## Monday, 6 September 2010

### Butler and utility, again

In reading Eamonn Bulter’s book Austrian Economics: A Primer I came across another comment on utility:
Utility is not quality of objects that we can stacked up and compared like piles of bricks – as mainstream economics textbooks often suggest. (Butler 2010: 29).
I would ask, Who suggests this and how often do they do so? A utility function is just a convenient representation of an underlying preference relation. As that preference relation is subjective I don’t see how anyone would claim that utility can be stacked up and compared. As I noted before utility is ordinal, not cardinal, so stacking it and comparing it doesn’t make much sense.

Butler goes on to say,
This is why textbook indifference curves are also misleading. They purport to show the amount of one good that people would willingly sacrifice to get another. (Butler 2010: 29).
The slope of the indifference curves tells us that how much a person is willing to give up to get another very small unit of the other good.

A little farther down the page Butler adds,
To see how people really do decide, take the example of a farming family with five sacks of gain – one to feed themselves, one to feed their animals, one to plant for crops, one to sell for essentials they need, and one they use to feed their pet parrots. Unfortunately they have to give up one stack of grain to pay an old debt. Do they cut back their uses of grain by one fifth, as mathematics would suggest? No, they eat, feed, plant and sell as much as before, but let the parrots starve, because that is the most marginal use to them. (Butler 2010: 29)
What would the RSPCA say?! But does the ‘mathematics’ really say that “they cut back their uses of grain by one fifth”? Butler does not show this. What the ‘maths’ says that they are willing to sacrifice an amount of one good (a parrot) to gain another good (less debt). Where is the problem here? The maths seems to be saying the right thing.

Butler’s representation of “mainstream economics” looks at bit straw-manish. The mainstream are more sophisticated he is willing to admit.