Upload
sorcha
View
21
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Economics and Kepler’s Angels Defending the Law of Marginal Utilities. Barry Schwartz, Ph.D. For the Mises Society March 2011. Law of Marginal Utilities. Price reflects Value at the Margin of “need” … 1862 Discovered separately by Jevons, UK Walras, France Menger, Austria. - PowerPoint PPT Presentation
Citation preview
Economics and Kepler’s Economics and Kepler’s AngelsAngels
Defending the Law of Marginal Defending the Law of Marginal
UtilitiesUtilities Barry Schwartz, Ph.D. Barry Schwartz, Ph.D.
For the Mises SocietyFor the Mises Society
March 2011March 2011
Law of Marginal UtilitiesLaw of Marginal Utilities
Price reflects Value at the Margin of Price reflects Value at the Margin of “need” … “need” …
1862 1862 Discovered separately byDiscovered separately by
Jevons, UK Jevons, UK Walras, France Walras, France Menger, Austria Menger, Austria
Comparison … Comparison … LMU vs Law of GravitationLMU vs Law of Gravitation
Kepler’s laws described planetsKepler’s laws described planets Mathematical precisionMathematical precision Causal connection to local events – UNKNOWNCausal connection to local events – UNKNOWN Newton’s law Newton’s law
locallocal (falling apples) (falling apples) large-scale large-scale (solar system) (solar system) Same law governs two realms Same law governs two realms
Classical Economic laws described supply & Classical Economic laws described supply & demanddemand LMU LMU locallocal (personal) utilities (personal) utilities large scalelarge scale (market) prices (market) prices
LMU deserves to be regarded as a Universal LawLMU deserves to be regarded as a Universal Law
Before Newton & Before Before Newton & Before LMULMU
KeplerKepler
Adam Smith Adam Smith
AngelsAngels
Invisible HandInvisible Hand
““let’s ask Newton …” let’s ask Newton …” @1690’s@1690’s
QuestionQuestion::British treasury British treasury
officials asked officials asked Newton how to Newton how to price the Pound price the Pound Sterling … Sterling …
AnswerAnswer:: “ “ in applied in applied mathematics, mathematics,
you must you must describe describe your unityour unit.” .”
It took 175 years for It took 175 years for economists to define their unit economists to define their unit
LMU dissolved the “Central Paradox” LMU dissolved the “Central Paradox” 1687 – Philosophiæ Naturalis Principia 1687 – Philosophiæ Naturalis Principia
Mathematica Mathematica 1862 – Law of Marginal Utilities 1862 – Law of Marginal Utilities
Challenge: Relating two unlike Challenge: Relating two unlike kinds of valuationkinds of valuation
1.1. The The personal utilitypersonal utility of a good of a good e.g. ice-cream e.g. ice-cream Scarcity has no intrinsic value, and yet …Scarcity has no intrinsic value, and yet …
2.2. in the in the MarketplaceMarketplace – scarcity means – scarcity means higher higher priceprice
Is a diamond more useful for being rare?Is a diamond more useful for being rare?
““Central Paradox of Central Paradox of Economics”Economics”
WaterWater is essential for is essential for life, diamonds are not, life, diamonds are not, so Why are so Why are diamondsdiamonds costlier than costlier than waterwater?? Do personal values Do personal values
contradict market contradict market prices?prices?
Are markets irrational?Are markets irrational? Are preferences un-Are preferences un-
economical?economical?
The LMU insightThe LMU insight
Error – valuing the whole world’s Error – valuing the whole world’s supplysupply Value depends on available supply in Value depends on available supply in
relation to needs that remain unsatisfied relation to needs that remain unsatisfied Goods are valued at the margin of Goods are valued at the margin of
subjective scale of utilities subjective scale of utilities Last satisfied need Last satisfied need or first unmet needor first unmet need
How LMU Solves the How LMU Solves the Water/Diamond Paradox Water/Diamond Paradox
Before buying a diamond, many uses Before buying a diamond, many uses for water have already been metfor water have already been met
The 1The 1stst useuse of a of a diamonddiamond is typically is typically greater than the greater than the nextnext (27(27thth ) ) useuse for a for a gallon of water gallon of water In a lifeboat: $ water may > $ diamondIn a lifeboat: $ water may > $ diamond
LMU Basic tenets – LMU Basic tenets – defining the unit of actiondefining the unit of action
#1 Two people trading two goods#1 Two people trading two goods Trading is done among “consenting” peopleTrading is done among “consenting” people ““Rational” = capable of choosing freelyRational” = capable of choosing freely
#2 Every economizing trader has a #2 Every economizing trader has a personal hierarchy of wantspersonal hierarchy of wants Both sides expect more utility after the Both sides expect more utility after the
tradetrade (They don’t have to achieve it!)(They don’t have to achieve it!)
