Friday, March 20, 2009

Ross: Austrians are Right...Cost is Also Subjective

John Quiggin critiques Austrian economics here, and occasionally I think he slips in some cheap shots that invite the crazies, despite his claim to wish the opposite. While I have Austrian sympathies, I cannot claim to be an Austrian. I've picked up a lot from being around them, but I still have to use an online dictionary to find the meaning of the word "epistemology," nor have I read the original and subsequent editions every important historical book of economics. The only Hayek I have read is the 1945 AER piece, and I have never read anything by Mises. Those all seem to be prerequisites to being an Austrian.

As such, I will let Austrians defend their field on the rest of the points, but I want to take aim at Quiggin's critique to Boettke's 4th proposition of Austrian economics that "Utility and Costs are subjective," which he states flatly is "clearly wrong."

This seems to be the extent of Quiggin's criticism, that we can see a price tag and therefore objectively identify the producer's costs, and if it is then he has missed the subtlety of their argument. Their argument is that the supply curve is actually other demand curves, where we all agree utility derived demand is subjective.

For example, I type here on a laptop, whose price tag was once $800. I'm sure that there were objectively verifiable price tags on all the inputs of my laptop for the labor, land, and parts, but where did those prices come from? Those inputs were all certainly in demand elsewhere, so why the Compaq assembly line? You think about this, and ultimately it must be realized that Compaq isn't putting the laptop together because costs are $x, but because I'm in their online que ordering the laptop instead of somewhere else.

Addendum: Schaeffer expands on the Austrian perspective of subjective costs.

10 comments:

Brad Taylor said...

There's also another sense in which cost is at least partly subjective. Most of the cost of most goods is in the labour used to produce them. Wages in part depend on the pleasantness or otherwise of the job, which is entirely subjective. In some cases the differential is huge: try to explain the relative supply curves for prostitution and live music with objective factors like scarcity alone.

Matt E. Ryan said...

I've got the same connection to the Austrian camp that you do-- in fact, all of the other bloggers here would be better suited to comment on this than either of us-- but I believe it may also be rooted in the fact that cost reflects opportunity cost, and opportunity cost is most certainly subjective.

John Quiggin said...

The defences of Boettke's claim, including his own, seem to amount to the suggestion that the statement "costs are subjective" is supposed to be read as "costs are also or at least partly subjective". If so, the claim is correct, but uninteresting. It's unfortunate, but probably inevitable, that lots of debate consists of making strong, but implausible, statements that are replaced, when challenged, by something much weaker.

Anonymous said...

Costs are completely subjective. I'm not sure what in this post suggests otherwise.

John Quiggin said...

Umm ... the title?

Anonymous said...

John, I agree the title might suggest a watered-down back peddling, but I don't think that is the argument in the post. My reading of Ross's argument is that the central point is: "Their argument is that the supply curve is actually other demand curves, where we all agree utility derived demand is subjective."

What about this claim do you disagree with?

John Quiggin said...

Cutting to the chase, the mainstream position is (and has been since Adam Smith) that economic outcomes are determined by the interaction between subjective factors (preferences and beliefs) and objective factors (technology, resources etc). In a simple partial equilibrium context, you can say that demand is determined by preferences and supply by objective costs. As noted here, once you go beyond this, you can't say that supply is determined purely by objective costs, but equally you can't say that demand is determined purely by subjective preferences.

So, Austrians can claim either that utility and costs are partly subjective and partly objective (true, but not original) or that both are purely subjective (original, but not true).

Anonymous said...

Technology, resources, etc are all priced by people's subjective preferences for the goods and services they can potentially create. I suggest that demand and supply are both wholly the result of subjective evaluations.

Adam Smith's greatest flaw, perhaps, was his adherence to the labor theory of value. One of the few areas where modern economists shouldn't look to Smith.

Anonymous said...

Its odd to quote "the mainstream position..." when the whole point is the Austrian position. You can't appeal to the status quo for support.

Justin M Ross said...

By "cost is also subjective" I meant in addition to demand, not in the sense that cost is partially subjective and partially objective.

I think treating cost as objective as a mental shortcut makes sense in understanding the theory of the firm. But I think it is more useful to recognize the subjective nature of costs when we want to understand markets in a more complete sense of why markets evolve in one manner as opposed to another.