First of all, why in the world does LK find Austrian Economics so fascinating? If his goal is to deconstruct their theories, he is palpably bad at it. Diagnosis without prognosis is all well and good, and I engage in it often, but at least libertarians make clear what their alternative is. He has no discernible alternative. I can only conjecture that he thinks the current status quo is fine and the state needs more power to accomplish its goals.
To brush off the potential of some inane philosophical arguments right off the bat, value can be subjective or objective. There are no other options. Value, as meant in this context, is defined by Merriam-Webster as “relative worth, utility, or importance,” i.e. the value of any conceivable object is the utility this object posses. We can use George Reisman’s definition of marginal utility from Capitalism, “The law of diminishing marginal utility states that the utility or, equivalently, the importance or personal value that an individual attaches to a unit of any good diminishes as the quantity of the good in his possession increases.” We will use the Stanford Encyclopedia of Philosophy‘s definition for incommensurable and incomparable, “this entry uses the term “incomparable” ordinarily to describe two or more concrete bearers of value of which no positive comparative evaluative judgment is true. In contrast, this entry uses the term “incommensurable” to describe the way in which two or more abstract values stand in relation to one another.”
First things first, since LK fails to define nor understand modern Austrian subjective value theory, I will sum up the main tenets as I see them. Values are comparable, only within a single anthropomorphic agent. They are incomparable between agents. They are not quantitatively commensurable, but are only subject to the relational categories of “more” and “less” (ordinal, not cardinal). Furthermore, its only possible to apply these relations to actualities, not potentialities, as in those actions which have actual existence (or hypothetical actual existence), not mere possible actions which have not yet been actualized. Actualization refers to the action’s completion, i.e. the attainment of the end sought. Potentialities may refer to other means for same end which were not chosen, or an entirely different course of action with different ends which was not chosen. Therefore, “more” and “less” only refer to a single instance of choice between one actuality and one potentiality that is presented to a single anthropomorphic agent . Applications of this principle will be shown.
On to LK’s criticism of Murphy,
“The Austrian argument against progressive taxation, from Robert P. Murphy’s Lessons for the Young Economist (2010), is as follows:
“If preferences are subjective to each individual, and cannot even be measured or quantified for each individual, then obviously it would make no sense at all to try to combine or aggregate individual preferences into ‘social’ preferences. Unfortunately, even professional economists often engage in just this type of reasoning. Many people (try to) justify progressive income taxation, for example, by claiming that ‘a dollar means more to a poor man than to a rich man.’ The idea is that taking $1 million from Bill Gates won’t lower his utility very much, whereas handing out $1,000 to a thousand different homeless people will greatly boost each of their utilities. Therefore, the typical argument goes, total or “social” utility has been increased by the redistribution of some of Bill Gates’s wealth.
… For now, we point out that the typical justification for it is absurd. You can’t add up different amounts of utility from various people. In fact, if you use the alternate term preferences it will be more apparent why combining them from different people is an impossible task.” (Murphy 2010: 42).
The trouble with this is that, just because it is impossible to aggregate the subjective utilities of different people or find some objective unit of measurement with which to make objective interpersonal utility comparisons, it does not follow that an economic argument for progressive income taxes, on basis of diminishing marginal subjective utility, has failed.”
Here is the thesis of the blog post, in which I assume I will come out of this understanding why this particular argument fails. With the typical obscurity in his explanations, when he says it’s impossible, I don’t know whether he is concurring, or just taking as given for the sake of argument. Obviously much rests on this. I will take this as him concurring, though I will probably be chastised.
“If any Austrian economist accepts the “law” of diminishing marginal utility (or accepts it merely as a general principle), it follows that a very rich person should, generally speaking, derive less utility from an extra dollar than a person who is very poor, even if one cannot measure the utility in some objective quantity like “utils.””
There is no refutation here. LK cannot possibly know whether any person “derive[s] less utility from an extra dollar than a person who is very poor,” without the actualization of the particular action. If a rich person buys a sandwich from a poor person, we can say that the rich person valued (derived more utility) the sandwich more than the money in the cost of the sandwich. Also, the poor person valued the money in the cost of the sandwich more than the sandwich. The terms “more” and “less” cannot be assigned unless referencing an actualized choice and to say any person “values” an extra dollar is meaningless unless referring to the actualization of an action. Saying a person “values” a dollar has the exact same connotation and intention as saying a person is actually engaged in the action of the possession of a dollar.
