08 Nov 2011

Econ Journeyman Watch

Economics 165 Comments

Sometimes my hunches turn out to be so correct that I surprise myself. (Other times, for example on late 2009 official CPI, not so much.)

So there I am, minding my own business skimming Tyler Cowen’s blog about Daniel Klein’s admission that libertarians can be just as biased when it comes to economics questions as he (Klein) and a co-author had declared a year ago in the Wall Street Journal about leftists.

The very first sentence Tyler quotes from Klein is this: “…under the right circumstances, conservatives and libertarians were as likely as anyone on the left to give wrong answers to economic questions.”

I immediately thought, “I bet you these ‘wrong answers’ depend on assumptions. Economics is such a joke at this point, in the hands of us ‘professionals,’ that you can squeeze any conclusion you want out of it. I bet what Klein labels as the ‘wrong’ answer could easily be made ‘correct’ with an understandable set of assumptions, that aren’t radically less plausible than whatever argument Klein has in mind for the obviously ‘correct’ answer.”

And holy cow, check out how Klein proves that his libertarian colleagues are stupid:

More than 30 percent of my libertarian compatriots (and more than 40 percent of conservatives), for instance, disagreed with the statement “A dollar means more to a poor person than it does to a rich person”—c’mon, people!—versus just 4 percent among progressives. Seventy-eight percent of libertarians believed gun-control laws fail to reduce people’s access to guns. Overall, on the nine new items, the respondents on the left did much better than the conservatives and libertarians. Some of the new questions challenge (or falsely reassure) conservative and not libertarian positions, and vice versa. Consistently, the more a statement challenged a group’s position, the worse the group did.

It’s the part I put in bold that stuns me. I went and checked Klein’s original article to make sure there wasn’t a typo, or that Tyler had unintentionally quoted him in a misleading way.

Nope, Klein says with no further comment “c’mon people!” to those who disagree that, “A dollar means more to a poor person than it does to a rich person.” And the well-read Tyler, who can give an impromptu lecture on von Neumann Morgenstern utility functions or the mating habits of Latvian beetles, didn’t have any comment on this.

So, on the off chance that neither Tyler nor Klein knows this, let me point out that some of us specifically use exactly this statement to teach undergrads the proper way to think about utility theory. As I thought every mainstream economist he cared about this stuff knew since at least Hicks (and of course the Austrians were into this earlier), there are serious philosophical problems with interpersonal utility comparisons. That’s why if you read a modern textbook, they will point out that preferences are ordinal rankings unique to individuals, and that we shouldn’t assign anything meaningful to the numbers popping out of utility functions. And if you need to come up with a “social welfare function” that aggregates everybody’s utility function, there are serious problems when using the weighting mechanism for just this reason.

I’m actually annoyed that more than 50 percent of the libertarian respondents agreed with the statement. It shows (to me) they never got a good lesson in the foundations of modern utility theory.

But of course, I’m not actually annoyed, because I understand that the people who agreed were thinking in the everyday, psychological sense of “means more.” They weren’t thinking in terms of formal economic theory, where such a statement is meaningless. It would be like if you asked a bunch of quantum physicists if they thought Jim’s cat (in the other room) were alive or dead or both, probably not 100% of them would say “both” even though that is the “correct” answer if you specify the question properly.

In the spirit of Klein’s question, I have a suggestion. On a future survey, Klein should ask, “Do you think it would be a bad idea to let Herman Cain chaperone Smurfette’s next slumber party?” Klein will be shocked at how many people put the wrong answer to this question. C’mon people, sexual harassment is a real issue! Don’t ignore it just because you are a conservative Republican!

165 Responses to “Econ Journeyman Watch”

  1. Silas Barta says:

    I pointed that out in the comments section. But I have to ask, Bob, have you ever told your son something like, “Don’t worry, that spider is more afraid of you than you are of it”?

    • Bob Murphy says:

      No, because I don’t want to give Obama an excuse to tax silk producers.

      • Joseph Fetz says:

        I am more afraid of they than he is of him.

        • Joseph Fetz says:

          For some reason, this gives me déjá vu.

          • MamMoTh says:

            déjà vu

            • Joseph Fetz says:

              So, what is it now? Fetz 20- MamMoth 1. I can live with that.
              ;)

              “Get along little doggies, get along” toodle-dee toodle-dee doo…..

              • MamMoTh says:

                Sorry, I was wrong, your jokes are more like a retarded person joke than a tourette patient.

                Did you find a merchant that will value your dollars differently than someone else’s dollar yet?

                Now I am waiting for Roddis’ graph, MF’s quote of Krugman, and your merchant.

              • Joseph Fetz says:

                Yeah, I think I am pretty much done allowing you to humiliate yourself by your own will. At this juncture, I am going to call it a night.

                If I were a real jerk, I would ask for a show of hands (or the internet equivalent) to further drive the point home that you lost the debate by a large margin. But, I am a nice guy, so I’ll just let our words stand as they are for all to see. No need for further elaboration, it is now part of the permanent record of the internet.

                Bye bye

              • MamMoTh says:

                You still believe the purchasing power of a dollar depends on its owner? Really?

                Well, at least you’ve learned how to spell déjà vu.

                Good night.

              • Major_Freedom says:

                You still believe the purchasing power of a dollar depends on its owner? Really?

                That’s not a matter of belief. Purchasing power is not some freely floating abstraction independent of human valuation. Purchasing power is a category of subjective value and catallactics, which means ownership cannot be challenged.

                The reason why you keep getting demolished over and over again is because the foundation of your economic worldview is mechanistic and ignores humanity.

                Now I am waiting for Roddis’ graph, MF’s quote of Krugman, and your merchant.

                Anonymous already showed you the quote from Krugman. Merely denying they have doesn’t enable you to pretend that you haven’t been provided with the relevant quote.

              • MamMoTh says:

                Purchasing power is not some freely floating abstraction independent of human valuation.

                Anon, that doesn’t matter.

                What matters is that at any given point in time and space, the purchasing power of a dollar of two different people is the same, so it is independent of ownership.

              • Joseph Fetz says:

                Ok, PPM is the same in a “freeze-frame” of time for all individuals due to its homogeneity. But, what does that tell us about the instance after that? Or, the myriad of instances thereafter of valuations determining exchange values.

                Obviously, there is a valuation occurring in an exchange, and no exchange is valued the same as the one before it by the actors over time; otherwise prices (of both goods and money) could not be explained. .

                Once again, I’ll ask you, how do you explain prices? How do you explain the changing of prices? After all, PPM is merely the “price” of money in exchange.

