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Great article; very interesting and well written. A bit of a tangent, but something that bothers me is the assumption in economics that the amount of money one

Great article; very interesting and well written. A bit of a tangent, but something that bothers me is the assumption in economics that the amount of money one is willing to pay for a good is equal to the utility provided by that good. And then it follows that if I am willing to pay €2 for a coffee and another person is only willing to pay €1 for that same coffee, then I value the coffee twice as much as the other person. But to me that doesn't make much sense. What if I am a billionaire and the other person is very poor? It could very well be that the other person values the coffee a lot more than I do, but because I have so much more disposable income than they do I am willing to pay more for it. To me, the assumption should be something like the amount of money as a percentage of my total wealth that I'm willing to pay is equal to the utility of the good. And because this assumption is so fundamental to economics, it determines the conclusions that the field reaches. For example, the definition of an "efficient market" or the optimal level of production of some good both embed this assumption that willingness to pay equals utility. And then one can imagine that policy decisions and such are influenced by this assumption. (And in fact the article itself mentions this problem: "Another challenge is that quadratic payments, being a payment-based mechanism, continues to favor people with more money."). So I'm wondering if anyone has looked into an alternative formulation of economics with a different fundamental assumption (perhaps something closer to the one I proposed above). If so, do certain things that are determined to be "optimal" in classical economics turn out not to be optimal in this alternative formulation (and vice-versa)? Apologies if this is a bit of a naive question; Econ 101 is the most I've ever studied the subject.