To say a poor person values an extra dollar more than a rich person would involve the inter-comparison between two individual actions of two different anthropomorphic agents. Physical science simply has no objective way of expressing this relation. It can describe if Joe ran more than Bob in terms of distance. It can describe if Joe is older than Bob in terms age. Joe values something more than Bob, in terms of… what? The brain’s production of dopamine? All in all, the examples of age and distance have physical existence, while value only has conceptual existence. This conceptual existence is a construct for the purpose of describing actualized actions. When LK says that a rich person values a dollar less than a poor person, this can never be a scientific statement, but one of LK’s own normative ethical theories or arbitrary personal opinion.
“If indeed there is good reason to think that the value of an additional unit of income to a person who is already very rich is considerably less than the value of an additional unit to someone who is poor, then redistribution of income to promote happiness and reduce hardship has sound economic justification.
And indeed empirical evidence seems to show that as wealth rises, the happiness that one derives from additional income falls or levels off after about $70,000 (US) (e.g., a fascinating discussion of this topic here).”
He forgot to temper his argument with the word “probably,” because his argument rests on the approximation of his own personal conception of value. Of course, if it were approximately true that “the value of an additional unit of income to a person who is already very rich is considerably less than the value of an additional unit to someone who is poor” than this would yield exceptions, which involves problems with his ethical theories. Apparently, any individual values of individual people must yield to the broader good, which is determined by LK’s subjective opinion.
Moreover, this is approximately true according to the statistics of what measurements? No physical evidence is presented in the linked post. The post refutes some journal article, “Note that past studies found that after annual income reaches around $70,000 (in adjusted dollars), gains in happiness become too small for continued acquisition of wealth to be a significant factor in making you happy.” No link to these past studies are provided. These past studies normally rely on polls, which ask people questions, where people answer according to their own subjective conceptions of happiness. The numbers assigned to happiness are applied by the individual people according to their own subjective notions, then aggregated as if they were equivalent units. Of course, no justification for this is supplied. These units don’t have any physical existence and are therefore not physical evidence of anything except what historically existed inside the brains of those who were asked during the moment they were asked. There are so many more problems in addition to this making these polls unscientific for LK’s purposes.
Curiously, it was none other than the Austrian economist Friedrich von Wieser who prided himself on having provided a solid economic justification for progressive taxation on the basis of diminishing marginal utility. Modern Austrians apparently choose to forget this embarrassing fact.”
Indeed, Wieser argued that this particular type of taxation has no “offence to the spirit of the private constitution of the economy itself.” His argument, unlike LK’s, does not rely on the inter-comparison of the differing actions between differing anthropomorphic agents. In addition, Weiser, nor anyone, has a justification of precisely how much taxation should be applied as a function of an increase in income, because, as already explained, this isn’t possible. Therefore, any rate or function assigned is according to LK’s opinion. Also, why would Austrians want to refute a relatively obscure author from decades ago? Is this so embarrassing? Austrians are not a homogeneous blob. Its not a big deal. Modern Austrianism has become affiliated with Mises, with the older Austrians providing its historical foundation. It has changed throughout the years.
“The argument against progressive taxation that we cannot objectively “measure” the utility lost by the rich man as compared with that gained by the poor man does not necessarily refute the argument from diminishing marginal utility: for it requires a highly unrealistic assumption, as we shall now see.
If we were to take two poor people both with the same income, and imagine one becoming extremely rich while the other remains poor, the argument against progressive income tax could only work if the utility the rich man derived from a unit of money while poor was vastly – and indeed unrealistically and extremely – greater than that of his fellow, so that as each additional unit of money the man received – even to very high levels like millions or billions of dollars – the diminished utility still remained so high that it exceeded that of his fellow who still remained poor.”
When he says “unrealistically and extremely,” there is no demonstration, and no possible demonstration. Again, he has strong opinions that he does not back up with any physical evidence. Also, what is LK’s “argument from diminishing marginal utility”? He supplies Weiser’s argument, but does he ever supply his own argument? Who knows? Probably not LK.
