Wednesday, August 11, 2010

A Mix-up at the Ludwig von Mises Institute

In the fall of 2009, I decided to order a book by the relatively mysterious but acclaimed economist Richard Cantillon. Due to his emphasis on entrepreneurship, I found that the Ludwig von Mises Institute had his work "An Essay on the Nature of Commerce in General". I ordered it, and in a few days I received "An Essay on the nature and Significance of Economic Science", by Lionel Robbins. I informed LMI about their mix-up, and like the good free market junkies that they are, they sent me Cantillon's book and allowed me to keep the one by Robbins. Yay Capitalism!

My interpretation of Mises and Cantillon will come later; suffice to say I decided to read Robbins essay. In this essay, Robbins seeks to clarify subject-matter of economics in general and discuss the limitations that its approach imply. Here is what I found:

1. Robbins feels that the common sense definition of economics as a study of wealth and its generation is mistaken. Rather, he argues that economics is the study of the behavior of agents when they face constraints or are endowed with scarce resources. This is a reiteration of the idea that economics is the study of scarcity.

I tend to disagree categorically with this definition. I think it applies to microeconomics. It is certainly true of the theory of the firm and consumer demand, but I think macroeconomics is exactly concerned with the study of wealth and its generation.

2. Economists should not judge the end goods to which individuals strive, nor are they meant to give advice concerning the technique used to achieve those ends. It is the way an individual prioritizes multiple ends and multiple means that interest economists.

Once again, I would categorically disagree concerning macroeconomics.

3. Scarcity has powerful roots in the perceptions of human beings, and it determines value to a great extent. One can easily recall seemingly priceless fad items that become worthless overnight, when the next rage hits.

4. Economists care about how the the relative individual valuation of scarce goods affect their individual decisions and others; they are not concerned about the origin of these differences in value, that is psychology or sociology.

5. Economists should not make comparisons between individual utility functions. This means that just because person A has higher utility than B according to our measurement, we have no grounds for assuming that A is happier than B or for transferring goods from person A to B. These values only matter within individuals. This is called incommensurability.

6. In the end, economics only really applies if we do make the normative judgement that rationality and coherence of ends and means are desirable. If this judgement does not hold for a situation, the application of economic theory to it is limited.

Too Long To Read Summary: Ludwig von Mises Institute sent me the wrong book, I read it anyways. It defined economics as the study of scarcity and not wealth, which I feel is a better description of the difference between micro and macro. The writer also asserted that economists should take ends and techniques as given, and only analyze the efficient allocation of means. But, to be of any use, economists must make the normative assumption that rational and coherent decisions are "good".

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