hderms 7y ago
it seems like in the event that quadratic payments are applied to a situation where multiple parties are competing for a single good that it reduces to something similar to an auction. Imo it's clear that auctions, corresponding with what you said, favor those with the most income.
- lisper 7y ago
  Yes, and adding a non-linear transfer function won't help in this case. To win an auction, I only need to outbid you by epsilon. Non-linear payments only help where the value of the thing being purchased can vary (non-linearly) with the purchase price.
  - deleted 7y ago
    [deleted]
  - hderms 7y ago
    can you go into more detail on this? it sounds interesting. What's an example of somethings value that varies non-linearly with the purchase price? Is a "non-linear transfer function" a stand-in for "quadratic payments" in this case?
    - lisper 7y ago
      "Non-linear transfer function" is a generalization of "quadratic payments." "Transfer function" is a general engineering term meaning a mathematical description of the output of a system in terms of its inputs. So the "transfer function" of a payment is its output (what you get) in terms of its input (what you pay). Normally that transfer function is linear: if one apple costs a dollar, then N apples will cost N dollars. (Actually, that's only true up to a point. In the real world, if N is large enough, N apples will cost you less than $N.)
- BurningFrog 7y ago
  > Imo it's clear that auctions, corresponding with what you said, favor those with the most income. This seems to boil down to observing that it's good to have money.
QuesnayJr 7y ago
Economics specifically does not make that assumption. You will see it in cost-benefit analysis, but it is not anything like a fundamental assumption in economics. I don't know where you got the idea that it was -- if you learned it from your econ 101 class you should demand your money back. The fundamental idea in economics is "Pareto efficiency". Something is Pareto efficient if there is a no way to make someone better off without making anyone worse off. An idealized perfectly competitive market would be Pareto efficient, but the bulk of microeconomics these days studies market imperfections. A level of production is "optimal" if it's Pareto efficient. Again firms in idealized perfectly competitive markets will produce a Pareto efficient output, but real markets can fall short of the ideal. For example, a polluting industry will overproduce, unless pollution is taxed. IIRC, there are conditions where your alternative criterion matches Pareto efficiency, but they are somewhat special.
- oarabbus_ 7y ago
  Pareto efficiency might be more useless than "calculate the physics problem assuming air resistance is negligible"
  - QuesnayJr 7y ago
    It is exactly as useful. Macroeconomics was completely tangled up until people understood that in a perfectly function economy there was be no business cycle, that even a serious shock would only temporarily slow down the economy. So the focus turned to understanding the market imperfections that make temporary dislocations have such long-term effects.
  - solveit 7y ago
    Physics in idealized situations is incredibly useful, and more importantly, absolutely necessary for understanding non-idealized real situations, so I'm not sure what you're getting at here.
- tossaway17 7y ago
  Can one prove that an idealized perfectly competitive market is Pareto efficient or is this taken as a definition?
rkagerer 7y ago
Interesting, but if I interpret your assumption correctly it would remove the incentive for people to accumulate more wealth (if everything costs me a % of my net worth, why bother to own more than $1?). Continue the thought experiment and I suspect you'd arrive at some form of Socialism - a topic with a lot of academic material (as you inquired). Neither does it take into account the ease at which one person can replenish their wealth compared to others (e.g. if rapid enough I can spend 100% of my wealth on every purchase). But I get where you're coming from in terms of the entrenched economics being imperfect. I thought the end of the article offered some interesting ideas (even if they don't solve your problem), like: A simple example would be a system where quadratic funding is done retrospectively, so people vote on which public goods were valuable some time ago (eg. even 2 years), and projects are funded up-front by selling shares of the results of these deferred votes; by buying shares people would be both funding the projects and betting on which project would be viewed as successful in 2 years' time.
Majromax 7y ago
> It could very well be that the other person values the coffee a lot more than I do, but because I have so much more disposable income than they do I am willing to pay more for it. In doing this (for any resolution of the question), you're making a quantitative comparison of utility between people. That transformation, that $1 for me is the same as $1 for you, is not at all a given -- but it doesn't have to be given, either. > For example, the definition of an "efficient market" or the optimal level of production of some good both embed this assumption that willingness to pay equals utility. You're neglecting that there are many possible definitions of 'optimal'. In fact, the fundamental theorems of welfare economics (https://en.wikipedia.org/wiki/Fundamental_theorems_of_welfare_economics https://en.wikipedia.org/wiki/Fundamental_theorems_of_welfar...) -- which give us the "market equals optimum distribution" idea -- only give us a Pareto optimal outcome, such that there exists no redistribution of products that would make everyone happier. Only when we start comparing utility between people can we talk about ways of selecting between Pareto optimums. For example, a market distribution where I owned everything as god-king would be a (morally reprehensible) Pareto optimum, since you couldn't make anyone else happier without leaving me relatively worse-off.
- sideshowb 7y ago
  Am I right in thinking that the concept of a social welfare function - which gives us a chance to specify that having you or anyone else as God-king is not the solution we want - is also considered part of welfare economics?
6gvONxR4sf7o 7y ago
You could imagine measuring in terms of each customer's annual incomes. In a year, you might provide value corresponding to 1% of ten customers' annual incomes, or you might provide value corresponding to 1% of a thousand customers' annual incomes. In some sense, in the former case you created a tenth of a person-income of value, whereas in the latter you created a hundred person-incomes worth of value. It'd be an interesting measure. It would be difficult to make meaningful for a large group because a transfer from A --> B --> C --> D won't measure the same as a transfer from A --> C --> B --> D even though the outcome is equivalent.
Erlich_Bachman 7y ago
> one is willing to pay for a good is equal to the utility provided by that good [...] then I value the coffee twice as much as the other person > And because this assumption is so fundamental to economics, That's just plain incorrect, it is not. It might be one of the thoughts that has been used by some economists some time. It is far from any bedrock economic theory. > Econ 101 is the most I've ever studied the subject. Well there you go, that is the reason you would think that.