              • Joseph Fetz says:

                I should mention that this is not limited to merely goods and money, the same is true of wages, services, gifts, favors, leisure, and just about anything else that humans value.

  2. Daniel Kuehn says:

    If the diminishing marginal utility of wealth is just an assumption that we can “squeeze anything” we want out of, then we might as well close shop and go home. Really? You’re taking a stand on this one? To quote Klein – “c’mon, people!”.

    Liberals failed on things like the minimum wage – an answer which was also justifiable on certain assumptions, but admittedly a little fishy to get wrong. At least with the minimum wage we have a big empirical literature and a reasonable theoretical reason to second guess a major increase in unemployment.

    Some of the questions liberals failed on were even worse – like asking if multinationals exploited the poor in developing countries. Klein’s enlightened answer was “disagree”, but simply as a matter of historical fact one can agree with this and be perfectly economically enlightened.

    Diminishing marginal utility is a much more solid and much more widely known point. If you respond “disagree” to this, there is some economic illiteracy going on.

    • Daniel Kuehn says:

      Ultimately I agree with Klein and Cowen that there’s no relationship – that’s what I told Klein in my EJW reply even before he came up with this new data.

    • Rick Hull says:

      I have to agree with DK here — the “law” of diminishing marginal utility indeed seems to preclude any need for interpersonal utility comparison.

      • Rick Hull says:

        Though Bob’s ultimate point about assumptions stands tall, even here.

      • Bob Murphy says:

        Well, good thing you never had me as a professor.

        • Rick Hull says:

          If I achieved even Journeyman status, I’d be thrilled. I’m an engineer. That said, I’d love to carve out some time for more rigorous study. And put that ruler away!

    • Joseph Fetz says:

      This goes far beyond the law of diminishing marginal utility, it is actually asking whether certain individuals of particular incomes value a single unit of money more or less than the other. The law of diminishing marginal utility is subjective to the individual. There is no way of knowing how an individual values a dollar other than to look at his demand schedule (which is entirely unknown). It would not be entirely unconceivable that a very wealthy person is a stingy bast%$#. The law of diminishing marginal utility is entirely subjective to the individual, it cannot be compared across income-classes. You should know this, Daniel.

      • Joseph Fetz says:

        Sorry, small error. Replace “demand schedule” in my above post with “preference ranking”. Thanks Silas for correcting my mistake. The rest still stands.

        • Rick Hull says:

          Joseph,

          What if the rich man is exactly the poor man, just having won the lottery, ceteris paribus?

          • Joseph Fetz says:

            That does not tell me anything. The law of diminishing marginal utility merely states that given an individuals preference ranks, the addition of an additional unit of a particular good above the margin will hold less value than those preceding it, the value of each additional unit decreases. I don’t know the ordinal preferences of your “man” so I cannot tell you with certainty.

            I will however tell you what my own preferences would be if I had won the lottery. And, I can say with certainty that each unit of money would be less valued on my ordinal preference scale (my margin is pretty low). I would probably purchase a few exotic sportcars, a small turbo-prop plane, a small J-class, and possibly some furniture for the J-class. (no need for a home)

            But, what do my ordinal preferences and my own diminishing marginal utility have to do with your example? I am not he, and he is not me.

            • Joseph Fetz says:

              Please excuse the “additional” redundancy in my in my redundancy of additions.

            • Rick Hull says:

              This reads like a total capitulation, to me. This is a thought experiment, and we can consider “acting man”, once poor and now rich, without being that hypothetical man.

              > The law of diminishing marginal utility merely states that given an individuals preference ranks, the addition of an additional unit of a particular good above the margin will hold less value than those preceding it

              If we are to accept the law of diminishing marginal utility, the now-rich acting man thus values his additional dollar less than he did when he was poor. Relative preferences and personal preference rankings for non-dollars need not enter the picture.

              • Major_Freedom says:

                Rick, you have to understand that when people’s economic circumstances change, heck, even when time changes, an individual’s value scale can change too.

                You are presuming that ordinal value scales are unchanging.

                Diminishing marginal utility is an “instantaneous”, cognitive, counter-factual kind of law. It is not temporal or empirical.

                Diminishing marginal utility means that for the same individual, if they otherwise would have had more homogeneous units of a good (that are equally serviceable to the individual according to his judgment), than they actually have, then the marginal utility of the additional goods will be lower.

                Diminishing does not mean diminishing over time.

                So when you talk about a poor man becoming rich, that immediately implies time has passed, and that immediately implies that you can’t assume the same ordinal value scale applies such that you can use it as a common denominator and say “the now rich man values an additional dollar less than he valued an additional dollar when he was poor.”

                You’re basically presuming that intertemporal utility comparisons can be made, instead of interpersonal utility comparisons.

                You can’t do that. My value scale this time last year is not the same as my value scale right now. Heck, it might even change depending on the outcome of this discussion.

              • Rick Hull says:

                @MF

                I don’t entirely disagree. However, if we take Fetz’ formulation:

                > the addition of an additional unit of a particular good above the margin will hold less value

                we have encapsulated the change over time — du/dt if you will. I have always taken DMU to be “true”, and this formulation is consistent with my understanding, so I’m not sure your critique holds. I fully admit to major gaps in my understanding of utility on top of major rust in its application.

                Nonetheless, see my comment below regarding “folk” knowledge. I maintain that Klein’s proposition, if allowed to meet my premises, is a useful heuristic.

        • Silas Barta says:

          Dang — I’m so smooth I can correct people without even addressing them! ;-)

          • Joseph Fetz says:

            It’s that whole ESP thing…

    • Silas Barta says:

      If the diminishing marginal utility of wealth is just an assumption that we can “squeeze anything” we want out of, then we might as well close shop and go home. Really? You’re taking a stand on this one? To quote Klein – “c’mon, people!”.

      Yes, *within* one person’s preference rankings, the (n+1)th unit will be higher than the (n+1000000)th unit. That still doesn’t make it possible to compare the value between *different* people.

      (Not endorsing the rapid anti-IUC stance, just explaining why you haven’t refuted it.)

      • MamMoTh says:

        It does make sense if you assume the value of each unit is the same regardless of its owner, which is pretty much the case of a dollar whose value is its purchasing power.

        • Joseph Fetz says:

          Wow, you completely are lost with regard to where purchasing power comes from.

          • MamMoTh says:

            It doesn’t matter where it comes from. What matters is that the purchasing power of every dollar is the same.

            • Joseph Fetz says:

              So, you value a dollar just the same as me? Are you seriously going to go with that?

              Here’s a test, how much would you pay in dollars for a ham and cheese sandwich from a deli located downtown? I bet you won’t get the same answer as me….

