedures with "operational meaning," either in the areas of observed behavior or in mental operations.
Toward a Reconstruction of Utility and Welfare Economics | Mises Institute
Vilfredo Pareto, perhaps the founder of an explicitly positivist approach in economics, championed both errors. Discarding a demonstrated preference approach as "tautologous," Pareto, on the one hand, sought to eliminate subjective preferences from economics and, on the other, to investigate and measure preference scales apart from real action. Pareto was, in more ways than one, the spiritual ancestor of most current utility theorists. Professor Armstrong has delivered a criticism of the revealed-preference approach which he would undoubtedly apply to demonstrated preference as well.
He asserts that when more than one commodity is being ranked, individual preference scales cannot be unitary, and we cannot postulate the ranking of the commodities on one scale.
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Only if a man ranks two alternatives as more and less valuable on one scale can he choose between them. Any of his means will be allocated to his more preferred use. Real choice therefore always demonstrates relevant preferences ranked on a unitary scale.
Utility theory, over the last generation, has been split into two warring camps: 1 those who cling to the old concept of cardinal, measurable utility, and 2 those who have thrown over the cardinal concept, but have dispensed with the utility concept as well and have substituted an analysis based on indifference curves. In its pristine form, the cardinalist approach has been abandoned by all but a rearguard. On demonstrated preference grounds, cardinality must be eliminated. Psychological magnitudes cannot be measured since there is no objectively extensive unit — a necessary requisite of measurement.
Further, actual choice obviously cannot demonstrate any form of measurable utility; it can only demonstrate one alternative being preferred to another. The ordinalist rebels, led by Hicks and Allen in the early s, felt it necessary to overthrow the very concept of marginal utility along with measurability. In doing so, they threw out the Utility baby together with the Cardinal bathwater. They reasoned that marginal utility itself implies measurability. Their notion rested on the implicit neoclassical assumption that the "marginal" in marginal utility is equivalent to the "marginal" of the differential calculus.
Since, in mathematics, a total "something" is the integral of marginal "somethings," economists early on assumed that "total utility" was the mathematical integral of a series of "marginal utilities. As a result, they assumed, for example, that the marginal utility of a good with a supply of six units is equal to the "total utility" of six units minus the "total utility" of five units.