Newton’s development of Newton’s development of unitsunits
F = G*mF = G*m11*m*m22 / r / r22 F= gravitational forceF= gravitational force Point masses - to define “Point masses - to define “rr” precisely” precisely
Infinitessimals to describe curved motionInfinitessimals to describe curved motion
Integral and Differential CalculusIntegral and Differential Calculus Two inventors – Newton & LeibnizTwo inventors – Newton & Leibniz
Fundamental unit of actionFundamental unit of action
Two people, two goods, two Two people, two goods, two quantitiesquantities
Two actors Two actors AA11 & & AA22 trade an amount trade an amount qq1 1 of good of good GG11 for an amount for an amount qq2 2 of good of good GG22
Before and after an economic Before and after an economic exchangeexchange
0
20
40
60
80
100
120
Peraon A Person B
Peanut Butter Jelly
0
20
40
60
80
100
120
Peraon A Person B
Peanut Butter Jelly
Mixed economy sandwich Mixed economy sandwich planning mentality planning mentality
Does either A or B know about global Does either A or B know about global supply of peanut butter or jelly?supply of peanut butter or jelly?
Can an outside agency determine the Can an outside agency determine the right p-b/j ratio for everyone’s lunch?right p-b/j ratio for everyone’s lunch?
Is there enough aggregate demand Is there enough aggregate demand for jelly without a federal stimulus?for jelly without a federal stimulus?
‘‘unit of action’ – 2 systemsunit of action’ – 2 systems
The properties of local The properties of local individual units individual units
2 masses 2 masses mm11 & & mm22 at a at a distance distance rr
2 actors 2 actors AA11 & & AA22 trade an trade an amount amount qq11of good of good GG11 for for an amount an amount qq22of good of good GG22
The dynamics The dynamics
of the of the systemsystem
Moons & planets in Moons & planets in Orbit & local motions of Orbit & local motions of pendulums, falling pendulums, falling applesapples
Market Prices, Supply, Market Prices, Supply, DemandDemand
LMU and free marketsLMU and free markets
Voluntary trades Voluntary trades are sufficient to are sufficient to explain the market explain the market laws of Classical laws of Classical EconomicsEconomics No external or No external or
collective influences collective influences are needed are needed
No coercion is No coercion is needed needed
HELP WANTED
No Angels Need
Apply
Angels & DemonsAngels & Demons
Kepler’s Angels went unemployedKepler’s Angels went unemployed But the angels of Economics had alliesBut the angels of Economics had allies
In universities, treasuries, and legislaturesIn universities, treasuries, and legislatures
Many arguments to dismiss or ignore LMUMany arguments to dismiss or ignore LMU Consider one set– challenges to its Consider one set– challenges to its
UniversalityUniversality
Meeting Objections Meeting Objections
Objections (from various books) to Objections (from various books) to the UNIVERSALITY of LMUthe UNIVERSALITY of LMU
““LMU might work for simple trades LMU might work for simple trades with only economic goods but …not in with only economic goods but …not in
real life real life .”.”1.1. Real life economics is more complexReal life economics is more complex
2.2. Groups (corporations) change Groups (corporations) change everythingeverything
3.3. There are non economic There are non economic “Externalities”“Externalities”
4.4. It’s not mathematical enough for It’s not mathematical enough for sciencescience
5.5. People are not rationalPeople are not rational
1.1. Real life economics is more Real life economics is more complexcomplex
Objection: LMU – just 2 actors, 2 goods – Objection: LMU – just 2 actors, 2 goods – never occursnever occurs
Answer: abstraction Answer: abstraction Trade with many goods & parties can be broken Trade with many goods & parties can be broken
down conceptually … down conceptually … Separate trades need not really existSeparate trades need not really exist
Comparison with GravitationComparison with Gravitation There are no cases with 2 isolated masses, and There are no cases with 2 isolated masses, and
point masses don’t really exist eitherpoint masses don’t really exist either You need to use an abstraction to apply the unitYou need to use an abstraction to apply the unit
Irony – the 3 body problemIrony – the 3 body problem
2. Groups (corporations) change 2. Groups (corporations) change everythingeverything
Objection: corporations are not like 2 actors Objection: corporations are not like 2 actors Answer: use abstractions Answer: use abstractions
As long as combinations are voluntary, the same As long as combinations are voluntary, the same abstraction applies … abstraction applies …
Comparison with GravitationComparison with Gravitation Point masses don’t really exist either, but the law Point masses don’t really exist either, but the law
still applies to complex planets with moons, and still applies to complex planets with moons, and asteroid fields … all are combinations of “point asteroid fields … all are combinations of “point masses”masses”
You need to use an abstraction to apply the unitYou need to use an abstraction to apply the unit
3. There are non economic 3. There are non economic
“Externalities“Externalities”” Objection: “not everything reduces to economics Objection: “not everything reduces to economics
and price—there are passions and there are natural and price—there are passions and there are natural disasters too” disasters too”
Answer: LMU describes economic action, not all of Answer: LMU describes economic action, not all of psychology. Other forces don’t cancel out economic psychology. Other forces don’t cancel out economic ones. ones.
