I’ve been reading Austrian Economics for a good while and have recently been expanding in to learning about neoclassical theory. I’ve started doing this by reading critiques of neoclassical theory from the Austrian perspective (biased I know, but it’s my logical starting point). I found a pretty good article on Mises.org entitled Economic Science and Neoclassicism available at
One of the issues that I’ve been trying to understand is general equilibrium, which seems to be a foundational element of neoclassicism. I know from the beginning chapters of George Reisman’s Capitalism
that equilibrium is a condition where marginal utility of good A / marginal utility of good b=
price of good A / price of good b
I can clearly see that dimensionally, dividing marginal utilities doesn’t make any sense. You can divide 1 by 2 but what is 1st divided by 2nd?
However, in Hulsmann’s article (linked first above) he suggests that prices also have a dimensional problem because they ratios themselves. The examples he gives is "1 dollar / 1 banana ; 2 dollars / 1 coke ; and 3 dollars / 1 hamburger. He says the ratios would then convert to “3 bananas / 1 hamburger ; and 3 cokes / 2 hamburgers” My question is, what specifically is “dimensionally wrong” with these ratios. In my mind they have common denominators. Is it that the numerators are not also common? But is that really an incongruence?
My sense is that I am confusing these ratios with mathematical ratios where both the numerator and the denominator are integers, therefore dimensionally uniform. But I just can’t wrap my head around why a price ratio would be ‘incorrect’, even if the numerators differ.
Do you understand that marginal utility is the pleasure or extra “good” received from consumption of 1 more of a certain good? Therefore if you take the MU of good A and divide it by the MU of good B you get the ratio of MU of good A to good B. The price ratio in this case is probaly relevant because P=Mu is something called the optimal purchase rule, whereas a person will continue buying good A until the MU=P, because until that point more utility can be derived from the purchase of a good.
The food problem is an example of ordinal measure of utility by comparison…basically saying that a=2b and b=2c so a=4c is the same as saying that same thing but substituting dollars in for a, b and c. So if a=1$ then b=.50 cents and c=.25 cents.