Is the law of diminishing marginal utility true?

Discussion at Cato Unbound over whether the Law of Diminishing Marginal Utility is an example of an a priori truth of economics. Alfred Marshall put the law this way: “the additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has.”[1]

In my view, there are no a priori truths anywhere in the universe. But here I want to ask: Is the Law of Diminishing Utility even true? Returns diminish in many cases — but not all — and if diminishing returns is not universal, it can’t be a “law.”

diminishing-muHere’s a standard example that supports the law. You’re hungry so you eat a piece of toast. You’re still hungry, so you eat another. And maybe one more. But while you could eat a fourth, you could as easily not bother. In this example, the utility you get from each piece of toast decreases: the first piece gives you much satisfaction, the second piece a little less, the third even less, and the fourth none.

But what of this example? I am thirsty on a hot summer day, so I have a beer. I drink it quickly and hardly notice it going down. But I savor the second one, and drinking it gives me more pleasure than the first did. That’s increasing marginal utility. (In my case, if I were to have a third I would enjoy it much less and fall asleep soon after.)

Collectors are another example. Suppose I want to collect a set of ten lovely wine glasses, but I can’t afford to purchase them all at once, so I save money and purchase additional ones when I can afford to. But as each successive unit brings me closer to completing the set, the more pleasure I get from each additional wine glass and the amount I’m willing to pay for each may increase.[2]

The three examples give us variable utility curves. The toast example is a diminishing curve. The beer example’s curve initially increases before declining. The wine-glass collection is an increasing curve.

So is diminishing utility a “law,” or does the marginal utility vary from case to case depending on the product involved and the consumer’s needs? And if it depends, do we not have to investigate the facts of the case and not assume a priori a law that can be applied deductively?[3]

Notes:
[1] Alfred Marshall, Principles of Economics (1890), III.III.3.
[2] In the wine-glass-collector example I assume each unit is identical. Those collector cases are different from cases where each unit in the collection is also unique. For example, if I were to collect 20th-century Canadian dollar coins, each coin is a Canadian dollar but each year is a different date, and each coin’s unique date adds a complicating utility factor.
[3] Related earlier discussion: “Are Austrian economists anti-empirical?”

Are Austrian economists anti-empirical?

cato-unboundAn instructive trio of essays by economists at Cato Unbound about Austrian economics’ reputation — especially Mises’s praxeological version — for being strongly a priori rationalist: Is Austrian economics anti-empiricist?

Steve Horwitz says no.
Bryan Caplan says yes.
George Selgin also says yes.

To Selgin’s series of quotations from Mises, I’d add this one from Human Action:

“Praxeology is a theoretical and systematic, not a historical, science. Its scope is human action as such, irrespective of all environmental, accidental, and individual circumstances of the concrete acts. mises-tmc-150x222Its cognition is purely formal and general without reference to the material content and the particular features of the actual case. It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts.” (Human Action, 2.1.)

My view is that George Selgin most accurately states what Austrian economics has been — its roots and the tradition have been mostly anti-empirical. Steve Horwitz nicely states a healthy aspiration for Austrian economics — to move on from its anti-empirical roots — and shows that some Austrians are doing just that. And with helpful suggestions for realizing that aspiration, Bryan Caplan points to recent developments in economics and related fields that can and should be explored and integrated with Austrianism.

Let me add that on this epistemological issue, my fellow philosophers are most to blame for the methodological dilemmas the economists have been struggling with. In modern philosophy, the dichotomies between a priori and a posteriori, theoretical and practical, formal and material, deductive and inductive — all have been enormously destructive, especially in their post-Humean and post-Kantian variants. Most of the big name Austrians — Mises and Hayek included — absorbed that dichotomous philosophical framework and worked within it.

So there is ongoing epistemological work for Austrian-friendly philosophers like myself and philosophy-friendly Austrian economists. (My contribution to understanding how the dichotomies played out destructively is in my Explaining Postmodernism: Skepticism and Socialism from Rousseau to Foucault.)

