Friday, August 22, 2014

Are Subjective Utilities utterly incomparable even in principle?

The view that the subjective utility human beings derive from goods is not – or, at least, not yet – capable of scientific quantification with some objective unit of measurement is a reasonable and convincing one.

But it does not necessarily follow from this that the subjective utilities of different people are totally incomparable even in principle, as one vulgar Austrian suggests here.

If this were so, one must posit that every single person’s emotions of happiness, satisfaction and pleasure (the emotions that subjective utility must be identified with) are utterly unique and in no way resemble anyone else’s. This is a bizarre, anti-scientific, and utterly unconvincing idea: it violates everything we know about human psychology, neuroscience and evolution.

Human beings are all products of Darwinian evolution, and the mind and all its emotions (like utility) are causally dependent on the same underlying brain processes. While there is no doubt individual variation in the way people experience these emotions and the subjective utility any two people might experience from the same good is likely to be different, it still does not necessarily follow that they are incomparable even in principle.

In fact, the sciences of the brain and mind are advancing every day. Non-evasive scanning like MRI is identifying the biochemical and neural basis of human mental states and emotions. It is even conceivable that eventually science can measure the intensity of human emotions underlying “utility” objectively.

For example, already there is some evidence that MRI will one day be used to assess the intensity of pain even with an objective measure (see Wager et al. 2013, with summary here).

Curiously, even an Austrian economist like Robert Murphy admits this possibility:
“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.” (Murphy 2010: 41).
That admission requires that, despite what vulgar Austrians think, at least in principle subjective utilities are comparable, and that it might even be possible to one day obtain a scientific quantification of the intensity and nature of human emotions underlying utility, with some objective unit of measurement.

At that point, the Austrian claim that subjective utilities cannot be objectively measured will have been refuted.

Murphy, Robert P. 2010. Lessons for the Young Economist. Ludwig von Mises Institute, Auburn, Ala.

Wager, T. D., Atlas, L. Y., Lindquist, M. et al. 2013. “An fMRI-Based Neurologic Signature of Physical Pain,” New England Journal of Medicine 368: 1388–1397.

Thursday, August 21, 2014

Post Keynesian Labour Market Theory: A Summary

The Post Keynesian view on labour markets is opposed to that of neoclassical economics. A summary of Post Keynesian labour market theory from Lavoie (1992) follows.

Post Keynesian economics holds that labour markets are not necessarily well behaved, that the wage rate is not an ordinary “price”, and that wages cuts can have perverse effects on economic activity contrary to neoclassical theory (Lavoie 1992: 217).

Wages are not, general speaking, set by reference to marginal product of labour, but wage rate determination is affected by notions of fairness, justice and social norms, and these factors can affect all attributes of labour from the real/nominal wage to productivity, working week, job safety, security and so on (Lavoie 1992: 218).

At the aggregate level, there is no necessary and consistent relationship between the real wage and demand for labour (Lavoie 1992: 217).

Even the neoclassical view that work necessarily carries disutility is untrue: work per se can be rewarding and bring satisfaction (Lavoie 1992: 218).

Lavoie (1992: 218) points to the dual labour market hypothesis, which is that most advanced economies have two sub-labour markets, as follows:
(1) the “core” economy labour market
Here wages and productivity are high, costs of labour training are high, and there is a greater degree of unionisation.

(2) the “peripheral” labour market
Here wages are generally low, little training is required, and turnover is high (Lavoie 1992: 218–219).
The administered pricing/mark-up pricing sector of an economy strongly corresponds to the “core” economy, though imperfectly.

A strong general characteristic of most households is that they wish to maintain their standard of living, and that they face fixed nominal contractual obligations like debt, and hence the need to maintain income levels (Lavoie 1992: 222). This, though amongst other reasons too, translates into a strong opposition to nominal wage cuts.

Even labour supply often depends on a perceived target wage rate and past standards of living (Lavoie 1992: 222–223), not necessarily on movements of the real wage rate.

The demand for labour is mostly driven by demand for output, and hence aggregate demand drives employment levels.

Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot, UK.