Bohm Bawerk's intriguing exposition of marginal utillity

Economics Economics Questions
1

I’ve recently been reading the Libertarian press translation of Bohm Bawerk’s (I may refer to as BB from now) Positive Theory of Capital(volume 2 of Capital and Interest). In part A of book 3(on Value and Price), he generalises the concept of marginal utillity in some ways I have found rather intriguing. I’d be interested to get people’s thoughts on what he elucidates here, but I must say in advance it seems rather more than what has been conveyed in the treatments of Rothbard and Mises (though I’m not sure to the extent Mises expected people to be conversant with BB’s work). I will very briefly summarise the set of propositions as follows:

In the elementary situations of action(e.g. for Robinson Crusoe) whereby we have say x units of a good A then the value of any one of the good is the value of the end served by the marginal unit serving the lest valued end. So far so good, now if we have a scenario similar to the one above except for the fact we possess y units of a good B that can also be a perfect substitute for some of the ends served by A. If we ask the question again as to what the value of one of the goods of type A serving an end which can be substituted by one of B(or any one serving an end more highly valued than the one(s) B is substitutable for) then the marginal utillity, which is the utillity that shall be lost may not necessarily be that associated with the end served by one of A, but by one of B, if the lowest valued end served by B is lower than that for A. This is exactly in the same way in which the marginal utillity in which the marginal utillity in the prior situation the MU of the x-1 units of A serving a higher valued end was worth the importance attached to the lowest valued end served by the marginal unit.

Going another step forward, we could have a situation commonly faced by an actor in a developed market economy, in which he can trade goods and money for one another. In that case the MU attached to losing a good may not necessarily be that attached to the value of its lowest valued end currently served, but the substitute utillity of what could be bought e.g. for £10 or exchanged for it which serve lesser ends. Thus a consequence of the development of market exchange is the generalisation of conversion opportunities and substitution opportunities for goods. Lastly, BB derives and gives the proper basis to the law of costs, by noting that in certain scenraios, where goods can readily be reproduced, the value attached to a group of factors of production is ceteris paribus that of its marginal product, and thus the lowest valued product serving the lowest valued end that can be served in the future. Thus if one good is lost, then the value of its end may equate to the “cost of production” which is actually the utillity of the marginal product of the means required to make it, when given time preference this marginal prdouct is valued less than other substitutes.

So that was quite a mouthful! I find this rather interesting, as not only is it much more than I gained from reading MES for instance on this subject, but, it seems to me this would have quite an interesting comparison to neoclassical approaches to the subject of utillity. For BB, the notion of a substitution effect “following” an income effect would be quite superfluous since the marginal utillity of the good if it could be substituted would already have been that of its substitute.. This is most intriguing stuff. Any thoughts? Thanks in advance!

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any thoughts?

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Come on guys! I was hoping for a good discussion on this here.

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I’d love to discuss this (if this makes you feel better), but I have no knowledge of the subject.

I can offer two interesting readings on utilitarianism, though:

http://en.wikipedia.org/wiki/Mere_addition_paradox

http://en.wikipedia.org/wiki/Utility_monster

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OP: What points of discussion do you have in mind? I’m afraid I’m not familiar enough with the neoclassical treatment of marginal utility to offer a synthesis or critique.

Wheylous: Does Nozick really frame the ‘utility monster’ in terms of increasing marginal utility, or is this just an error of the wikipedia author? Increasing marginal utility assumes that, in acting, the utility monster seeks to replace his current state with a state of greater uneasiness. I don’t see how this can be embarrasing for utilitarian theory as such a being is incomprehensible to the human mind.

Now I haven’t actually read Nozick on this, so maybe he doesn’t actually put it that way, but rather that the utility monster simply acquires more utility from any good than anyone else does.

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the utility monster seeks to replace his current state with a state of greater uneasiness

How so?

I think I defined it well, reviewing Google Search results.

