I want to elaborate on my earlier post in which I temporarily ceased being The Fonz of Economics due to a problematic question that Dan Klein had used to separate the men from the boys among the libertarians. First, let me be clear: Tyler Cowen clearly knows about everything I am going to say in this post, but for some reason (perhaps he thought it was obvious or he was just in a rush and didn’t want to confuse things) he let it go. I am less sure about how to handle Klein on this issue, because he (I believe) wrote the list of questions in the first place.
Anyway, to refresh your memory, Klein had asked people whether or not they agree with this statement: “A dollar means more to a poor man than to a rich man.” Klein thought the answer should clearly be yes, so much so that he said “c’mon people!” to those who disagreed.
I just double-checked and yes, I disagree with Klein on this so much that I actually devote a whole section of my introductory textbook to saying why the above statement is meaningless. Now you can see why I am taking this so seriously, and why it makes me lament the state of economics that we can have such huge disagreements. (Note, I am not saying Klein is a bad economist and I’m a good economist. I’m saying, economics as a discipline is in sorry shape if Klein dreams up a question to test basic economic literacy, that I use an example of economic illiteracy in an introductory textbook.)
So for those who want more (both of you), here is the discussion from my textbook, Lessons for the Young Economist. And keep in mind as you read the following that I am aiming this at junior high or even younger students, so that’s why I engage (for once) in puerile humor.
Preferences Are Subjective
Because preferences are tied to specific individuals, we say that preferences are subjective. Loosely speaking, the difference between a subjective versus an objective statement, is akin to the difference between an opinion versus a fact. It makes sense to say, “Mary prefers vanilla ice cream to chocolate, but John prefers chocolate ice cream to vanilla.” These two statements are perfectly compatible, because preferences (in this case, preferences for ice cream flavors) are subjective and can differ from person to person.
In contrast, it does not make sense to say, “The ice cream has 300 calories for Mary, but 280 calories for John.” The number of calories in a serving of ice cream is an objective fact; it can’t differ from person to person. Mary and John might disagree with each other about how many calories the ice cream has, but in that case at least one of them is simply mistaken. Yet both of them could be simultaneously “correct” when Mary says, “Vanilla tastes better than chocolate,” while John says the opposite. To repeat, Mary and John can disagree with each other about which flavor of ice cream tastes better—with neither one nor the other being wrong—because preferences are subjective. There is no “fact of the matter” concerning which ice cream tastes better, the way there definitely is an objective way to demonstrate how many calories are in a serving.
Warning! Many critics of economics—both from the progressive “left wing” as well as the religious “right wing”—totally misunderstand what economists mean by saying that preferences are subjective. These critics think that economists are somehow endorsing moral relativism, or that they are saying no one can judge the actions of anyone else. But these complaints are without merit, because economists aren’t saying those things at all!
Remember, we are simply tracing out the logical implications of our decision to classify observed behavior as purposeful action. If we see Mary go up to the counter and choose vanilla ice cream, while we see John go up to the counter and order chocolate, we won’t get anywhere in our understanding unless we realize that Mary and John have different tastes when it comes to ice cream flavors. As we will see more clearly in Lesson 6, the only satisfactory way to explain market prices is to first recognize that preferences are subjective. This recognition in no way condones the preferences of particular individuals.
For example, an economist can’t possibly explain the price of tobacco without acknowledging that some people prefer to spend their money on cigarettes, rather than on other products. After the economist states this fact, he can—with perfect consistency—then ground his teenage son when he catches him smoking in the garage with his hooligan friends. If you’re still not seeing the distinction between professional analysis versus personal beliefs, forget about economics and consider an FBI profiler. To track down a serial killer, the profiler needs to “think like the killer,” and try to understand what desires are causing the killer to act the way he is. Obviously this analysis doesn’t mean that the profiler is neutral with regard to the actions the killer takes, or that murder “is a personal choice.”
To sum up: When people engage in purposeful actions, they are motivated by desires that are not necessarily identical from person to person. In order to explain exchanges, economists must recognize that preferences are subjective.
