Elsewhere I have made substantive arguments for why we are better off without putting monetary values on our lives, but I won’t get into that here. My interest at the moment is the incomprehension on all sides of the VSL debate.
Here’s what I think it comes down to: the metaphor of choice. This metaphor is so deeply ingrained in economic analysis most economists can’t think beyond it, but the moment it is invoked the very notion of what it means to be alive rather than dead is rendered irrelevant.
No need to reinvent the wheel. I discussed the metaphor of choice in my introductory micro text:
What about the metaphors used in economics? First consider choice. Much of what we do in the economy does involve choosing: we choose where to work, where to live, and paper or plastic in the check-out line. No doubt many of the choices we make are unconscious, but it might not be too far off the mark to think about them as if they were conscious and “rational” as we will describe in the following section. Nevertheless, the metaphor of choice can be misleading in some instances. There are two reasons for this.
First, many of the actions we undertake are governed by a process very different from conscious choice....
Second, many activities are not choices at all. You can choose whether to buy white or red potatoes, but cooking the potatoes is an act of (household) production, not a choice. Working, doing the actual tasks that make up a job, is not choosing; it is working. Spending days or weeks searching for a new house is not making a choice; it’s doing a search. Of course, subject to the qualification we made in the previous paragraph, all these activities lead up to or follow from a choice. In other words, what the metaphor of choice is telling us is that what is deemed important about any economic activity is the element of choice connected to it. This is a simplification of great power, because it enables us to make general statements that apply to the many aspects of life through their common element of choice, but it downplays the economic importance of the non-choice element.This applies in flashing neon to the valuation of life. To an economist, it is obvious that the salient moment, the one that determines everything else, is when you make a choice about something that increases or decreases the probability of an early death. The tradeoffs you make in that moment, or that are implicit in it and could be teased out using statistical methods, are the very substance of value. When a normal person—someone who hasn’t been trained to view existence as nothing more than a sequence of instantaneous choices—thinks about life, however, they think about living (and dying). What’s the value of that? It might have something to do with the attitude you felt when you were making a choice that changed your odds of survival, but that barely begins to cover it. The value that matters is the value of being, to you and to those who know and care about you.
What’s the lesson here? It’s not that economists are “wrong” to reduce all of being and doing to choosing; there is great power in this simplification, and few insights of modern economics would be attainable without it. But economists would do well to remember this crucial step and acknowledge it limits the scope and applicability of what they think they know. Allowing that there are values to being alive that VSL doesn’t begin to address would be a useful place to start.
The Theory of Value and the worthlessness of economics
Comment on Peter Dorman on ‘The Value of Life and the Metaphor of Choice’
Peter Dorman summarizes what economics is all about: “Here’s what I think it comes down to: the metaphor of choice. This metaphor is so deeply ingrained in economic analysis most economists can’t think beyond it, but the moment it is invoked the very notion of what it means to be alive rather than dead is rendered irrelevant.”
The curious thing, to begin with, is that choice is NOT AT ALL an issue for economics but for psychology and sociology. To build economics on behavioral concepts like utility/choice/optimization was the foundational blunder of Orthodoxy. Economists, though, either have not realized it to this day or did not find the way out of the proto-scientific PsySoc swamp. Human behavior is NOT the subject matter of economics ― the behavior of the economic system is.
Methodologically, economics is a system science but economists wasted 200+ years with second-guessing Human Nature/motives/behavior/action.
To this day, economists have been unable to give a consistent description of how the monetary economy works. Economists do not even know what profit is. Because Profit Theory is false Value Theory is false. This is like medieval physics before the concept of energy was consistently defined and fully understood. Economic policy guidance has NO sound scientific foundations since Adam Smith/Karl Marx.
For this compelling methodological reason, a paradigm shift is necessary which means practically that Walrasianism, Keynesianism, Marxianism, Austrianism, has to be buried at the Flat-Earth-Cemetery.