              Haha! You fail.

              Bye bye.

              • MamMoTh says:

                So wrong it’s laughable.

                You and I might value ham and cheese differently, obviously.

                But the ham and cheese seller will value our dollars equally and charge us the same amount for the same ham and cheese.

              • Joseph Fetz says:

                So, you’re basing the PPM entirely upon one individual? Seriously? Do you not see how this just further drives home my point?

                Come on, you’ve got to do better than that.

              • MamMoTh says:

                There are three individuals, because I gracefully considered you as such even if you can’t count.

              • Joseph Fetz says:

                No, you are basing PPM on the ham and cheese seller’s valuation. Obviously, we do not actually know the buyers valuation, all that we know is that they value the sandwich more than what they gave up for it. What if the purchase price agreed upon was $5?

                Does the fact that the buyer was willing to pay $5 for the sandwich mean that he values the sandwich at $5? Absolutely not, the buyer values the sandwich more than the $5 that he is willing to trade for the sandwich, otherwise the exchange simply would not have taken place.

                What if the buyer values the sandwich at $10, but the selling price is $5?

                I swear, talking to you is like teaching etiquette to a tourettes patient.

              • MamMoTh says:

                It doesn’t matter.

                The dollars of both people will buy the same amount of cheese or ham.

                Hence, they have the same PP.

                It’s that simple really. Even you should get it.

              • Major_Freedom says:

                You and I might value ham and cheese differently, obviously.

                But the ham and cheese seller will value our dollars equally and charge us the same amount for the same ham and cheese.

                That’s brutal.

                That fact that the seller accepts the same price from either you or the other person, doesn’t mean that the seller’s value scale, or your and the other buyer’s value scale, can be compared such that you can arrive at the conclusion that “It does make sense if you assume the value of each unit is the same regardless of its owner, which is pretty much the case of a dollar whose value is its purchasing power.”

                Total fail.

              • MamMoTh says:

                The purchasing power of a dollar is the same regardless of the owner.

                Unless you provide me with a quote from Krugman claiming it is not.

              • Joseph Fetz says:

                “The purchasing power of one dollar is independent of ownership.”

                LOL, you’re something else. First you say that PPM doesn’t matter, now you say that it is independent of ownership.

                I am almost afraid to ask you this due to the ridiculous answer that you’ll give, but screw it, I am going for it.

                From whence does money derive its value?

              • Major_Freedom says:

                The purchasing power of a dollar is the same regardless of the owner.

                It is ownership and individual valuation that determines purchasing power. It can’t be independent of ownership.

                You can’t think “There are 1000 units of money and 1000 goods, so the purchasing power of money is independent of the owner’s valuation and is one unit of money to one good, period.”

                The whole concept of money only makes sense if the thing that someone owns is considered by them and others as money.

                Even if just a single dollar bill is valued by someone as a bookmark, then what you thought was the purchasing power of money, by adding up all the dollar bills and all the goods, would be shot.

                Purchasing power depends on ownership and human valuation. It is not independent of it.

                Think of the Weimar Republic when people were using bank notes as wallpaper, or for kindling in their fireplace. I hope it is clear to you that it was the ownership and human valuation that determined the purchasing power of money, not how many bills and goods were in existence.

              • MamMoTh says:

                No Anon, the purchasing power of a dollar is independent of the owner.

                A trip to the local supermarket will prove it.

                Just stand next to the cashier for a long time (preferable a few years), and you’ll be surprised!

              • Major_Freedom says:

                No Anon, the purchasing power of a dollar is independent of the owner.

                No Mammy, it isn’t. Purchasing power DEPENDS on ownership and the valuation of the owner for you to even know that something is money and something is a good for sale for money, and by what extent.

                A trip to the local supermarket will prove it.

                No, empirical trips to the supermarket only prove what the owners of money and goods valued at the time and place of the exchange, both of which are dependent on ownership, not independent of it.

              • MamMoTh says:

                No my little poodle.

                The purchasing power of a US dollar in independent of the owner.

              • Major_Freedom says:

                The purchasing power of a US dollar in independent of the owner.

                False. It is dependent on the owner. Purchasing power is a function of goods that are valued as being for sale for money, and goods that are valued as being money.

                The purchasing power of money is dependent on ownership. Without ownership, there is not purchasing power of money at all.

              • MamMoTh says:

                The purchasing power of a US dollar in independent of the owner.

              • Major_Freedom says:

                The purchasing power of a US dollar in independent of the owner.

                There is no one “the” owner. There are many owners, and the purchasing power of money is dependent on those owners. Without ownership, purchasing power cannot exist.

              • MamMoTh says:

                It doesn’t matter.

                What matters is that the purchasing power of a US dollar is independent of the owner.

              • Major_Freedom says:

                It doesn’t matter.

                What matters is that the purchasing power of a US dollar is independent of the owner.

                False. The purchasing power of a dollar is not independent of ownership. Without ownership, purchasing power cannot exist.

              • MamMoTh says:

                False. The purchasing power of a dollar is independent of ownership.

              • Major_Freedom says:

                False. The purchasing power of a dollar is not independent of ownership. Without ownership, purchasing power cannot exist.

              • MamMoTh says:

                Clearly, the purchasing power of a dollar is independent of ownership.

              • Major_Freedom says:

                Clearly, the purchasing power of a dollar is dependent of ownership, because without ownership, there would be no purchasing.

              • Anonymous says:

                Major_Freedom, I am afraid Mammy is right. My dollars and yours have the same purchasing power.

              • Joseph Fetz says:

                You’re splitting hairs on that one.

                PPM comes from all individual valuations of the money in exchange. Without exchange and individual valuations PPM merely does not exist.

                While we think of PPM in terms of the immediate past, which very well may be independent of a particular owner (i.e. past PPM), when the individual makes an exchange based upon his own valuations, this valuation in exchange is from whence PPM comes.

                MamMoth is attempting to turn this into a circular argument.

              • Joseph Fetz says:

                PPM is basically like saying the price of money itself. Yes, money is a homogeneous good, and its price is the same across an economy at any given time. So, I agree with you there. But, the valuation of each unit of money is not the same, and that is from where PPM comes from.

                I think that MF is thinking those terms, where PPM comes from. MamMoth, I think, is assuming PPM as a given.

            • Joseph Fetz says:

              Here’s another, how much would you pay in dollars for a used hand-crafted guitar (Gibson model ES-335) sold at Centre City Music in San Diego?

              I bet you won’t come up with the same price as me…

              Haha! You fail again.

              • MamMoTh says:

                You failed again.

                Time to get used to it.