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It implies that the utility monster seeks to forego utility, since he chooses to allocate a unit of equally servicable goods to his least desired end first, i.e. the end that provides the least utility. It seems to me that this is the only way he could have increasing marginal utility (though, formulated in this way, the utility monster could never actually exist - or at least comprehended by acting man). The Misesian formulation of the law of diminishing marginal utility is, after all, based on the fact that in acting, man seeks to replace his current state with a state of lesser uneasiness. Do you disagree with that?

The utility monster would make sense as a thought experiment if it was simply a being that always gained more utility from goods/action than any other being possibly could (although there is, of course, no way to compare utility interpersonally). Does Nozick actually mention increasing marginal utility?

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According to Wikipedia, he does.

Even if he doesn’t, consider a new thought experiment where he does:

I find great pleasure in disproving utilitarianism. To disprove it, I want to prove the utility monster. Hence, I can become a utility monster myself. Any good I eat more of, I gain more and more pleasure, as I come closer and closer to becoming a utility monster and disproving utilitarianism.

The utility monster doesn’t have to be a normal human. He could be a psychopath (or she, fine, ladies, it could be a she).

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although there is, of course, no way to compare utility interpersonally

True, though utilitarians seem to disregard this. I guess that utility could be standardized for each person and then added up. As in out of the possible utility a man could get, what is his current state? Yet that implies perfect calculation, and fails. Also implies actually knowing everyone’s thoughts and values and having a map of their subconscious, which also affects their perceived utility.

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Well, @ Aritippus and Wheylus, I made an attempt to summarise what I felt were the key propositions of BB’s discussion of the theory of value from pp. 121-183 of the Libertarian press translation of the 4th edition of his Positive Theory of Capital, leaving aside the complications he highlights with regard to the valuation of complementary goods. So if you want to follow what I’m talking about, I’d say first read carefully what I read in the OP, and ask yourself if this is something you don’t already know.

I think I now have a preference for using this edition, as BB notes some significant changes he made to the book on Value and Price in between his 1st and 3rd edition of the book. Unfortunately, I can’t find the Libertarian press edition free online to point you to. Here’s a link to the section on value from William Smart’s translation of BB:

http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=283&chapter=35337&layout=html&Itemid=27

Relevant reference for this discussion would be chapters I-VII and X. I understand it’s quite hefty expectation on my part for you to read those chapters, but I thought I’d give them just for reference.

Rothbard’s discussion of MU in MES is comparatively thin (not that this blemishes the other merits of this work), only covering what I have said as the first and most simplest case of the pheonmena of marginal utillity according to BB, without any reference to the generalisation of this concept due to conditions that make possible, echange, production and substitution among means. For RB’s treatment, see the following:

http://mises.org/resources.aspx?Id=b4ae972c-99b7-4773-b214-3602549f908c#B._THE_LAW

The only modern Austrian that I think has referred to these issues at all is George Reisman. What makes this more interesting from a polemical perspective is that the inabillity to incorporate and show both income and substituion effects has been one of the problems Bryan Caplan has been insistent in pointing out has been missing in the Austrian approach to utillity.The following author has attempted to defend Rothbard and respond to these charges, and also provides a good verbal/graphical summary of the issue regarding income and substitution effects if you’re interested:

http://mises.org/daily/4223

Needless to say, I have never quite been satisfied with this defence, finding it tbh rather ad hoc and unsatisfactory , and felt that something deeper needed to be elucidated. Thereby it was quite apleasant surprise to find that Bohm Bawerk’s complete approach to marginal utillity would have been completely immune to the allegation of not incorporating income and substittion effects, since it incorporated both in one fell swoop; the marginal utillity is the substitute’s marginal utillity when substitution may take place in response to an income change for instance.

Whether BB’s approach can be formalised slightly in order to explicitly point out these differences in terms of vale scales or something else against the neoclassical approach is another question altogether.

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bump!

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bump! Come on guys, I’d really like to have a discussion of this issue.