These are the correct systemic foundations of economics.#1, #2 The elementary production-consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit/loss Qm≡C−Yw, monetary saving/dissaving Sm≡Yw−C). From this follows Qm=−Sm, that is, macroeconomic profit comes in the most elementary case from the growth of household sector debt.#3 Macroeconomic profit has NOTHING to do with exploitation or innovation or value creation or optimization or the choice between strawberry and raspberry yogurt.#4
Capitalists don’t know this. Workers don’t know this. Orthodox economists don’t know this. Heterodox economists don’t know this. And Peter Dorman, too, does NOT know the most elementary fact about the economic system.
#1 Do first your macroeconomic homework!
#2 Wikimedia, New Foundations of Economics
#3 Wikimedia, AXEC Profit Law and Balances Equation
#4 For details of the big picture see cross-references Profit
I agree with Egmont,
Economists started out on the wrong foot precisely because they thought they had the right to define human beings and analyze human behaviour. The irony in all of this is that one must visit a psychologist before they are able to come to the realization that having to be an 'economic agent' in order to meet needs, and having no choice in the matter, is the very cause of their misery in life. Economists are the least equipped to understand anything beyond statistics and yet they exert more influence on policies than anyone else.
I do appreciate this essay, and do not understand the criticisms.
Certainly there is value to simplifying concepts like choice when it comes to economic theory or econometric modeling.
On the other hand, the application and political realities that can stem from these exercises can really leave the water muddy.
For example, there is clearly a big difference between the existence of the choice to go to a doctor and the ability to afford making that choice. But framing this kind of situation as a simple matter of choice really misses several salient points.
Conversely, utterly removing the ability for an individual to make choices(through whatever means), such as the choice to start smoking, would be a great public health boon, even if it was the result of really limiting individual choice.
If taking away smoking doesn't move you, consider that alcohol is very much a carcinogen, and eliminating access to it would likely have a drastic effect on reducing cancer.
Choice in neoclassical economics is always choice subject to constraints (scarcity), and if you accept the necessity of the constraints individuals face (obviously a very big if), there is a case to be made for respecting the choices people making knowing they're constrained. We could argue that one, but that's not my point in this post.
I'm saying something so simple only an economist might fail to see it. Choosing to bear a risk, if that is what we're doing, is not the same as bearing the risk or experiencing the consequences of it, just as choosing to accept a job offer is not the same thing as working at that job, just as choosing to buy a house is not the same thing as living in that house, and so on. For neoclassical econ, there is nothing to life, individually or collectively, but a sequence of choices. That works for some things, but sometimes it's extremely limiting.
Perhaps economists might borrow from theology? Both Islam and Christianity had debates on the extent to which God exercises his will. Christian orthodoxy settled on "not often" (that is, having set the universe in motion, set its laws, God then relaxes except for miracles), while orthodox Islam went the other way - God exerts choice all the time.
In the same way, an economist could distinguish between the initial act of choice (buying the house) and the routine of living in it, or regard both as continuous acts of choice - you could after all decide to live somewhere else at any moment. People as the Islamic god - exerting their free will continuously.
Egmont dismisses studying optimization. For different reasons (more legitimate ones) Peter D. is questioning how most economists pose choice related to risk.
In Egmont's case it is not what Anonymous thinks he said, with Anonymous's position actually closer to Peter D.'s. Egmont simply dismisses microeconomics entirely. It is of no consequence or interest and should be viewed as a minor subsidiary to his tautological macreconomic theory of profit. Sorry, Anonymous, you did not read very carefully. Peter D. is your guy, not Egmont remotely.
You say: “Egmont dismisses studying optimization.”
Not exactly. Egmont dismisses microfoundations and advances in a genuine paradigm shift to macrofoundations (see preceding post).
The microfoundations approach has been methodologically defined as follows: “As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states. By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program. ‘Taken to be true’ means that the hard-core functions like axioms for a geometry, maintained for the duration of study of that geometry.” (Weintraub, 1985, Joan Robinson’s Critique of Equilibrium: An Appraisal, p. 147)
In order to be applicable, HC2 requires a lot of auxiliary assumptions, most prominently a well-behaved/differentiable production function.