              • Major_Freedom says:

                I bet you won’t come up with the same price as me…

                His confusion is derived from the triviality that “one dollar is just as good as any other dollar.”

                Yes, for the same individual who values his dollars as equally serviceable.

                No, to different individuals who do not have the same valuation.

            • Joseph Fetz says:

              Here’s another:

              How much of a return on investment in dollars would you consider to be substantial?

              I bet your figure will be different than mine.

              Haha! Failed again. Can’t you ever get it right, MamMoth?

              • MamMoTh says:

                ROI is a relative concept, by definition.

                Third time you show you are clueless.

                Time to get used to it?

              • Joseph Fetz says:

                And, for some reason the PPM is NOT a relative concept, one that is subjective to the individual?

                You must be getting blisters upon your little, bitty fingers judging by how deep of a hole it is that you’re digging for yourself.

                I’ll give you one more shot: come on, sock it to me!!!

              • MamMoTh says:

                ROI is a relative concept independent of the PPM.

                The PPM of one dollar is the same for everybody.

              • Joseph Fetz says:

                OK, I’ll humor you for a moment.

                What is the PPM of the US Dollar?

              • MamMoTh says:

                What is the PPM of the US Dollar?

                It doesn’t matter.

                What matters is that it is the same for any holder of a US Dollar.

              • Major_Freedom says:

                What matters is that it is the same for any holder of a US Dollar.

                No, it isn’t.

                I don’t value $100 offered by a murderer the same as I would value $100 from my employer.

                You’re so wrong it hurts.

              • MamMoTh says:

                I don’t value $100 offered by a murderer the same as I would value $100 from my employer.

                You don’t value a thief and your employer the same.

                But the purchasing power of their dollars is the same.

            • Bob Murphy says:

              Mammoth, take a step back and look at the implications of your stance. If your argument here with Joseph and MF is right, then you just “proved” that DMU for a given person doesn’t exist. After all, the millionth dollar has the same purchasing power as the first dollar, right? So therefore a guy values a dollar the same, whether he is rich or poor?

              Obviously something is wrong in your argument. What you are proving is that a merchant values a dollar paid by Joseph Fetz the same as a dollar paid by you. Technically even that’s not true–I would value a dollar paid by Nicole Kidman to my business over one paid by you; I would frame her dollar perhaps. (I literally have saved an IRS refund check of $1.06 because I thought it was hilarious.)

              But even if we stipulate that you are right, you haven’t proven that a dollar to the merchant is the same as a dollar to Joseph Fetz.

              • Joseph Fetz says:

                Ok, now that we’ve got the more “elementary” topics covered, let’s move on to price theory… (I think that you know where I am heading with this)

                ;)

              • MamMoTh says:

                Thanks for addressing my point seriously (at least it looks that way which is good enough).

                Yes, we can always come with some exception.

                But by and large, the purchasing power of a dollar is independent of the owner, right?

                But even if we stipulate that you are right, you haven’t proven that a dollar to the merchant is the same as a dollar to Joseph Fetz.

                Are you saying fiat money has some sort of intrinsic value other than its purchasing power?

              • MamMoTh says:

                Concerning DMU I think you are wrong: even if we assume an extra dollar has the same value (purchasing power) than any other dollar, its marginal value (purchasing power) is 1/(N+1), N being the N dollars possessed, which is diminishing.

              • Bob Murphy says:

                Mammoth wrote:

                even if we assume an extra dollar has the same value (purchasing power) than any other dollar, its marginal value (purchasing power) is 1/(N+1), N being the N dollars possessed, which is diminishing.

                Mammoth, look what you just wrote. You are saying even if we assume X, then we can still conclude not-X.

              • skylien says:

                Money is just the means to acquire your ends sought (lined up on your value scale). As you march down your value scale by using your Dollars (although all having the same purchasing power) every new Dollar spent will buy you less satisfaction , right?

                Now every human has a different value scale, and therefore every Dollar they spend has a different amount of satisfaction that is given to its spenders. And this satisfaction/utility is not comparable between different people.

                Does that help?

              • Major_Freedom says:

                But by and large, the purchasing power of a dollar is independent of the owner, right?

                Your confusion here, as in all your other attempts in all other economic topics, is brought about by an inability to ground such things as “purchasing power” on praxeology and individual action.

                You have a mechanistic view of the economy, instead of an active, humanistic view.

                The same dollar having the same purchasing power is only true to the extent that individuals choose to value them the same regardless of anything else.

                I know that I will value $100 more if a friend gave it to me than if some thief or murderer gave it to me. I’d totally reject the $100 offer from the thief.

                The only way that the same dollar will be valued the same in terms of purchasing power is if it just so happened that individual valuations were such. But it is not necessary as per your original claim, which you have now, thankfully, backtracked from.

                But not far enough because you’re still clinging to a mechanistic view of economics.

              • MamMoTh says:

                Sorry MF but my comments were addressed to Murphy.

                I am not interested in your opinion. Use your time to find that Krugman quote.

              • MamMoTh says:

                Mammoth, look what you just wrote. You are saying even if we assume X, then we can still conclude not-X.

                Not really. Are you conflating value and marginal value?

              • Bob Murphy says:

                You said both items were “(purchasing power)”. By putting “(purchasing power)” after each term, did you mean something different for one versus the other? If so, that was really confusing, don’t you think?

              • MamMoTh says:

                No Murphy I don’t think it was confusing at all.

                One is marginal, the other not.

              • Bob Murphy says:

                For some reason I feel like letting you walk down this path, Mammoth. OK, so far you have established that (a) a rich guy values a dollar the same as a poor guy because (b) both dollars have the same purchasing power, and (c) people derive their valuation of dollars from purchasing power.

                Then, from this you conclude that (d) a poor guy values a dollar more than a rich guy.

                Have I missed any steps in your argument? If not, note the apparent tension between (a) and (d).

              • MamMoTh says:

                Because you are still conflating value and marginal value.

              • Major_Freedom says:

                Sorry MF but my comments were addressed to Murphy.

                I am not interested in your opinion. Use your time to find that Krugman quote.

                Anonymous already provided the quote to you. Merely ignoring it won’t make it go away.

              • Major_Freedom says:

                Because you are still conflating value and marginal value.

                No, he’s correctly reading the nonsense you’re writing. You said:

                “even if we assume an extra dollar has the same value (purchasing power) than any other dollar, its marginal value (purchasing power) is 1/(N+1), N being the N dollars possessed, which is diminishing.”

                You just said that even if its purchasing power is the same, its purchasing power is diminishing.

                There is no such thing as marginal purchasing power and value purchasing power. There is purchasing power period.