Ronald Hamowy, R.I.P.

Ronald Hamowy has died. He was a student of Friedrich Hayek’s, educated at the University of Chicago, historian, libertarian, Cato fellow, and emeritus professor at the University of Alberta in Canada.

I knew him slightly as my editor when I wrote the article on “The Enlightenment” encyclopedia-of-libertarianismfor The Encyclopedia of Libertarianism, which he published with Sage and Cato in 2008.

Stephen Cox and Bryan Caplan have penned remembrances. (Update: David Boaz’s remembrance.)

Hamowy had a vigorous mind and a productive career. For a sample, here is Hamowy’s critical summary of modern American conservatism’s key tenets (from 50 [!] years ago):

“They may be summed up as: (1) a belligerent foreign policy likely to result in war; (2) a suppression of civil liberties at home; (3) a devotion to imperialism and to a polite form of white supremacy; (4) a tendency towards the union of Church and State; (5) the conviction that the community is superior to the individual and that historic tradition is a far better guide than reason; and (6) a rather lukewarm support of the free economy.”

Interesting that the same tensions between libertarians and conservatives exist over half a century later.

Source: RONALD HAMOWY AND WILLIAM F. BUCKLEY, Jr., “‘National Review’: Criticism and Reply,” New Individualist Review, Ralph Raico, editor, 1961.

Bleeding-heart libertarianism?

Jumping into the debate about “bleeding-heart libertarianism” (Matt Zwolinski and John Tomasi, Bryan Caplan and again, David Friedman, David Henderson, and others), which seeks to integrate libertarianism with social justice. bhlbanner-150px“Social justice” is one of those vaguely-specified, usually suspect phrases, defined by one defender of BHL as the position that “the moral justification of our institutions depends on how well these institutions serve the interests of the poor and least advantaged.”

Thus stated, BHL accepts the basic Rawlsian line about the morality of politics, and its advocates seek either (a) to wrest the “social justice” label away from the lefties who use it most by showing that ends of social justice are best achieved by free-market liberalism, as Edmund Phelps tries to do, or (b) to find common ground with lefties on moral issues.

Five quick points against BHL:

1. As a political-philosophical method: BHL says we should start politics by dividing people into groups and granting one group special prior ethical status. In this case, BHL divides people into poor and non-poor and holds the poor to have a special moral position in politics-making. That is not the way to ground politics, for two reasons: (a) Politics should start with individuals, not individuals-as-members-of-a-sub-group; and (b) politics should initially treat all individuals as having equal moral status — in my view, as self-responsible, free agents — not as having preferred status by belonging to a sub-group.

2. As a moral justification of liberty: BHL says your liberty and mine are justified only if and to the extent that it serves or benefits the interests of others, especially poor others. This means that its moral principle is serving or benefiting others. This is not the way to do the ethics of politics: Liberty as a basic principle means that each individual’s life is his or her own, whether or not the individual’s choices serve or benefit others. Individuals’ political freedom is justified because they need it in order to think and act independently to produce the values their lives need. My liberty to be a philosopher or a poet or an explorer is not morally contingent upon my doing so’s demonstrably serving the interests of others.

It’s fine to argue the general point that free-market liberalism leads to win-win results for everyone involved, and it’s a worthy effort to show how free markets are beneficial to various sub-groups — women, immigrants, the poor, and so on — but all of that is a consequent sub-topic to the basic moral point that individuals have a right to live their own lives freely.

3. As a conception of life’s core values: By focusing on the poor, BHL seems to make politics essentially or primarily about economics. If political institutions are to be designed by reference to their relative economic impact on the poor and non-poor, then economic wealth is the critical factor. But that is much too narrow a conception of liberty’s scope and the proper purpose of politics. Family, art, sports, religion, and so on, as well as economic pursuits, are parts of life, and the principles of politics should cover them all generally. A narrow conception of BHL would seem to imply that one is free to engage in art, religion, or whatever only if that can be shown to be to serve the interests of the poor.

