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Value, Utility, and Price (lecture 3 of 34)

June 10, 2004

I'm at the Mises University now, and I plan on transcribing my notes. This is the third lecture given. Any errors are mine, feel free to point them out so that I can correct them.

This lecture was given by Prof. Herbener.

 

Basic points about Human Action

 

  • Human Action, the Action Axiom: man acts, using means to obtain ends, so as to ease unrest felt.

     

  • The Action Axiom is true in the Aristotlean sense in that nay attempts to disprove it are in fact actions, and are thus self-contradictory.

     

  • Understanding ("verstehen") of human action comes from our reflection on conceptual structure.

     

  • Only human beings as individuals can act; this rules out collective action; thus, we can forgo "group valuation".

     

  • How do we reconcile different individuals with the overall group?

     

  • Appraisal -- choice between two alternatives, scarcity; in fact, action implies scarcity.

     

  • Choice is two-dimensional: one thing is chosen, while the next-best thing is forgone.


Choice and Preference

 

  • Choice is choosing between two alternatives.

     

  • Preference is just our ranking of the alternatives in the ordinal sense (e.g., 1st, 2nd, 3rd, etc).

     

  • Praxeologically, preference is part of action. There is no such thing as preference separate from action, and thus no such thing as a "preference map" existing separately from action.

     

  • Preference can only be demonstrated through action; there can only be demonstrated preference. Thus, we often times cannot know very much about an individuals value-scale, except what can be deduced.


Value

 

  • Value is subjective: that is, it is in the human mind and lacks extensive objective property; value does not exist outside of the human mind.

     

  • Because value is subjective and wholly in the human mind, it can not be measured.

     

  • Value is the state of mind we have; thus, there are no cardinal units of value (e.g., 1.5utils), as such is non-sensical; thus, we cannot add or subtract value, nor do any other mathematical manipulations of it.

     

  • Values are not constant, but are constantly changing.

     

  • There are no constants that relate our actions to objective conditions.

     

  • Value is not a cipher through which, influenced by external factors, preference determines action.

     

  • Mainstream economists have tried to use "cardinal rank" to represent ordinal rank; thus, they arbitrarily assign numbers to ordinal rankings:

     

    • e.g.,
      A -- 95
      B -- 85
      C -- 75
    • However, as Austrians note, A, B, and C are not like grades, but are states of mind.
    • Cardinal numbers are not a representation of ordinal rank: they are a "representation" plus a quantitative difference between the rankings.
    • The mainstream response was to do linear transformations, which don't change the function, but only the gap-size.
    • The Austrians responded that linear transformations don't change the ratios. The only way to "represent" ordinal ranks would be through all cardinal functions.

     

  • The mainstreamers then tried to use the concept of indifference -- the possibility of being indifferent between two options -- to equate utility:

     

    • Leap of FaithThis is wrong: to say that someone is indifferent is to say that they can't make a choice; if they can make a choice, then they were not indifferent; however, to say that someone can't make a choice is not to say that he or she equates utility.
    • Ordinal preference rankings:
      • 1st: $100
        2nd: good X
        3rd: $80
    • Cardinal preference rankings:
      • ordinal rank: good -- utility function
        1st: $100 -- (2x,1y)(1x,2y)
        2nd: X -- (1x,1y)
        3rd: $80 -- (0x,1y)
    • Money is never valued in this system -- only the "utility cardinality" of one good vs. another good. This is unrealistic:
      • The realistic thing to do is to consider the value scale: money vs. goods.
      • Unrealistic, because it requires us to map out a utility function for all possibilities, as if such a thing exists; in reality, individuals only demonstrate preference through action, and the idea of a utility map is contrary to that.
    • Indifference does not explain action, but only inaction.
    • Indifference is not a useful economic theoretical concept, as indifference cannot be revealed through action, nor can indifference explain action. Indifference is only useful to psychologist, entrepreneurs, and forecasters.
    • Continuity: assumption that indifference is infinitesimal, smooth. In reality there is no reason to think that economic phenomena are continuous.
    • Assumption that utility function is constant, so that we can empirically measure a demand curve. This is flatly wrong, as peoples valuations are constantly changing.
    • Summarily, indifference is simply an equivocation that allows economists to get to cardinal utility. Bah humbug.


Valuation leads to the societal division of labor

 

  • Individuals always aim action at maximizing psychic profit, and can evaluate actions. This is implicit in the action axiom, that "man acts".

     

  • All action is economizing; decision are based on valuation.

     

  • Alternatives for valuation:

     

    • One person does all valuation for everyone (problematic).
    • Weigh opportunity costs.
    • All individuals decide for themselves.

     

  • No one person can do all of the calculation needed to determine what should be produced.

     

  • General structure of causality:

     

    1. Preferences cause supply and demand.
    2. Supply and demand determines the prices of goods.
    3. The prices of goods determine the cost for consumers, and the revenues for entrepreneurs.
    4. Preferences determine the supply of factors. The revenue for entrepreneurs restrains their demand for factors.
    5. The supply of factors and the demand for factors determines the price of factors.
    6. The price of factors determines the revenues for sellers and the costs for entrepreneurs.

     

  • Two Laws of Utility:

    These laws apply for equally suitable uses of goods; one unit serves any one end; e.g.,

    • 1st use of car => transportation to job
      2nd use of car => errands
    1. Diminising Marginal Returns: the greater the stock of the good, the lower the value of the marginal unit, because that marginal value goes to the least valued use.
    2. More units of a good are preferred to less units of a good.

     

  • Consider the following examples (H = horse):

    Rank..Buyer A..Buyer B..Buyer C
    1st....$16k.....$14k.....$12k
    2nd....H........H........H
    3rd....$13k.....$15k.....$11k

    Rank..Seller X..Seller Y..Seller C
    1st...$11k......$13k......$15k
    2nd...H.........H.........H
    3rd...$10k......$12k......$14k

    Price..Q{D}..Q{S}
    $15k...1.....3
    $14k...1.....2
    $13k...2.....2*
    $12k...2.....1
    $11k...3.....1

    Above the market clearing price ($13k), sellers want to sell, but buyers don't want to buy. Below the market clearing price ($13k), buyers want to buy, but sellers don't want to sell. At the market clearing price, buyers want to buy and sellers want to sell, and all traders have their preferences satisfied. Price fixing at a price above or below the market-clearing price will result in excess supply or shortages, respectively.

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