              • MamMoTh says:

                Anonymous already provided the quote to you. Merely ignoring it won’t make it go away.

                So my pavlovian poodle is schizophrenic too?

                And no, none of your personalities have provided the quote.

              • Major_Freedom says:

                And no, none of your personalities have provided the quote.

                Anonymous provided you with the quote.

                “He’s reacting to Cameron’s statement, semi-withdrawn but not really, that what Britain needs is for everyone to pay down debt, said in obvious obliviousness to the fact that if everyone cuts spending at the same time, income must fall.”

                Title of blog post is “Arithmetic Has A Well-Known Keynesian Bias”

                Why is saying “what Britain needs is for everyone to pay down their debt” a sign that the speaker is “totally oblivious to the fact that if everyone cuts spending at the same time, spending must fall,” if the obliviousness, and hence the connection between paying back debt and spending, is NOT one of arithmetic, as per the blog post title?

                You lost. Get over it.

              • MamMoTh says:

                I will point out that none of your personalities have provided any quote from Krugman that claim what you pretend he claims, in as many posts as you want.

              • Major_Freedom says:

                I will point out that none of your personalities have provided any quote from Krugman that claim what you pretend he claims, in as many posts as you want.

                I will correct you and say that the quote has been provided, and that Krugman meant what Murphy and I said he meant, and that you lost.

                You will not win. It’s over. Deal with it.

            • Bharat says:

              That’s like saying the price of every apple is the same. Sure, there’s a market clearing price and over time it equilibrates, but the price is not the same in every single exchange. Purchasing power is simply the price of money. Over time, it equilibrates just like the price of the apple, but that does not mean it is the same everywhere at once.

              Just like an apple can have buyers and sellers bargaining for different prices, so can money. Your confusion involves not treating money itself as a commodity.

        • Joseph Fetz says:

          Now, go play in traffic.

          • Silas Barta says:

            Sorry, he’s on the Do Not Kill List.

            • Joseph Fetz says:

              Really?!?!?!

              • Silas Barta says:

                Wait, turns out he’s not!

                MamMoTh, do you want to be on it?

              • MamMoTh says:

                Sorry Silas but I make the lists.

              • Silas Barta says:

                Well, MamMoTh, we all have independent databases, so you can keep yours, but you still should let me know if you want to be on my DNKL. The more DNKLs your’e on, the more likely you are to be protected from a government “oopsie” when they decide you need to be killed.

              • MamMoTh says:

                No need, I make the Do Kill Lists, and they take precedence over any Do Not Kill List.

          • Bob Murphy says:

            JF it is hard for me to send Mammoth to time out if you tell him to go play in traffic.

            • Joseph Fetz says:

              I apologize, Bob. Please don’t spank me…

              • MamMoTh says:

                No problem. I guess Bob must also enjoy your mistakes.

              • Joseph Fetz says:

                MamMoth….Joke….FAIL!

                I think that I am seeing a trend, shall I make a forecast?

              • MamMoTh says:

                Let me guess Jo, you’ll make another stupid joke?

              • MamMoTh says:

                And did you already give up on showing the purchasing power of a dollar depends on the owner?

              • Joseph Fetz says:

                Ok,here’s my forecast: Prices. MamMoth has absolutely no way to explain prices. Go ahead M, the floor is yours.

                “you’ll make another stupid joke”

                Come on, you have to admit that my saying that talking to you is like teaching etiquette to a tourettes patient is freaking hilarious. Come on… that’s pure comedy gold.

              • MamMoTh says:

                Compared to the rest of your jokes it is indeed gold comedy.

                Somehow your jokes remind me of the jokes of a tourettes patient, if you see what I mean.

              • Joseph Fetz says:

                Aaaannnddd, PRICES. Go!!!
                (tick, tick, tick, tick)

        • Major_Freedom says:

          That assumption makes no sense.

          You just claimed that value is independent of ownership, and hence independent of human judgment.

          In other words, you just denied rational economic theory since the marginalist revolution.

          • MamMoTh says:

            The purchasing power of one dollar is independent of ownership.

            Then you can argue that one dollar’s value is not its purchasing power, and that a dollar has some unknown intrinsic value for its owner.

            That’s when the party starts.

            • skylien says:

              This is really not about purchasing power…

              You are bit late to the party ;)

            • Major_Freedom says:

              The purchasing power of one dollar is independent of ownership.

              False. Purchasing power is a function of catallactics, of individual human judgment and valuation. It is NOT independent of ownership, because that would make it independent of human valuation.

              Then you can argue that one dollar’s value is not its purchasing power, and that a dollar has some unknown intrinsic value for its owner.

              That’s exactly what I will argue, because the value of a dollar IS determined by subjective utility, of the owner and of the potential trader with that individual.

              Read Human Action.

              • MamMoTh says:

                The purchasing power of one dollar is independent of ownership.

                Just ask any merchant.

              • Bob Murphy says:

                MF I think you are getting sucked into the vortex of Mammoth’s warped logic. It’s like you’re arguing with Hitler, he says sauerkraut is good on hot dogs, and you fight him to the death over it.

                Purchasing power means how many real goods and services a unit of money exchanges for on the market. So that is an objective fact. That’s not where you should be hitting Mammoth.

                Where Mammoth goes wrong is in assuming that because people value money based on its purchasing power, that therefore everyone values a dollar the same way. No, because people don’t value goods and services the same way. So even though a dollar buys Bill the same vector of goods and services that it will buy John, it doesn’t follow that Bill values a dollar the same as John does.

                As I pointed out to Mammoth, the first dollar has the same purchasing power to Bill Gates as his billionth dollar. So if Mammoth is right, and people value units of money based on their purchasing power, he just disproved DMU. Oops.

                Last point: If you really push it, it actually doesn’t even make sense to say, “Jim values an ice cream more than John does” or vice versa. So it’s not that I’m saying, “For all we know, there could be a rich guy who values his billionth dollar more than, say, a monk who took a vow of poverty values his third dollar.” It’s that the statements are nonsense.

              • Major_Freedom says:

                The purchasing power of one dollar is independent of ownership.

                Just ask any merchant.

                Purchasing power includes valuation of goods as well as valuation of goods used as money.

                By telling me to go ask any merchant, you are asking me to go ask an OWNER.

                Which is funny.

              • Major_Freedom says:

                Purchasing power means how many real goods and services a unit of money exchanges for on the market. So that is an objective fact.

                An objective fact contingent on ownership and human valuation.

                That’s not where you should be hitting Mammoth.

                Where Mammoth goes wrong is in assuming that because people value money based on its purchasing power, that therefore everyone values a dollar the same way.

