Friday, June 28, 2013

Mises Institute Article

Today I read an article on the Mises Institute entitled "Monopoly Through Austrian Lenses" that left me truly dumbfounded.

In the beginning of the article, Newman feels the need to "bash" a tool that neo-classical economists use.  He argues against the introductory monopoly model used to teach students why monopolies are inefficient, and then he acts as if this is as rich as monopoly theory gets to the neo-classicals.  If one wants to argue against a certain school of thought, should they not be arguing against the most advanced and highly celebrated theory?  Certainly they should not be arguing against the learning tool for college freshman.  Also, the differences aren't just compared to the perfect competition model either, they are compared to the oligopolistic model, and the monopolistic competition model.  But that is neither here nor there, just one more thing he forgets to mention, as if the only models are monopolistic and perfect.

In essence what he is doing is using a teaching tool to argue that the methodology is wrong.  This is similar to me bashing the "broken window fallacy" to say that Austrian Economics is the wrong way to study.  The broken window fallacy does not take into account the desire for the shopkeeper to want a new suit, or hat or whatever his desires are.  Since all individuals are different with different degrees of desires, how can we conclude that the shopkeeper won't use a credit card to buy what it is he desires, or take out a loan?  Now he has to fix the window, which leads to increased spending and he buys the suit he so desperately desires.  Hence the multiplier is real and the broken window fallacy is a farce.  Austrian economics must be the wrong way to do economics right?  But of course this argumentation is not right.

The next thing he does left me as perplexed as the first.  He compares it to individuals selling their labor.  This surprised me because the monopoly model used in the article holds zero bearing when considering individuals selling their labor.  There is an entire different field of study for that.  It is called Labor Economics and recognizes that each person has a monopoly on their own labor.  This again goes back to what I mentioned in the blog I wrote a few weeks ago.  If Austrians want to start getting taken more seriously they need to start making coherent arguments.  One must have taken two economics courses, labor and micro, to realize this argument does not mean anything.  So what do you think someone with a PhD in economics thinks of it?

Just a few more things to consider.  First he talks about calling things "unjust" or "unfair".  I hope he is not bashing neo-classicals with this argument but rather the interviewer.  No where will you find a good economist in any school of thought talk about things being unjust or unfair when they are doing economics.  However, this might not be the case if they are talking about political philosophy.

One last thing I would like to consider is the following statement, because Austrians seem to make this claim all the time.

"Finally these valuations are entirely subjective in two ways:  Jones's utility or satisfaction from wearing  a pair of Oakley's cannot be compared quantifiably to his satisfaction from wearing a pair of Ray-Bans, even by his own inspection.  Similarly, Jones's satisfaction from wearing a pair of Oakley's cannot be compared to Smith's satisfaction from wearing an identical pair of Oakley's.  Interpersonal utility comparisons are impossible, and even intrapersonal preferences are only ordinally ranked."

No economist would disagree with the Austrians that we cannot put a number on our "happiness" and then compare them.  There have been economists that have given us tools to look at this in a different way, such as Von Neumann and Morgenstern in TGEB.  Austrians have never addressed these arguments as far as I have seen (I plan on writing about this in a different post).

Here is one way how Jones can do it.  Say for example the Ray-Bans cost $150 while the Oakley's cost $130.  If he buys the Ray-Bans, clearly he prefers them by at least $20.  And in his head it is completely plausible for him to think "I'd pay up to $180 for these!"  I do this in my head all the time.  Almost every time I purchase something I do this.  Think about the next time you go to McDonald's you are either going to buy off the value menu or not.  If I do, that means I don't value a Big Mac at its original price.  However, if it is 2 for $3.33 I might buy them.  I can then compare the utilities as prices.

Finally Jones's satisfaction of wearing Oakley's to Smith's can be done the same way.  They both know what they would be willing to pay and compare the prices.  It's not rocket science.

This of course is exactly what airlines do when setting their prices.  Clearly someone buying tickets 3 months out from a flight is not going to be willing to pay as high of a price as someone whose parent gets sick and needs to fly out immediately.  Hence the airline charges more to the more needy person.  Their "satisfaction" from getting the ticket is higher than the person who has 3 months to make other arrangements. 

I do not understand why there has to be a separate way to look at monopolies for the Austrians.  Other schools of thought have already absorbed the proper Austrian Theory into their theories, why can't Austrians do the same?

Here is the link to the article I am referencing:
http://mises.org/daily/6468/Monopoly-Through-Austrian-Lenses

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