Comparison with GravitationComparison with Gravitation Newton’s law does not claim that Gravitation is the only Newton’s law does not claim that Gravitation is the only
force. The equation refers only to the force due to the force. The equation refers only to the force due to the effect of gravity. effect of gravity.
Other forces (momentum, magnetic fields) will alter the Other forces (momentum, magnetic fields) will alter the position of two masses, but once you know mass and position of two masses, but once you know mass and distance, you can calculate the gravitational force distance, you can calculate the gravitational force perfectly well.perfectly well.
You need to use an abstraction to apply the unitYou need to use an abstraction to apply the unit
4. It’s not mathematical enough for 4. It’s not mathematical enough for sciencescience
Objection: “LMU is too qualitative. Real economists use Objection: “LMU is too qualitative. Real economists use numbers.” numbers.”
Answer: Answer: Numbers without the right units are empty. LMU is the BASIS Numbers without the right units are empty. LMU is the BASIS
for using numbers. for using numbers. It’s wrong to throw out a law because it doesn’t deliver It’s wrong to throw out a law because it doesn’t deliver
predictions in one step. When observed conditions are added, predictions in one step. When observed conditions are added, one can make quantitative conclusions. one can make quantitative conclusions.
Comparison with GravitationComparison with Gravitation Newton’s law was much simpler and less numerical than the Newton’s law was much simpler and less numerical than the
Ptolemaic wheels within wheels model of the solar system. Ptolemaic wheels within wheels model of the solar system. To apply the law, one must add in specifics of mass, velocity, To apply the law, one must add in specifics of mass, velocity,
position and other forces. The law doesn’t generate ellipses in position and other forces. The law doesn’t generate ellipses in one step. one step.
You need to use an abstraction to apply the unitYou need to use an abstraction to apply the unit GIGOGIGO
5. 5. People are not rationalPeople are not rational
Objection: “Do you really believe that myth about the Objection: “Do you really believe that myth about the rational economic man? Not with this crazy economy!” rational economic man? Not with this crazy economy!”
Answer: Answer: The objection uses “rational” to mean “wise, logical” – The objection uses “rational” to mean “wise, logical” –
economists don’t say that man is wise…it’s naïve and economists don’t say that man is wise…it’s naïve and irrelevant.irrelevant.
LMU assumes “rational” in the sense of “capable of choosing”LMU assumes “rational” in the sense of “capable of choosing” LMU requires no specific degree of logical consistency.LMU requires no specific degree of logical consistency. The “myth” rests on a crude equivocation on the term The “myth” rests on a crude equivocation on the term
“rational”“rational”
Comparison with GravitationComparison with Gravitation Is there a “myth” of a perfect planetary system with no Is there a “myth” of a perfect planetary system with no
explosions, collisions, comets or disasters? That has nothing explosions, collisions, comets or disasters? That has nothing to do with the law of gravitation.to do with the law of gravitation.