Or perhaps the BHLs intend for poor to be taken more metaphorically to refer to anyone in a weaker position in any sphere of human life. The final phrase in the above definition adds the “least advantaged.” But then BHL implies that the political rules governing family, religion, and so on, should be crafted to serve the interests of the least advantaged participants. For example, in basketball, short people are less likely to be successful. Does the BHL principle imply that the rules of basketball should be devised and justified by reference to their ability to improve the basketball outcomes of the short? Or religion: Who would the least-advantaged members of religious groups be, and what would it mean to craft political rules about religion to serve their interests? Not a perfect analogy, but: Politicians should not care about the poor any more than they do about men who can’t get a woman to start a family with them — or any more than referees care about short basketball players.

4. As a marketing strategy: This is only speculation, but I know a number of libertarians who complain that their position comes across as too rational and coldly analytic. So to gain broader appeal, they argue, libertarians need to go out of their way to show that they have feelings and care. So perhaps the BHL strategy is to lead with their emotions by emphasizing their empathy.

Well, certainly reason and passion should be integrated, and a morally normal person feels for those who are in poverty through no fault of their own. This takes us into the fascinating territory of the moral emotions, and for BHL our question should be: Why should exhibiting those particular feelings be primary in making the case for a free society? Other passions are part of the morally-healthy package: Admiration for those who have achieved a lot. Anger at those who violate rights. Respect for those who exhibit independence and integrity. And of course empathy for those who are struggling with poverty. But empathy for the poor is not more morally special than respect for integrity or anger at bullies and tyrants, and it is a mistake to single it out for special foundational political status. Instead, political theorists concerned with the moral foundations of liberal society should be concerned with general principles of moral character that enable individuals to live freely.

(Side note: I think a case can be made that admiration for achievement is a more important moral emotion than empathy for the poor is, but that is another post.)

5. As a rhetorical strategy to get the lefties who dominate academic life to talk to us: Again a speculation, but perhaps BHL is partly an internal-to-academics strategy to make nice with the social justice crowd in order to get a seat at the table. Maybe there is some merit to this strategy, and I am all for seeking common ground when possible. But our problem with “social justice” academics is not that they just didn’t realize that we care about the poor too. The modern history of the social-justice movement from Rousseau to Marx to the 20th century is not a story of people with an unworkable theory but whose hearts are in the right place. Of course, social-justice academics come in a variety of degrees, and it may be that some of the moderate and open-minded ones will listen to our case if they are first convinced that we genuinely care about the poor. Fine. But that is at most a tactic within the overall strategy of making the case for the free society, which requires hard-nosed economics, plenty of empirical history, and vigorous and passionately-argued ethics of individualism.

[Update: Further commentaries on BHL: Jason Kuznicki, Jacob Levy, Andrew Cohen, Will Wilkinson, Jason Brennan, John McCaskey.]

Do conservatives value economic liberty?

The question matters because many smart libertarians and conservatives, Bryan Caplan included, are wondering whether the two groups can overcome their differences, either for short-term coalitions on particular issues and elections or to create a longer-term movement.

My view is that the philosophical differences between the two militate against long-term compatibility, though there are prospects for targeted short-term alliances. Here are two relevant pieces of data: quotations from two major conservatives, each representative of a different sub-species of conservatism.

bork-time-125pxFirst the traditional conservatives, taking Robert Bork as representative, this from his Slouching Towards Gomorrah:

“Because both libertarians and modern liberals are oblivious to social reality, both demand radical personal autonomy in expression. That is one reason libertarians are not to be confused, as they often are, with conservatives” (p. 150). Bork goes on to argue that “Free market economists are particularly vulnerable to the libertarian virus” and to cite philosophical errors about ethics and human nature as the root problem: too often the free market economist “ignores the question of which wants it is moral to satisfy” (p. 151) and fails to recognize that “[u]nconstrained human nature will seek degeneracy often enough to create a disorderly, hedonistic, and dangerous society” (p. 153).

kristol-irving-125pxSecond, the neo-conservatives, taking Irving Kristol, “godfather” of the neo-cons, as representative, this from his contribution to his co-edited Capitalism Today:

“The inner spiritual chaos of the times, so powerfully created by the dynamics of capitalism itself, is such as to make nihilism an easy temptation. A ‘free society’ in Hayek’s sense gives birth in massive numbers to ‘free spirits’ – emptied of moral substance” (p. 13).