Preferences Are a Ranking, Not a Measurement Using Numbers
Because preferences are tied to a person’s exchanges, the preferences can only reveal a ranking of goals. When Mary chooses vanilla over chocolate ice cream, this purposeful action only indicates that she prefers vanilla. We can’t determine “how much” Mary prefers vanilla over chocolate; indeed, that statement doesn’t even make sense in terms of strict economic logic.
In everyday conversation, we all know what it means to say that “Mary really prefers vanilla over chocolate but her sister Jane only slightly prefers vanilla to chocolate.” But it’s important for you to see that this type of talk makes no sense in terms of the preferences that we use in economic reasoning.
After all, what does it really mean—from the standpoint of pure economic logic—to say that Mary has a preference for vanilla over chocolate? All it means is that, faced with a choice between the two flavors, Mary would pick vanilla. But that is the same thing we can say about her sister Jane, whose friends would testify that she has only a “slight” preference for vanilla. Jane too, when faced with a choice, would pick vanilla over chocolate. So in terms of logical deductions that we can make based on a person’s purposeful actions, all we can say as economists is that both girls exhibit a preference for vanilla over chocolate.
We can take this train of thought further to drive home the lesson. Even if Jane announces, “I just barely prefer vanilla to chocolate!” that wouldn’t give an economist the ability to conclude that her preference for vanilla is “less intense” than Mary’s. No, it would merely allow the economist to conclude that Jane preferred to yell that particular sentence, versus yelling something else or keeping her mouth shut. Remember, we are using the notion of a person’s subjective preferences to explain the concrete actions that the person takes. If someone utters a statement, that informs economists about the person’s preferences all right, but only because the utterance itself is a purposeful action!
To help you remember the points of this lesson, consider the analogy of friendship. For example, Sally might have three friends, and so we could say that in her mind she holds feelings of friendship for each of them. We can push it further and ask Sally to rank her friends. She might say that Bill is her best friend, that Mary is her second-best friend, and that Joe is her third-best friend. Such talk is perfectly meaningful.
But what if we then asked Sally how much better a friend Bill was than Mary? Now things start to sound a little strange. And if we asked her, “Does Bill possess at least 30% more friendship than Joe?” we would have entered the realm of the absurd. The moral of this story is that it makes sense to rank friends, but even so there’s still no such thing as an objective “unit of friendship” behind the scenes, driving our ranking.
The same is true with preferences in general, at least as we use them in economics. As you will learn in upcoming lessons, to understand and describe exchanges, we need to assume that people have a ranking of goals or ends. People take actions to satisfy their most important preferences, or to achieve their highest goals. We do not have to say that people have a mathematical “utility function” that they seek to maximize, even though such talk is commonplace in other economics textbooks. This alternate approach is only useful in coming up with specific answers to contrived numerical problems; it doesn’t actually shed more understanding on the process of exchange. In fact, the use of mathematical utility functions is very harmful when learning basic economic principles, because it often causes the student to forget where the notion of preference comes from in the first place.
An Alternate View
Even professional economists do not always heed the principle that preferences are a ranking, not a measurement. For example, economists often use the term utility to describe how much pleasure or satisfaction a person gets from a particular situation. Therefore they might describe our scenario by saying, “Mary chose vanilla ice cream because it gave her more utility than the chocolate ice cream would have given her.”
So far, so good. But then many economics textbooks push it further and start assigning numbers to measure how much utility, so that (say) Mary gets “55 utils” from vanilla but only “34 utils” from chocolate, and so in order to “maximize utility” she obviously chooses the vanilla. If you are taking a Ph.D-level class, the textbook will explain that “utils” don’t really exist, the way “kilograms” are an objective unit of weight and “meters” are an objective unit of height. Instead, the Ph.D.-level textbook will explain, economists can use mathematical utility functions just as a convenient shortcut to describing preference rankings. So when the function assigns “55 utils” to a bowl of vanilla ice cream but only “34 utils” to the chocolate, all that really means is that Mary would choose the former over the latter. The utility function could just as well have assigned “18.7 utils” to the vanilla and “2.3 utils” to the chocolate; the important thing is that Mary acts “as if” she is maximizing this arbitrary mathematical function.
