In the past couple of weeks, I have actually been associated with an email exchange about the distinctions in method between the Austrian school and the Chicago school. The correspondence has exposed some unexpected misconceptions of a crucial Austrian view, showed preference, and what I intend to do in today’s post is to provide an account of that view and some of the misconceptions about it.
The best account of demonstrated preference remains in Murray Rothbard’s essay “Towards a Reconstruction of Utility and Well-being Economics” (1956 ). Essentially, the teaching is this. When you choose, it’s usually among a couple of options. The choice is an action, and the action demonstrates, or exposes, that the option, or choice, that you select ranks greater than the competing choices. As Rothbard puts it,
Human action is making use of methods to arrive at favored ends. Such action contrasts to the observed behavior of stones and planets, for it suggests purpose on the part of the actor. Action implies option among alternatives. Male has methods, or resources, which he utilizes to get to numerous ends; these resources may be time, money, labor energy, land, capital products, and so on. He utilizes these resources to achieve his most favored ends. From his action, we can deduce that he has actually acted so as to please his most highly valued desires or preferences.
The idea of shown choiceis merely this: that actual option exposes, or shows, a guy’s choices; that is, that his choices are deducible from what he has actually chosen in action. Hence, if a man chooses to spend an hour at a show instead of a film, we deduce that the previous was preferred, or ranked higher on his value scale. Likewise, if a guy invests 5 dollars on a shirt we deduce that he chose purchasing the t-shirt to any other uses he might have discovered for the cash. This principle of choice, rooted in genuine options, forms the keystone of the sensible structure of financial analysis, and especially of energy and welfare analysis.
When we discuss “preferences” or “choices” here, what is indicated are the alternatives that an actor wants when he decides what to do. We aren’t assuming that these choices stay continuous over a considerable period of time, much less that the star has “in his mind” a list of all possible actions he might take in all possible worlds which this list also stays the very same for a long period. Because we don’t presume these things, we also do not assume “transitivity of preferences.” If you prefer A to B, B to C, and A to C, then your preferences are transitive; but if your preferences are A over B, B over C, and C over A, they are intransitive. Lots of people think that intransitive preferences are unreasonable, for reasons we will not enter into here.
In the Austrian view, this problem does not occur, because we’re concerned only with somebody’s option at a particular time. If the actor now has to select in between A and B, we don’t presume that he thinks about how to pick in situations that involve other choices, nor do we presume that his preference for A over B stays constant. As Rothbard puts it, “The prime mistake here is the presumption that the choice scale stays continuous gradually. There is no reason whatever for making any such presumption. All we can say is that an action, at a specific point of time, exposes part of a male’s choice scale at that time. There is no warrant for assuming that it stays continuous from one point of time to another.”As Rothbard mentions, there is a difference between constancy and consistency, and the previous isn’t a requirement of factor.
[C] onstancyand consistencyare 2 totally various things. Consistency suggests that an individual keeps a transitive order of rank on his preference scale (if A is chosen to B and B is chosen to C, then A is chosen to C). However the revealed preference procedure does not rest on this assumption so much as on an assumption of constancy— that a specific keeps the very same worth scale with time. While the previous may be called irrational, there is certainly absolutely nothing unreasonable about someone’s value scales altering through time. Hence, no legitimate theory can be built on a constancy presumption.
Among the individuals in the e-mail exchange raised this objection:
It [showed choice] at many exposes his greaterchoice, his preference between two alternatives he is totally free to pick between … Consider a prude who is made unhappy by other people’s usage of porn. In the free enterprise society he does not have the choice of forbidding it, even though his greatestchoice may be an otherwise free enterprise plus a restriction on pornography. If there were just two other people in the society he could use to pay them to agree not to consume porn, but in a society of millions transaction costs plus the general public great problem– the ban is a public excellent from the perspective of all the other prudes– make that not practical.
The error here is that shown choice concerns only options that deal with an actor at a time. It isn’t about how he ranks possible states of affairs. I ‘d “prefer,” in one sense of that word, a world in which everyone held the appropriate view (mine, obviously) of how society must be organized, but that sense of preference isn’t relevant to Austrian economics.
Another remark about shown preference didn’t intend to undermine it directly, but rather to reveal that the doctrine brought with it luggage Austrians wouldn’t invite. Austrians protest sensible positivism, however, the commenter said,
[t] here is actually something like sensible positivism in Austrian economics. I imply the concept that a person can’t make interpersonal energy contrasts, along with the more fundamental idea that “preference” must mean “revealed choice”. This is extremely reminiscent of the positivistic idea that all significant declarations must be testable by sensory observation. Great rationalists reject this assumption.
Perhaps they do, however “demonstrated preference,” as Austrians use this idea, implies that option reveals the chooser’s highest preference. It isn’t a claim about the significance of “choice.”
This objection, one should state, doesn’t “show” much associate with Austrian economics. It’s good to have it anyhow. As W.V.O. Quine as soon as stated, “Every knock an increase.