Bork and Kristol are hostile to free-market capitalism, and both are major representatives of conservatism. Both recognize that free-market capitalism is generally economically fruitful, but they have major philosophical objections to it. So some follow up questions:

1. In contemporary conservatism, what proportions of its members are traditional, neo-con, or other?
2. Are Robert Bork’s and Irving Kristol’s views still representative of current traditional and neo-con thinking?
3. While economic liberty is extremely important to libertarians, how strong is the mainstream conservative commitment to economic liberty?
4. While libertarians advocate for liberty consistently in all human affairs, do conservatives see economic liberty as compatible with liberty in other areas of human life: religion, sex, family, art, foreign affairs, and so on?
5. To the extent that conservatives believe economic liberty to be in conflict with other important human values, how likely are they to sacrifice economic liberty?

We need good survey data on those questions to be able to answer this follow-up question:

6. To the extent that there are philosophical differences between libertarians and conservatives, can or should those differences be set aside to pursue short-term coalitions?

[For more on neo-conservatism, I recommend Brad Thompson’s study.]

[Thanks to Dan for the Kristol image correction.]

Talk at Liberty Fund on art and free markets

Earlier this week I gave a talk in Indianapolis at the excellent Liberty Fund on whether free-market capitalism is good or bad for art.

The question matters in today’s intellectual context because thinkers on both left and right argue regularly that art suffers under free market systems. Traditional conservatives such as Robert Bork and neo-conservatives such as Irving Kristol believe that capitalism’s freedom allows and encourages us to indulge our basest impulses, which means irrational and immoral work comes to dominate the art world. Meanwhile leftish thinkers such as Benjamin Barber and Richard Brustein believe that capitalism’sriacewarrior mass market means that middlebrow taste is where the money is, which seduces true artists to sell out for the lowest common denominator.

My view is that both left and right are badly wrong on this issue. The talk I gave at Liberty Fund comes out of my current documentary and book project with the working title The Fate of Art under Capitalism. In the talk I focused mostly on one strand of my overall argument — the historical thesis that the outstanding eras in art history have all arisen in cultures that had relatively free markets and democratic or republican politics. Classical Athens, Renaissance Florence, the Dutch Golden Age, and nineteenth-century Paris all fit this pattern.

The question-and-answer session after my talk was a lively discussion of a wide variety of examples of cultures — ancient Egypt, Naples in the Renaissance, Elizabethan England, China — and whether their art achievements supported or contradicted my thesis. Great fun, for which I thank the participants. Thanks also to philosopher Douglas Den Uyl for the invitation.

lf-logo-137x50Liberty Fund, in case you are not familiar with it, is an organization that sponsors a wide variety of conferences for academics. It also hosts the Concise Encyclopedia of Economics, a widely-used resource, especially for students, in economics, business, political science, and public policy; Econlog, the web log of three very smart and clear-writing economists, Bryan Caplan, David Henderson, and Arnold Kling; and Russ Roberts’s EconTalk, an ongoing series of podcasts devoted to interviews with a wide range of economists on timely subjects. Liberty Fund’s site also hosts an astounding free online collection of books and essays from the history of economics, history, political theory, and philosophy. Over the past few years I’ve used many of them in my courses.

[Images: The statue is the Riace Warrior (c. 450 BCE). The symbol, which Liberty Fund uses as its logo, is the ancient Sumerian cuneiform “amagi,” which is thought to be first written reference to the concept of liberty.]