HC2 introduces marginalism which is the all-pervasive principle of Orthodoxy. HC2, though, and HC4 and HC5 are plain NONENTITIES, that is, they have not more reality content than the Easter Bunny, dancing angels on a pinpoint, the Tooth Fairy, or Pegasus.
The methodological fact of the matter is that ALL models that take just one NONENTITY into the premises are a priori false. And methodology tells us that if the premises are false the whole analytical superstructure is false. Therefore, the standard microfoundations approach with all its variants and derivatives from Jevons/Walras/Menger up to DSGE is methodologically false.
To put NONENTITIES into the premises is the defining characteristic of fairy tales, science fiction, theology, Hollywood movies, politics, cargo cult science, and microfounded economics.
Not only constrained optimization, i.e. HC2, has to be dismissed but the whole set of behavioral axioms. Microfoundations have to be fully replaced by objective-systemic macrofoundations.#1, #2, #3
Studying optimization, just like studying epicycles, is a thing of the proto-scientific past.
#1 If it isn’t macro-axiomatized, it isn’t economics
#2 How to restart economics
#3 New Economic Thinking: The 10 crucial points
I for one was not criticizing Peter and agree with him but I am also in agreement with Egmont.
I see economists as viewing people and life itself as commodities but for reasons, which the economists in my view, have completely wrong.
My parents won the lottery in 1998, became instantly rich, and were bankrupt 4 years later. I subsequently learned that this occurs to 19 out of 20 lottery winners. I then learn that 19 out of 20 businesses ultimately fail, 19 out of 20 people retire needing govt assistance, and 19 out of 20 people have more debt than assets. It was obvious to me that this was no co-incidence.
So, the next question was - "are the 95% of the population themselves to blame for these statistics and their own financial ineptitude?"
If so, then are these same 95% exactly as economists say they are '(rational optimizing choice makers with full relevant knowledge having preferences over outcomes subject only to constraints and perceived risk)' but instead of exercising these attributes, are in fact lazy, emotionally undisciplined, and simply expect others to do it for them (such as govt)? And if so, then all of economic theory based on micro-foundations, optimization, and choice, must be correct, and we 'choose' to live the lives we live.
If on the other hand, it is not the case that the 95% are to blame, but rather, it is because of a macro reality, which micro-perspectives are unable to see, which will deliver them into and keep them in this 95%, then it becomes obvious that economic theories based on micro-foundations are only ever going to explain your rise or fall on this ladder, but never why you are in the 95% to begin with. When human needs are treated as commodities, they become property in every sense of the word, and all property comes with risk. It then becomes obvious that for most people, they experience the consequences of risk without ever having the knowledge they are taking it on, meaning they never had the choice to begin with.
I apologize if this is off the mark as to the point Peter was trying to make, but as I have been seeing it for years now, if economists continue to hold on to the idea that we are all rational and everything is a choice, and that the reason we don't all become financially solvent is merely choice, then maybe they have the right to view all life as a commodity as a means to sweep up all that we waste and redistribute it - but because they are wrong in this respect (as my years of research have shown me), then they are also wrong in every other respect and the whole profession needs a complete revamp, which requires people to show them the error of their ways in any way they can.
The percent of lottery winners who go broke is about 70%. The percent who owe more than they own is about 20%. You are about right on the businesses, although that is a matter of time horizon. Push it out to a century and it is more like 99.9% go out of business. As for retirees, that is a fuzzier number. Nearly all Americans get some sort of US govt aid when they retire, but it is very unclear what percentage of those "need" it. That is not at all well-defined.
More precisely the final sentence of my post reads: Studying behavioral optimization, just like studying epicycles, is a thing of the proto-scientific past.
You simply have not gotten behavioral economics, especially its truly scientific part in the form of experimental economics. It studies how people behave and does not assume people optimize or are rational. It is clear that regarding many things they are not, and there are well known ways in some matters how they tend to deviate in actual behavior.
Nevertheless, this does not mean that it is useless to consider how people might behave if they did optimize. For some things there is not a clear answer or multiple equilibria. But for some there are. This can make a useful benchmark for when we study how people actually behave, which, as already noted, does not correspond with such solutions.