                No, because people don’t value goods and services the same way. So even though a dollar buys Bill the same vector of goods and services that it will buy John, it doesn’t follow that Bill values a dollar the same as John does.

                As I pointed out to Mammoth, the first dollar has the same purchasing power to Bill Gates as his billionth dollar. So if Mammoth is right, and people value units of money based on their purchasing power, he just disproved DMU. Oops.

                I see your line of “attack”, and is sufficiently devastating to Mammy as far as it goes, but I think that your statements depend on my statements being true first.

      • Daniel Kuehn says:

        I’m well aware of the problem with interpersonal utility comparisons, Silas. But as Rick Hull points out above, you don’t seem to need to invoke that here. Would you be less bothered if “holding all else equal” was included?

        I figure that was implicit.

        After all – take the minimum wage question Klein asks too. I would have assumed that “holding all else equal” was more or less implicit. Otherwise I could bitch and moan and say “well what if we raised the minimum wage at the same time there was a massive increase in labor demand!!!”.

        Sure – that would cause problems – but holding all else equal raising the minimum wage (probably) increases unemployment.

        Holding all else equal a rich person values a marginal dollar less than a poor person – period.

        • Silas Barta says:

          Alright, Daniel_Kuehn, what if they said, “holding all else equal, a rich person and a poor person have the same conscious experience on seeing the color red”? _Now_ are interpersonal mental comparisons verboten, or would you allow them here?

          • Daniel Kuehn says:

            I don’t understand the point of the question, so I’ll ask one of my own that’s been bugging me – why do you always put the underscore between my first and last names?

            • Silas Barta says:

              It’s a software issue, it captures poster names so I can access them with hotkeys instead of typing the full poster’s name out.

              Anyway, let me rephrase my point: saying “all else equal” doesn’t eliminate the problems that (some) economists see with comparing utility between people, since it’s still an ordinal scale for both of them. That prohibits you from getting magnitudes that let you make the comparison between them, *irrespective* of what you hold constant.

              And again, while I don’t have the same rabid anti-IUCism, many economists take pains to emphasize that even cardinal utility values expressed in models are mere rephrasings of ordinal rankings.

              Now, you can certainly *dispute* this view, but that still doesn’t make the claim in question so uncontroversial as to be evidence of someone’s economic understanding.

            • Silas Barta says:

              Oops, forgot to finish the first paragraph: the software has a bug that makes it replace spaces with underscores, and I don’t want to start a policy of tinkering with username representations, especially when underscores aren’t particularly offensive.

              (Note that I also refer to “Scott_Sumner”, Rick_Hull, etc.)

            • Joseph Fetz says:

              Hmm! That is actually a very good question, at least from my perspective. But, to be honest, I have noticed that he also does it to MF.

              Habit, maybe?

              I certainly wouldn’t draw anything from it, only that it is his typographical convention.

              • Silas Barta says:

                It’s a good question that I answered before your comment appeared ;-)

              • Joseph Fetz says:

                DARNED YOU, SILAS BARTA!!!! (shaking clenched fists in the air like a madman)

                P.S. Murphy, see how I did that? I kept it clean… this is a family show, after all.

                :)

              • Silas Barta says:

                Out of reciprocity, it’s perfectly acceptable to address me as Silas_Barta. :-P

              • Joseph Fetz says:

                Silas_Barta?
                (stated with increasing pitch, and inquisitive tone, and a “puppy-dog” tilt of the head)

              • Silas Barta says:

                lol

              • Joseph Fetz says:

                Yeah, I completely stole Murphy’s “slavery” line from ‘Interview with a Zombie”.

                What? What?

        • Major_Freedom says:

          Comparing interpersonal utilities with each other requires a common denominator.

          What is the common denominator between, say, your subjective value of $100 and my subjective value of $100?

          The real reason why interpersonal utility comparisons are without economic meaning, is because individual humans are different entities and have different value scales at whatever times and places are considered.

          It is right to say “$100 to me is not $100 to you.”

          It is wrong to say “$100 to me is more/less than $100 to you.”

          The latter is wrong because it requires a non-existent common denominator for giving meaning to “more” and “less.” More means more than something. Less means less than something. There is no “something” here that can serve as a common denominator between individuals such that “more” and “less” even makes sense.

          Holding all else equal a rich person values a marginal dollar less than a poor person – period.

          No, there should be a comma at the end there, followed by “is what I shouldn’t say because it’s not true.”

          There is no “holding all else equal” possible, even in principle, on this. Two individuals are NOT equal. Their value scales are NOT equal.

          “Holding all else equal” is only valid when it is capable of being true in principle. So for minimum wage, “holding all else equal” makes sense, because minimum wage is not unique for one entity.

    • Bob Murphy says:

      No Daniel, you are simply wrong here. It would be like Klein saying, “Government spending can boost GDP.” Surely you would flip out if I (or Klein) said that clearly the answer was “no” (or “yes” for that matter).

      I wasn’t kidding. I literally in my classes at Hillsdale would teach my students that it made no sense to say, “A dollar to a poor person means more than a dollar to a rich person.” Maybe I’m totally wrong, but by the same token I think you are totally wrong for believing in the Keynesian multiplier. I still wouldn’t be calling you “economic illiterate” in the comments of your blog.

      • Daniel Kuehn says:

        First – ya – I was a critic of the whole language of “economic illiteracy”, so I’m with you on that. I’m less concerned if he says “everyone is equally economically illiterate”.

        Anyway – my only point is that I think the interpersonal utility point is clear and that the assumption of comparability as a convenience measure is clear – but as Rick Hull said above you need not invoke that to say what Klein says.

        My guess is a lot of this is semantics, but I would absolutely not tell students that it doesn’t make sense to say this.

        • Major_Freedom says:

          First – ya – I was a critic of the whole language of “economic illiteracy”, so I’m with you on that. I’m less concerned if he says “everyone is equally economically illiterate”.

          That’s interesting, since the reference was your usage of “economically illiterate”. How can you be a critic of it when you use it?

          Anyway – my only point is that I think the interpersonal utility point is clear and that the assumption of comparability as a convenience measure is clear – but as Rick Hull said above you need not invoke that to say what Klein says.

          How is it clear? How is the assumption of comparability clear? I see a lot of talk and no substance.

          My guess is a lot of this is semantics, but I would absolutely not tell students that it doesn’t make sense to say this.

          And another generation of bad economists are born.

        • Bob Murphy says:

          Daniel, no, this isn’t about semantics. This is about the very foundation of modern subjective utility theory. That’s why I flipped out when I read Klein’s commentary, and why I was surprised that Tyler didn’t even blink.

