08 Nov 2011

Dan Klein and IUC: May I Have Another, Sir?

Economics 8 Comments

OK I am supposed to be balancing my checkbook tonight, so that’s why I continue to harp on this issue of Dan Klein and interpersonal utility comparisons. Gene Callahan and Daniel Kuehn have chimed in. I have just two more clarifications, and then it’s double entry bookkeeping time, baby. Goethe, eat your heart out.

(1) I have no problem if Dan Klein thinks “a dollar means more to a poor person than to a rich person.” I have no problem if he goes so far as to say, “Look, we’ve all heard the standard shtick from Rothbard to Varian about ordinal preference relations blah blah blah. But c’mon people, we all know perfectly well that there is a legitimate sense in which a dollar means more to a poor person than to a rich person.”

To repeat, if Klein says that, fair enough. I have little problem with it. What I do have a problem with, is Klein putting that on a test to see if people know basic economics. That would be like asking, “Can the government raise GDP by spending a dollar?” and then dinging people for saying yes. That would be a very unfair question to ask people, since they were probably taught that government spending can raise GDP. And by the same token, some of the people Klein surveyed may very well have been explicitly taught that it is a meaningless statement to claim that a dollar means more to a poor person than to a rich person.

So that was my objection, that this was an awful question for the purpose Klein intended. I don’t care how Klein himself would answer the question.

(2) Daniel thinks we can all get along if we assume “other things equal.” No, that won’t cut it, at least not in the way I am thinking about utility. It’s not that I think “a dollar means more to a poor person than a rich person” is sometimes true, sometimes false, and thus I don’t want to say it is true in general. For example, my objection isn’t that hey, maybe we’re comparing a miserly billionaire with an aesthetic monk who took a vow of poverty.

No, that’s not the problem. The problem is that utility has to do with ordinal preferences. To say “an apple gives Mary more utility than a banana, but vice versa for John,” simply means that Mary would choose the apple over the banana, while John would do the opposite if faced with the same choice. There is no way you can take such language and come up with a comparison of Mary’s utility from an apple versus John’s utility from a banana. Mary and John are separate, acting agents. It is simply nonsense to start comparing one person’s utility with another, if you are using “utility” the way mathematical economists have used it in price theory since (at the latest) the 1930s, and the way the Austrians were using it even earlier.

8 Responses to “Dan Klein and IUC: May I Have Another, Sir?”

  1. marris says:

    I think Danny Sanchez is an answer to Callahan’s question: “…can you guess who did?”

    I think Sanchez’s position is that we can compare interpersonal utility on qualitative terms, even if we can’t do it on quantitative terms.

    [I don't remember my wordpress login at the moment. Otherwise, I would post this on Callahan's site]

  2. AC says:

    Whether or not you want to defend the statement, I don’t think the fact that you were taught something is an excuse for not knowing “basic economics.” Then you could just state any fallacy and the Harvard student could say, “well, that’s unfair because that’s what I was taught.”

    • Bob Murphy says:

      AC you need to refine your statement. If a Harvard professor dreamed up a survey, and one of the questions was something that his colleague taught to all incoming freshmen, and then the Harvard professor wrote an article for The Atlantic complaining that kids these days don’t know the basics of Discipline X, then yes that professor would be being goofy.

      When right-wingers complain about the garbage at Harvard, they typically say, “Look at the drivel these kids are being taught!” In contrast, when they want to say how dumb the kids are, they’ll say, “They couldn’t say which century the Declaration of Independence was written!!” or something. There, they aren’t complaining that a feminist historian taught them the wrong century.

      Do you see the difference? I don’t think your comment works here.

  3. Ben Kennedy says:

    Ruby K Paine talks about socioeconomic class differences and perception of money. In one of her books (I think it is “Bridges out of Poverty”), she describes an experiment where she offers a hypothetical scenario of person living in the inner city, out of jail, has a minimum wage job, shares a one-bedroom apartment with siblings, etc. She then asked people who generally live in a state of poverty to rank the situation on a scale of 1-10, and they would say, “wow, a job, a place to live, sounds like a 8-9″. A middle class person looks at it and says, “awful job in a crowded apartment in a bad part of town, sounds like a 1-2″.

    All of this is to say that culture matters. The belief that a dollar has more utility for the poor than the rich reflects a middle-class cultural value system toward money. An extra dollar very well could have little meaning to a poor person who already sees themselves in an 8-9 situation, even though they are a lot less materially well-off than a middle class person. Poor (by middle class definitions) people often don’t even define “wealth” in terms of money, rather it is defined by your relationships with other people which form a kind of currency.

    The Ruby K Paine material on the “culture of poverty” is fascinating, and lines up nicely with Austrian statements about how interpersonal utility comparisons are impossible. It explains why showering the urban poor with welfare benefits hasn’t really done anything to reduce poverty in those areas.

  4. K Sralla says:

    A dollar is worth more to a poor person than a rich person.

    Bob, you are right in saying that it is a statement of nonsense as an economic proposition. Value is subjective to almost everyone except a few remaining Marxist holdouts. Capitalists do not root the concept of value in the quantitative amount of physical labor required to obtain a unit of exchange.

    Now here is where things get tricky. If Dan Klein intended this statement in a normative way, then we are not talking “value” but rather “values”. In the ethical world, preferences still apply on an individual basis. Yet these preferences do find a kind of aggregate expression in the emergence of informal rules and norms of society, some of which are tacitly held. These are rules based on conscious and unconsciously held ethical “standards” held by many individuals in a group, and those “group rules” guide the actions of individuals, and ultimately the evolution of society.

    I would submit to you that there is an almost tacit ethical position held in the minds of vast numbers of individuals comprising “western society”, that holds that the poor amoung us should occupy a special position where “society” bestows legal protection from predation by the strong. This almost tacit ethical standard drives the statement “a dollar is worth more to a poor person”. If most folks on the street are asked this question, they don’t think about it terms of positive economics, they instinctively think “of course this is true”. The answer they give is a response to tacitly held beliefs about ethical questions.

    The role of the economists is to ask the question whether the intentional creation of laws to alleviate poverty, let’s say through progressive taxation, can possibly achieve the ethical ends hoped for. The role of the economist is that of the social gadfly.

    • Bob Murphy says:

      K Sralla, if the question had said “a dollar is more valuable in the hands of a poor person” then I would be more inclined to agree with you. But it said it to a poor person. What else could that possibly mean, except to say that the poor person values it more than the rich person does?

  5. Papi says:

    So there are two definitions of “rich” here. One is wealth, the other is earning power. You can still say that a dollar is worth more to a low-earner because it has a higher leisure cost.

    Example: you hear Bill Gates owes the mafia $10k. You hear a Somali refugee child owes the mafia $10k. You’re equally sympathetic?

  6. Major_Freedom says:

    Check out what Rothbard wrote in his “History of Economic Thought”, Volume 1, pages 380-381.