But you are uninterested in such matters, only your vacuous macro tatuology based on your idiosyncratic definition of profit.
You say: “It [behavioral economics] studies how people behave and does not assume people optimize or are rational. It is clear that regarding many things they are not, and there are well known ways in some matters how they tend to deviate in actual behavior.”
Oh dear, this was already known 140+ years ago when Jevons/Walras/Menger started blathering about rational choice/constrained optimization.
Note that there is NO way that leads from the understanding of Human Nature/motives/behavior/action to the understanding of the behavior of the economic system. All human-centered approaches invariably crash against the methodological wall of the Fallacy of Composition.
So, microfoundations are the lethal methodological blunder and it does NOT help to replace constrained optimization by behavioral economics. This dead-pig cosmetic does not alter the fact that economics is a failed/fake science.
The microfoundations approach in ALL conceivable variants is bound to fail. Methodologically it holds: If it isn’t macro-axiomatized, it isn’t economics.
By the way, while you are occupied with folk psychology/sociology your academic colleagues from the MMT camp are pulling off a political fraud by pushing deficit spending/money creation and hiding the macroeconomic fact that Public Deficit = Private Profit.#1
Too bad for the American worker that you are of no help because as a micro-behavior guy, cheerleader of cargo cult economics, and political storyteller you never had any idea what profit is and how the profit-mechanism works.
#1 The Kelton-Fraud
"Nevertheless, this does not mean that it is useless to consider how people might behave if they did optimize. "
I did a google search on optimization from an economic perspective. It essentially said:
Finding an alternative with the most cost effective or highest achievable performance under the given constraints, by maximizing desired factors and minimizing undesired ones.
Considering that one entities income is typically another's expense, then for every entity it behooves them to optimize and at the same time encourage others not to optimize. What would be of interest is how the whole economy will react if every entity started reducing spending and paying down their debts.
With regard to the theory of value, you complain: “But you are uninterested in such matters, only your vacuous macro tautology based on your idiosyncratic definition of profit.”
Fact is that I have rectified the ridiculous behavioral Paradox of Value long ago. See The Value of Water and Diamonds: Back to Square One
Time for you to do some scientific homework.
This is the behavioral theory of value: “In other words, how is it that water, which is essential to life, has little value, while diamonds, which are generally used for conspicuous consumption, command an exalted price? Although it troubled Adam Smith 200 years ago, we can resolve this paradox as follows: “The supply and demand curves for water intersect at a very low price, while supply and demand for diamonds are such that their equilibrium price is very high.” (Samuelson et al., 1998, p. 90)
Note that a consumption good, which vanishes in the act of consumption, is juxtaposed to a durable=not-to-be-consumed store of value. This is imbecilic, to begin with, and the rest of the pseudo-explanation consists of vacuous supply-demand-equilibrium blather.
The axiomatically correct objective-systemic Law of Value for produced consumption goods reads P1/P2=R2/R1.#1
Because you do not understand anything there is no need to elaborate on this fundamental economic relationship in any detail here.
#1 Wikimedia, Law of Value
ANC Driver: 19 out of 20 people retire needing govt assistance.
JB Rosser: Nearly all Americans get some sort of US govt aid when they retire.
The idea that US Social Security or an Australian pension is "government aid/assistance" in a way that say a bank account or Treasury bond is "not government aid" is very wrong. So those numbers, based on that incoherent idea are wrong. They should be either 100% or close to 0%.
The architects of SS, like FDR did not see or sell it that way. Stuart Chase put this idea on a list of basic economic errors back then. They correctly saw it as the state formally performing a social function that all human societies have performed one way or another: The now young and able providing for the old, as the now old had provided for them earlier. The pay as you go, SS tax can be criticized on macroeconomic grounds, as they well knew, but it can be seen as one representation of this intergenerational provision.
ANC Driver- I replied to you on that old thread at Mike Norman's if you are still interested.
all property comes with risk
What do you mean by this? Everything imaginable under the sun comes with risk. I don't see your particular meaning.
(Meant to post this a week ago.)
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