          (NOTE: I am 99.99% certain that Tyler Cowen is fully aware of all these issues. I don’t know Klein as well, so I’m not as sure about him. Since I think he invented the question, my guess is that he has learned about IUC–I think Joe Salerno was his professor at one point–but never had this particular illustration of it driven home.)

          Daniel, I’m not trying to be a jerk, but have you read Hicks’ discussion in Value and Capital where he gives price theory an ordinal foundation? Hicks actually jettisons the very concept of Diminishing Marginal Utility–saying it is meaningless–and replaces it with Diminishing Marginal Rate of Substitution.

          The reason I am OK (though quasy) with DMU is that there is an ordinal way you can render it, though even there you quickly get into dangerous waters.

          To repeat: If you take modern (by which I mean post Hicks) utility theory seriously, then it is meaningless to say, “Jim values that dollar more than Jane does.” You don’t get around that by saying ceteris paribus.

          • Joseph Fetz says:

            Bob, excuse me if this comes off as completely ignorant, but what is IUC? I am having an acronym “brain fart”.

            Thanks.

            • Rick Hull says:

              Interpersonal Utility Comparison, I believe

              • Joseph Fetz says:

                Ohh… That…. Ok, gotcha.

    • Bob Murphy says:

      DK wrote:

      f the diminishing marginal utility of wealth is just an assumption…

      I just want to make sure you get the point here, Daniel. Of course Rothbard and I agree with the DMU for a given person. So if you want to say, “A dollar means more to Jim when he has $10 than when he has $1 million,” sure. But it is still nonsensical (if you really think about what modern utility theory means) to say, “A dollar means more to Jim, who has $10, than it does to Bill, who has $1 million.”

      Also, this isn’t at all me saying, “Klein shouldn’t have caved in, the leftists really ARE stupid.” No, not at all. I’m sure his questions for them were loaded too, in particular the one about multinationals. In fact, that question epitomizes what I’m talking about. You and I both know the sense in which Klein thought the “right” answer was no, and you and I both know that in the real world, those assumptions might not be true such that people really were being exploited in foreign countries.

      What I’m saying is that the $1 to a rich man/poor man question is even worse than that. Klein is getting mad that people wrote down an answer that I literally taught in all of my undergrad classes. (And I’m not some lunatic on this issue; at least 75% of free-market economists would have no problem if they heard me give those remarks.) That is absurd.

      • Silas Barta says:

        Wait, just to clarify, do you think there is an intended meaning for which “a dollar means more to a poor person …” is true? If so, what is that meaning?

      • Silas Barta says:

        To further clarify, I’m asking if there’s some essentially correct belief people might have in mind, even if they phrase it incorrectly, when they make the claim about a dollar to poor vs rich person.

        • Rick Hull says:

          Silas,

          I would answer in the affirmative. People have a “folk” knowledge of what it “means” to be rich or poor. They have had moments where they alternately felt one way or the other. They may identify distinctly with one or the other and imagine how the other half lives.

          All of this folk knowledge is, I submit, a placing of ones self into another’s shoes. The idea that Rich and Paul are two completely distinct people with different sets of goals is not at the forefront. It’s rather: How would I behave if I were Rich, or I were Paul.

          So you get this folk understanding of a poor person valuing a dollar more than a rich person. I think it’s a useful heuristic. It’s not “true” in any meaningful sense though. The question must be more formally specified to get a meaningful answer.

          • Silas Barta says:

            I happen to agree, for the most part. But I was interested in whether Bob believes there’s such a belief, since I imagine him rejecting any of my attempts to phrase the basic intuition you describe.

            • Joseph Fetz says:

              While I would agree in part, it is my opinion that that is not how DMU works. The fear that I have is that by using a particular individual’s preferences as an absolute, we then run into the problem described in Bob’s post; that individual preferences can be measured and compared. This is pure claptrap!

              What if the “actor” in question has no concept of money at all? What if the “actor” in question is a “dollar hoarder”? Obviously, we cannot then derive an economic law that states that we can compare the preferences of these two individuals in quantitative terms, or know the preferences of the same when compared.

              DMU is a law describing the diminishing value of additional goods at the margin– there is no way to know what the margin is for an individual at any given time or at any given second. The closest we can get is the price shown to us through exchange, but this is not to be confused with the actor’s valuation (after all, he could value the good that he wishes to purchase far more than what he pays).

        • Bob Murphy says:

          Silas, people are “essentially correct” because 99% of the population (just take out all the Austrian economists) would think they were saying something meaningful and true. There’s nothing economics has to add here. If you add anything from economics, then you either maintain the folk knowledge or you destroy it by giving a formal definition to “value” that ties it to ordinal preferences, at which point IUCs are meaningless.

          By the same token, we all know what I mean by saying “my preference for steak over hamburger is smaller than my preference for hamburger over rat poison.” But strictly speaking, that statement is meaningless too, from the standpoint of standard utility theory. Maybe cognitive psychologists can give operational meaning to it, but economists can’t.

          • Silas Barta says:

            Okay then, if I understand you correctly, there is a sense in which a dollar “means more” to a poor person than a rich, but it’s not an economic sense; rather, it’s possibly a moral or cognitive one, and so an affirmative answer is not evidence of economic wisdom.

            I agree with that, though I note it’s tricky to get the respondents to keep the topical distinction in mind — perhaps it wasn’t even emphasized that the survey is of economic knowledge?

            • Bob Murphy says:

              Silas, right, that’s why it actually doesn’t bother me that a lot of people agreed with the statement. Just like a physicist shouldn’t flip out if I say Jim’s cat is alive in the next room.

              • Major_Freedom says:

                You’re not even a little concerned that economists are primarily responsible for the results of that questionnaire?

                I mean, economists all over agree with the statement, and teach it to their students. I was taught it. It sucked having to answer questions with “correct” responses I knew were wrong.

              • Silas Barta says:

                You’re not even a little concerned that economists are primarily responsible for the results of that questionnaire?

                I think Bob has made pretty clear that this disturbs him!

              • Bob Murphy says:

                MF wrote:

                You’re not even a little concerned that economists are primarily responsible for the results of that questionnaire?

                I don’t understand what you’re asking me. Am I bothered that economists teach people that subjective value isn’t comparable between people, as economists use the term? No, I’m not bothered by it, and that’s why I put it into my textbook.

                I’m also not bothered if people use some folk notion of “means more” that is perfectly fine, though meaningless in economic science.

                The only thing that bothered me was Klein lecturing people on being economically illiterate, when–if anything–the answer should have been the opposite. I actually could see someone putting that question in, as a particularly hard one to see who fell for the trap of thinking you could compare utilities across people.