Ceteris ParabisCeteris Parabis
All extraneous variations are held All extraneous variations are held constantconstant
The expression is justThe expression is just a form of method of JS Mill’s joint a form of method of JS Mill’s joint
method of agreement and differencemethod of agreement and difference Applied to economic questionsApplied to economic questions
Bring on the AngelsBring on the Angels
Physicists Physicists were wise enough to test and adopt Newton’s were wise enough to test and adopt Newton’s
universal laws of gravitation universal laws of gravitation Economics Economics
borrowed the borrowed the solutionsolution to the economic paradox, to the economic paradox, but combined it with “classical” economics – ie but combined it with “classical” economics – ie
NO THEORY OF VALUE AT ALL …NO THEORY OF VALUE AT ALL … Neoclassical economics is like …Neoclassical economics is like …
F = G*mF = G*m11*m*m22 / r / r22 + Angels+ Angels
LMU is Scientific because…LMU is Scientific because…
Subject to empirical testsSubject to empirical tests Needs to be employed in context of dataNeeds to be employed in context of data Universal to economic phenomenaUniversal to economic phenomena
Like Evolution is to biology, Gravitation to physicsLike Evolution is to biology, Gravitation to physics Can be challenged but not dismissedCan be challenged but not dismissed
Unless there’s a contradiction or contrary Unless there’s a contradiction or contrary predictionprediction
Or unless there’s a more universal and Or unless there’s a more universal and parsimonious theory to take overparsimonious theory to take over
The AustriansThe Austrians
Austrian economics – adheres to LMU Austrian economics – adheres to LMU Extended LMU to … money, interest, Extended LMU to … money, interest,
business cycles, employment, and so business cycles, employment, and so on…on…
Don’t ask whether economists Don’t ask whether economists support the free market … support the free market … ask they agree with LMU ask they agree with LMU
Non Marginal Economics?Non Marginal Economics?
Any factor “added to” Marginal Any factor “added to” Marginal Utilities Utilities Joker in the deck – arbitrary and Joker in the deck – arbitrary and
unscientific unscientific prevents economists from making prevents economists from making
accurate predictionsaccurate predictions It’s a step backwardsIt’s a step backwards
New RuleNew Rule
If you don’t adhere to Marginal If you don’t adhere to Marginal UtilitiesUtilities Then, you can’t claim to solve the earlier Then, you can’t claim to solve the earlier
“economic paradox”“economic paradox” You can’t have angels AND science. You can’t have angels AND science.
You have to chooseYou have to choose
ConclusionsConclusions LMU got the units rightLMU got the units right
It can claim to be scientificIt can claim to be scientific No other system has made a serious No other system has made a serious
attempt to formulate its units of action attempt to formulate its units of action Newton said he saw further because Newton said he saw further because
he “stood on the shoulders of giants”he “stood on the shoulders of giants” He didn’t step in their faces!He didn’t step in their faces!
Questions?Questions?
Barry Schwartz, Ph.D.Barry Schwartz, Ph.D.
Topics for QuestionsTopics for Questions
Does LMU deny that Economics is Does LMU deny that Economics is value free value free “Wertfrei”“Wertfrei” ? ?
Is LMU un-mathematical?Is LMU un-mathematical? Is numerical math valid in economics?Is numerical math valid in economics? Does using money change anything?Does using money change anything? Does LMU still work if people are Does LMU still work if people are
irrational? irrational?
Topics for QuestionsTopics for Questions
Does LMU deny that Economics is value free? Does LMU deny that Economics is value free? No—values are factored out via ceteris parabisNo—values are factored out via ceteris parabis The only value is presupposed: trade assumes non aggression The only value is presupposed: trade assumes non aggression
Is LMU un-mathematical?Is LMU un-mathematical? It is mathematical… Ordinal Scale vs Interval and Ratio scales It is mathematical… Ordinal Scale vs Interval and Ratio scales Parallel in Psychophysics (Thresholds)Parallel in Psychophysics (Thresholds)
Is numerical math useful in economics?Is numerical math useful in economics? Yes in application to Catallactics - (but only if the units are right!) Yes in application to Catallactics - (but only if the units are right!)
Does using money change anything?Does using money change anything? No – real $ is a commodity No – real $ is a commodity As a medium, it is an intermediary exchange As a medium, it is an intermediary exchange
Does LMU still work if people are irrational?Does LMU still work if people are irrational? Rationality determines how much wealth you get, just the way Rationality determines how much wealth you get, just the way
altitude determines how far someone falls – it doesn’t altitude determines how far someone falls – it doesn’t CHANGE CHANGE the law!the law!