“Now of course individuals display variation and can and do have different degrees of subjective utility in terms of the satisfaction that they derive from any good x (and even from a unit of money), but to believe that all or most rich people derive greater utility from one unit of their money than a poor person from one extra unit again requires the ridiculous assumption that, if (hypothetically) or when (in reality) they were poor, all or most of these rich people derived a degree if utility vastly – and indeed unrealistically and extremely – greater than that of other poor people. “
“satisfaction that they derive from any good x” is not a physical quantity. “a unit of money” is not a measurement of the type of value thus far considered. He is confusing objective exchange value with subjective use value, which are entirely separate concepts. Money has no intrinsic relation to psychological value and LK fails to show this relation.
He also entirely misses the point, probably on purpose. “to believe that all or most rich people derive greater utility from one unit of their money than a poor person from one extra unit again requires the ridiculous assumption.” The point of subjective value theory is the absence of this assumption. The praxeologist is much more reserved and does not make any assumption about the relation between differing actions between differing anthropomorphic agents. Spinning this to make it seem as if they make this assumption is a strawman, which is very characteristic of LK’s style.
“This, quite frankly, violates everything we know about human psychology, neuroscience and evolution. Human beings are all products of Darwinian evolution; they have the same fundamental biochemistry and neural processes in the brain; the mind and all its emotions, like happiness, satisfaction and pleasure, are causally dependent on brain processes. People do display individual variation in many traits – such as height, eye colour, and no doubt in what economists call utility – but not to the extent that average people have such a vast difference between them as would be required in the case we have imagined above.”
Indeed, he may be correct when he says, “happiness, satisfaction and pleasure, are causally dependent on brain processes,” but does he provide any measurements of any brain processes? Without these physical measurements, again, the argument is not supported.
“But we need only think of height here. Most human beings have a height between 5 feet and 6 feet, and even exceptions (apart from highly usually things like dwarfism and gigantism) do not deviate too far from this range. Height is a product of genetics and environmental influences. There is every reason to think that the propensity to feel emotions like happiness, satisfaction and pleasure – the emotions that the word “utility” in an economic sense describes – are a product of genetics and environmental influences too, with individual variation, but not so vast that the utility felt by two average people while poor is so vastly different that one million dollars or $100 million – under the principle of diminishing marginal utility – given to one man would still not reduce his utility from one extra dollar to a level below that experienced by the other poor man from one extra dollar.”
Even though there is “every reason to think,” LK does not provide any of these reasons. Perhaps if they were so self-evident to his genius mind, he could elaborate on them. Height being relatively invariable does not syllogistically conclude that any of the subjective psychological states mentioned are relatively invariable. Also, relative to what? These heights are relatively giant in the microscopic scale. Height is physically measured in space, numbers assigned to psychological states are arbitrary. Again, “given to one man would still not reduce his utility from one extra dollar to a level below that experienced by the other poor man from one extra dollar.” Reduce to a level below in terms of what exactly? No physical evidence is given for the assertion, as usual. Need I point out more evidence of his lack of empirical justification?
“In short, Austrians, like neoclassicals, if they really accept the “law” of diminishing marginal utility without the ridiculous assumption we have identified above, then the economic argument for progressive taxation from diminishing marginal utility is hard to refute.
Of course, they might make a moral argument from Rothbardian natural rights or Hoppe’s argumentation ethics, but this is clearly a different type of argument from the one based on subjective utility.”
In short, LK failed to point where Austrians even make such an assumption. The theory of subjective value makes the opposite point in that the economist is unable to make any of these assumptions. Ironically, LK’s error is the one he attributes to those he is criticizing. He assumes that it is possible to make the inter-comparison of differing actions between differing anthropomorphic agents. However, no demonstration is given, nor any physical evidence supplied.
There is no reason to bring in the ethical theories of Rothbard and Hoppe, since this has nothing to do with the economic argument presented by Murphy. Many of those who are Austrian economists unmentioned by LK have different ethical theories. Again, LK chooses a select few as if they were a single homogenous blob.
 Value scales are mere explanatory tools under unrealistic conditions.