economic psychologism

One generation of my family consisted largely of Keynesians. The next generation produced psychologists instead of economists. I never had the chance to address economics with the economists, but a few months ago, one of the psychologists was asking me what I've been up to, other than keeping house.

I told her that I write and edit for the Ludwig von Mises Institute.

"Who's Ludwig von Mises?"

"He was one of the big names in the Austrian School of economics."

"What's the Austrian School?"

"Have you heard of Friedrich Hayek?"

"No."

"Have you ever heard the term Marginal Revolution?"

"No."

"Well, the Austrian School was founded in the late 19th century by Carl Menger who was one of the three men to discover the law of marginal utility."

"What's marginal utility?"

We were sitting at a restaurant table, so I pointed to my water glass. "Marginal utility is the fact that I value my second glass of water less than I value my first glass of water."

"Oh," she replied. "Any psychologist could have explained that!"

I was happy to let the conversational spotlight leave me, so I didn't say anything more. But there's plenty to say on the subject of economic psychologism.

If you are already familiar with Austrianism, you might not want to bother reading further. I'm not going to say anything new. But because I don't really know who reads this blog, and because I find it helpful and clarifying to write things out, I'm going to repeat that part of value theory that focuses on the distinction between mainstream economics and Austrian economics.

The other two "Marginal Revolutionaries" were Jevons and Walras, both of whom posited a quantifiable psychological substance that we now call utility. 'Utility' in the neo-classical (which just means the Jevons/Walras tradition) economic sense means something like want-satisfaction, or satiation. 'Marginal' refers to the quantity of utility experienced at the margins of decisions, the boundary between one-more-please and no-thanks-I've-had-enough. According to marginal utility theory, the value of all the units of a good is determined by the want-satisfaction of that last one-more-please unit.

It was Menger's student, Wieser (himself an advocate of neo-classical psychologism) who coined the term marginal utility. A French Mengerian came up with the much less opaque term la moindre jouissance, which means "the least enjoyment". The value of a glass of water is the least of the enjoyments you can satisfy with a given supply of water. If I'm not very thirsty and can't drink more than 1 glass right now, then the 2nd glass of water might be used to rinse my hands and I might turn down a 3rd glass of water altogether. Given a supply of 3 or more glasses, the value of any particular glass is the value I get from rinsing my hands -- la moindre jouissance.

Notice that in the Mengerian account of value, there are no hypothetical quantities of want-satisfaction. There's only a ranking of my preferred uses.

So neo-classical value theory continues to be based on hypothetical quantities of a hypothetical satisfaction substance they call utility. Menger used the word value instead of utility, and by value he meant the results of an evaluation.

What Ludwig von Mises did to Austrian value theory was to remove it entirely from the realm of psychology. The fact that I value a thing less as its supply increases does not depend on any empirical facts of human psychology, but is the a priori logical consequence of

1. a good having multiple uses, and
2. some uses being more important to me than others.

So long as those two conditions hold, an increasing supply of a good will mean that I apply the next available units to less and less important uses.

Human psychology might explain the proximate causes of certain expressed preferences, but the logic of preference expression is independent of human psychology and independent of human experience.