In this book, we will not be using the confusing terminology of “utils,” and we won’t be performing calculus on “utility functions” the way other economics textbooks do. These practices, though common, are dangerous because they can mislead you into thinking that we are measuring the amount of psychic satisfaction an individual derives from particular actions.
It may be that one day neuroscientists come up with an objective way to quantify various degrees of happiness, such that they can coherently talk about Mary being “three times more satisfied” than Bill. But even if this happens, our point here remains the same: In the field of economics, such talk is meaningless. In economics, we use terms like “preferences” as a way to explain or describe the purposeful actions of individuals. When someone chooses one thing over another, all we can conclude is that the person preferred the chosen item over the discarded item. Psychologists or neuroscientists (or even common sense) might shed more light on the event, but economic logic per se can go no further. The economist isn’t claiming to have all the answers; far from it! The economist is actually being humble here by admitting the limits of what economic reasoning can say about a given event. In Lesson 6, we will see how subjective preference rankings interact to yield objective market prices. At that time, you will understand better why we are stressing these points in this lesson.
Different Individuals’ Preferences Can’t Be Combined
If preferences are subjective to each individual, and cannot even be measured or quantified for each individual, then obviously it would make no sense at all to try to combine or aggregate individual preferences into “social” preferences. Unfortunately, even professional economists often engage in just this type of reasoning. Many people (try to) justify progressive income taxation, for example, by claiming that “a dollar means more to a poor man than to a rich man.” The idea is that taking $1 million from Bill Gates won’t lower his utility very much, whereas handing out $1,000 to a thousand different homeless people will greatly boost each of their utilities. Therefore, the typical argument goes, total or “social” utility has been increased by the redistribution of some of Bill Gates’s wealth.
In Lesson 18 we will examine the consequences of progressive income taxation. For now, we point out that the typical justification for it is absurd. You can’t add up different amounts of utility from various people. In fact, if you use the alternate term preferences it will be more apparent why combining them from different people is an impossible task. It makes sense to ask, “What is the total weight of the population?” or “What is the average age of the population?” It does not make sense to ask, “What is the total preferences of the population?” or “What is the average amount of utility per person?”
To make sure you understand just how nonsensical it is to (attempt to) perform arithmetical operations on different people’s preference rankings, once again let’s switch to the analogy of friendship. Suppose that Sally and Larry have the following “friendship rankings”:
Before continuing, make sure you understand the table: Sally has five friends total. Her best friend is Bill, her second-best friend is Mary, and so on. Larry, on the other hand, only has two friends. His best friend is Joe, and Bill is his second-best friend. Notice that even among their shared friends, Sally and Larry don’t have the same ranking order. Sally thinks Bill is a better friend than Joe, while Larry thinks that Joe is a better friend than Bill. There is nothing strange about this, because preferences are subjective.
Now suppose a busybody school administrator comes along and says, “This is terrible! Poor Larry doesn’t have as many friends as popular Sally! I have a great idea to make things fairer. I’ll write a note in Sally’s handwriting that says, ‘You smell!’ and put it in Adrian’s lunch bag. This will cause a big fight between Adrian and Sally, so he won’t be her friend anymore. Then I’ll arrange it so that Adrian sits near Larry on the school bus. They will eventually become friends. I can’t predict whether Adrian will become Larry’s 1st, 2nd, or 3rd-best friend, but no matter what, he will be ranked higher as a friend of Larry than he was as a friend of Sally. Through my benevolent intervention, I will have increased the total amount of friendship among the children.”
Obviously the above story is quite silly. But we have used a silly story to demonstrate the silliness of trying to add up subjective, individual preferences. Hopefully you can now see that trying to increase “social utility” by taking money from a rich man and giving it to a poor man, is simply nonsensical. Perhaps proponents of progressive taxation can justify it on other grounds, but appealing to the economic concept of preferences (or utility) doesn’t get the job done.