Steve Randy Waldman has utterly pre-empted the need for this post, cut to the core of the thing, in the opening line of his latest (collect the whole series!):
When economics tried to put itself on a scientific basis by recasting utility in strictly ordinal terms, it threatened to perfect itself to uselessness.
But I’ll try to help a little. What that means:
In the mid 20th century, economists decided:
It’s impossible to measure absolute utility. We can’t say what the value to you is of a heart bypass for your mother, or the value of a college education for your kid, or the value of (you or someone else) buying a third or fourth Lamborghini.
So we’re simply going to punt, and only talk about ‘preferences’. For our discipline, in its scientific impartiality, absolute utility — because we can’t measure it — will effectively not exist.
Inside our hermetic logical construct, we not only aren’t able to think about absolute utility — actual human value — we are forbidden to do so. Barred.
And with this spectacular piece of rhetorical legerdemain, the discipline disavowed itself of any responsibility for the implications and effects of that rhetorical legerdemain. (It’s hard not to be impressed.)
The effects? Economic analysts must assume, prima facie, that a billionaire buying a third or fourth Lamborghini delivers the same value as buying a college education for your kid or a heart bypass for your mom.
Who are we to second-guess preferences? They’re all the same price, right?
The (inexorable) implications? Concentration and distribution of wealth and income not only don’t matter. For economists who aren’t willing to tear open the prison door (at serious risk to tenure and employment), they can’t matter.
Steve explains it all far better, with circles and arrows and a paragraph on the back of each one explaining how each one is to be used as evidence against us. But I hope this little summation helps.
Cross-posted at Angry Bear.
Comments
4 responses to “The Pernicious Prison of the Price Theory Paradigm”
[…] Steve Roth — The Pernicious Prison of Price Theory Paradigm […]
Steve, this seems off historically. The shift you are talking about did not happen in the mid-20th century. It happened in the 19th century, right at the point when utility was introduced into economics. The view you describe here is exactly the view of Walras, Jevons, Bohm-Bawerk, etc.
We can disagree about whether the idea of absolute utility is useful or not. But the claim that it was abandoned by economics only in the mid 20th century strikes me as simply wrong as a matter of historical fact.
@JW Mason
Are you saying that those thinkers used the concept of ordinal utility (of course they did), or that they used it exclusively?
The latter is the claim I’m making for mid 20th price theory — placing the concept of cardinal utility off-limits for any “scientific,” “positivist” academic discussion.
I’m claiming that the shift you are describing did not take place that you said. In fact I think you’ve got it backward. Today’s economists are more interested in ideas of absolute utility than economists of the early 20th century, who in turn were more interested in absolute utility than the classical economists of the early 19th century.
Here’s my sense of things. Economics started out with with a focus on the revenue and power of the state. Then it evolved toward a more purely positive description of the behavior and evolution over time of (capitalist) economies, with no normative content — except the negative content of rejecting most ideas for improving people’s wellbeing. Utility first entered in th elate 19th century with the marginalists, as purely subjective. The Pareto criterion was the first substantive claim about utility in the economics profession, not (as you seem to suggest) a retreat from some broader concept. Welfare wasn’t a big concern in the big debates of the early 20th century, and once it returned to center stage after WWII the movement was AWAY from a purely subjective concept of ordinal preferences. One of Gary Becker’s big things, I believe, was the idea of getting behind observed preferences to try to find a few basic determinants of wellbeing to which consumption provided “inputs.” I had dinner with a friend from a top department the other night and when this topic came up, he said nobody talks about Pareto optimality anymore. People take it for granted that you need some more substantive utility measure that allows comparisons across people.