  3. Joseph Fetz says:

    This is what economics has been reduced to? Let’s ask questions whereby one person acts as the knower of all individual valuations?

    It is a loaded question/statement, because nobody can know the value that ANY individual applies to money. The respondents didn’t just disagree with the statement, they disagreed with the entire premise of the statement. Of course they would disagree with it, because the entire statement is BS.

    It is like saying, “Do you agree/disagree with the following statement: ‘pigs prefer sunlight at noon, but not in the pm’, please submit your answer now”. It makes no freaking sense!

    • Bob Roddis says:

      Great point. I know very rich guys who invest in start-ups who fuss over every nickel and poor people facing utility shut-offs who still go out and spend all of their SS check on wine and cigarettes.

      The only economic facts that we can know for sure are the terms of past transactions which only act as a rough guide to future action.

      • Joseph Fetz says:

        Yes, the immediate past is definitely important in understanding an individual’s valuation of a currency and/or goods, but we’re still at diminishing marginal utility (if you can believe that).

        It is almost as if we walked into a world whereby all of the greatest economists of all time were immediately turned into toddlers, and we have to commence to teach them how to walk and poop on the big boy/girl potty.

        This borders on ridiculousness.

        • Major_Freedom says:

          Just as Austrians were done cleaning up the intellectual mess Keynesians made, new babies called MMTers came in an pooped all over the place, and Austrians have to clean up after them too.

          Seems like every non-praxeological school of thought has to learn how to use the potty.

          • MamMoTh says:

            I guess that explains why Austrians are so full of crap.

            Not the best cleaning technique though, but you can’t beat fetishism.

            • Major_Freedom says:

              I guess that explains why Austrians are so full of crap.

              It explains why Austrians are cleaning up the crap you are leaving.

              • MamMoTh says:

                And why you are so full of crap.

              • Major_Freedom says:

                Why your crap is being cleaned up.

              • MamMoTh says:

                Bon appetit chérie

              • Major_Freedom says:

                It’s being thrown away into the trash along with Keynesianism.

              • MamMoTh says:

                C’est bon?

              • Major_Freedom says:

                You should get out of the trash. It’s not healthy in there.

              • MamMoTh says:

                Encore un peu, chérie?

              • Major_Freedom says:

                I think the trash fumes are starting to make you believe you’re a french poodle.

              • MamMoTh says:

                Un p’tit rot?

              • Major_Freedom says:

                Well, if you’re going to stay in the trash, you might as well rot with the Keynesians.

              • Anonymous says:

                Voilà c’est mieux comme ça

  4. david stinson says:

    Advantage, Murphy.

  5. Tel says:

    Interesting topic BTW.

    “A dollar means more to a poor person than it does to a rich person”

    OK, first reaction is that the question is poorly defined, and therefore cannot resolve to a YES/NO answer. Asking a poll question within a particular context is angling for a particular result, in other words this is politics, not science.

    If you regard the question on the basis of a pure logic proposition, then even a single counter-example instantly renders the proposition false, and I think it’s safe to say that there are enough counter examples falling into the “Scrooge Mc Duck” stereotype that from a logical point of view we can be completely comfortable that the proposition is false.

    However, maybe the question was not intended as a logical proposition, maybe it was intended as a general “gut feel” trend in a particular direction. In which case I would tend to generally agree that using a model that presumes rich people have lower marginal utility from a dollar is a reasonable general purpose model. Mind you, this is a model, and not real people. We need models, but we also need to recognize the limitations of those models.

    What’s more, there is the problem of maintaining nominal consistency across an entire model. You have a number of choices here — the standard Austrian choice is to only accept ordinal rankings of personal utility and thus insist that no nominal consistency exists across the model. In which case the statement posed above is meaningless — built on a false premise. This is probably the most strictly accurate approach but also the most unhelpful when it comes to building a working model.

    If you want to maintain nominal consistency across your model, then you have to face that what MamMoTh points out above is true — from the seller’s point of view anyone’s money is as good as anyone else’s money. Thus the statement, ““A dollar means more to a poor person than it does to a rich person.” is completely equivalent any and all of these statements:

    * A can of beans means more to a poor person than it does to a rich person.

    * A Toyota corolla means more to a poor person than it does to a rich person.

    * An all expenses paid tour round the world means more to a poor person than it does to a rich person.

    * A fully equipped luxury yacht means more to a poor person than it does to a rich person.

    Or any other material goods that you care to substitute. Clearly the weakness of forcing nominal consistency is apparent here, but this is a model only remember. It depends on what you are intending to use this model for.

    On another tack, it is perfectly reasonable to claim that everyone values a dollar as exactly equal to whatever purchasing power that dollar may have, but a rich person values their own time and effort at a higher rate. This is also a consistent approach to modeling and avoids any need to have some dollar-to-utility mapping. If you want to translate the calculation into dollars then you have full nominal consistency, but if you want to translate into hours of work required to achieve some outcome then you get a different result for each individual. This approach looks attractive because it allows for individual difference while still offering some universal reference point. The true cost of anything is how much of your life you must give up to obtain that thing.

    Finally I’d like to point out that to some extent, a least one real world price study indicates the opposite to the proposition under question. That is, on average, rich people tend to drive a harder bargain than poor people when it comes to negotiating over price (possibly they enjoy it, possibly they do it out of principle, possibly their better education and resources makes them more effective). Consider this news article (from the Daily Terrorgraph so you know it’s good):

    http://www.dailytelegraph.com.au/money/money-matters/fresh-food-prices-at-woolworths-stores-can-vary-by-more-than-70-per-cent/story-fn300aev-1225796689424

    Note that in the Sydney suburb of Greystanes fresh vegetables are more expensive than in the nearby suburb of Pemulwuy, as sold by exactly the same retail chain (and no it’s not a franchise chain). A quick check of the real estate guide reveals that houses in Pemulwuy are significantly higher priced than Greystanes. Mind you, other price studies have come up with conflicting results on this same question.

    • Joseph Fetz says:

      Tel, I just have to point out an inconsistency of yours. You said,

      “If you want to maintain nominal consistency across your model, then you have to face that what MamMoTh points out above is true — from the seller’s point of view anyone’s money is as good as anyone else’s money”

      You are completely disregarding time and prices. If you hold everything in “freeze-frame” then your assumption is true, but this would require all buyers to be purchasing at once. But, this is not what happens at any given “freeze-frame” moment. Rather, each buyer in the exchange has their own valuations with regard to the seller’s price. Further, if we leave this particular “frame” and allow time to commence, we find that the seller’s valuations begin to change depending upon circumstance. If this were not true, how could we explain prices at all?