Utility Functions or Value Scales?: Bryan Caplan's Debate with Austrian Economists

In "Why I am not an Austrian Economist," the neoclassicist Bryan Caplan criticizes the Austrians' rejection of utility functions; he thinks that the Austrian view of individuals' value scales and the neoclassical view of individuals' utility functions are functionally identical. The Austrians, however, insist that the two approaches differ radically in that the Austrian approach entirely rejects the false idea of cardinal (measurable) utility, while the neoclassical approach implicitly employs the notion despite explicitly perceiving its falsity.

According to economist Murray Rothbard of the Austrian school, all utility is ordinal; individual valuations can be ranked on a hierarchical scale-but there is no way for an economist to measure the "distances" between such rankings. Thus, assigning quantity X to the utility an individual derives from one good and assigning quantity Y to the utility he derives from another is a concession to the fallacy of cardinal utility. This means that, in practice, Rothbard rejects the mainstream theorem that in equilibrium the ratio of the marginal utilities of various distinct goods equals the ratio of their prices.

Caplan thinks that Rothbard and the Austrians misinterpret the position they are attacking. He considers the mainstream approach to have been developed specifically with the aim of avoiding invocation of cardinal utility. According to Caplan, when a mainstream economist says, "a bundle of goods has utility Y>X, while another has a utility X," this just means that the first bundle is preferred to the second. Caplan supports his assertion by pointing out that any given utility function is defined up to a monotonic transformation, which means that it can be rescaled in any way one likes so long as the original order of rankings is preserved. If U(y)=Y > U(x)=X, then one can harmlessly redefine the utility functions to be U(y)=Y+1 > U(x)=X+1 or even U(y)=Y² > U(x)=X².