dcolkitt 7y ago
> To me, the assumption should be something like the amount of money as a percentage of my total wealth that I'm willing to pay is equal to the utility of the good. I think you raise a good objection, but this metric overlooks the concept of leisure as consumption. Say Alice doesn't like working and chooses to only work 10 hours a week. Whereas Bob really likes material goods and doesn't mind working a lot, so he works 80 hours a week. Bob will have eight times as much money as Alice, and therefore much more money to spend on things like coffee. But this disparity really does reflect different utility levels for coffee (and other consumer goods). Alice does have less money to buy coffee but that's a downstream manifestation of the result that she genuinely prefers leisure over coffee. To really get into it you have to start figuring out which wealth disparities are due to genuine differences in preferences (like higher savings rates, longer hours worked, studying harder in school, compensation for stressful or unpleasant jobs, more risk-taking, etc.), and which are due to exogenous factors (like higher intelligence, more opportunities, getting lucky in some endeavor, etc.)
littlestymaar 7y ago
> But to me that doesn't make much sense. What if I am a billionaire and the other person is very poor? It could very well be that the other person values the coffee a lot more than I do, but because I have so much more disposable income than they do I am willing to pay more for it. To me, the assumption should be something like the amount of money as a percentage of my total wealth that I'm willing to pay is equal to the utility of the good. You're right, it doesn't make sense and it's even worse than you think, because even a given individual doesn't give the same value to something depending on whether they have it (and are asked a price to sell), or not (price to buy).[1] [1]: https://evonomics.com/resolve-fights-reclining-airplane-seats-use-behavioral-economics/ https://evonomics.com/resolve-fights-reclining-airplane-seat...
gorgonical 7y ago
There's a branch of economics, usually lumped in with "heterodox economics" that says that interpersonal comparisons of utility are impossible. This is called the Austrian school of economics, whose figures are von Mises and Rothbard. Their basic unit of the market is the transaction. You know you value the coffee more than $2 and the coffee seller less than $2, and the other person values it more than $1, but until you and the other person actually make a trade you can't figure out the relationship between your preferences. That is, you are exactly right that you cannot say you prefer coffee twice as much. Here's a video that explains this idea, called "praxeology" in these circles. He explains it in the first five minutes: https://www.youtube.com/watch?v=TI5fjTz1Rbw https://www.youtube.com/watch?v=TI5fjTz1Rbw
- QuesnayJr 7y ago
  This is an example of a weird phenomenon where the heterodox schools of economics argue against a position that hasn't been mainstream in years. In this case, years and years and years. Economics stopped requiring interpersonal comparisons of utility a hundred years ago.
- selectionbias 7y ago
  Among the first things you learn in microeconomic theory are the expected utility axioms (developed by Von Neumann and Morganstern), and Afriat's theorem. These results give conditions under which an agent's behavior is indistiguishable from utility/expected utility maximization. This is the standard justification for the use of utility maxmization in economics: that it is a good mathematical model of decision making, not that it captures what actually goes on in people's heads. This is not a heterodox idea, it has been mainstream since at least as early as the 1950s. Of course, modern economists like to empirically verify whether these models of decision-making are accurate or whether other behavioral models are more consistent with the data, because economics is a science. Praxeology, on the other hand, is the opposite of science.
selectionbias 7y ago
As someone has already commented, the definition of an 'efficient market' in no way equates willingness to pay with utility, and in fact economists seldom make this assumption. Pareto efficiency is very deliberately not utilitarian. A Pareto efficient outcome needn't be a 'good' outcome, it is just an outcome such that no other outcome would make everyone better off. If an outcome isn't Pareto efficient then there is room for improvement. It's worth noting that while Pareto efficiency is central to some very neat foundational concepts taught in introductory econ, modern ecenomic research uses a range of welfare measures to quantitatively evaluate policies. This includes utilitarian welfare analysis. These maybe better capture the actual ethical goals we should have when making policy decisions, but they are usually a bit ad hoc and don't lead to such neat results.
dragonwriter 7y ago
> A bit of a tangent, but something that bothers me is the assumption in economics that the amount of money one is willing to pay for a good is equal to the utility provided by that good. Some economic analysis uses that (or, rather that willingness to pay is linearly proportional to utility) as a simplifying assumption to make particular problems tractable (or, because the systematic bias it introduces is ideologically preferred by the actor doing the analysis), but it's fairly basic—like, 101 level—economics that aside from the biases introduced by variable wealth that this isn't true because money, like anything else—or, rather, a a direct consequences of this being true for everything money can buy—has declining marginal utility.

hderms 7y ago

it seems like in the event that quadratic payments are applied to a situation where multiple parties are competing for a single good that it reduces to something similar to an auction. Imo it's clear that auctions, corresponding with what you said, favor those with the most income.

lisper 7y ago
Yes, and adding a non-linear transfer function won't help in this case. To win an auction, I only need to outbid you by epsilon. Non-linear payments only help where the value of the thing being purchased can vary (non-linearly) with the purchase price.
- deleted 7y ago
  [deleted]
- hderms 7y ago
  can you go into more detail on this? it sounds interesting. What's an example of somethings value that varies non-linearly with the purchase price? Is a "non-linear transfer function" a stand-in for "quadratic payments" in this case?
  - lisper 7y ago
    "Non-linear transfer function" is a generalization of "quadratic payments." "Transfer function" is a general engineering term meaning a mathematical description of the output of a system in terms of its inputs. So the "transfer function" of a payment is its output (what you get) in terms of its input (what you pay). Normally that transfer function is linear: if one apple costs a dollar, then N apples will cost N dollars. (Actually, that's only true up to a point. In the real world, if N is large enough, N apples will cost you less than $N.)
BurningFrog 7y ago
> Imo it's clear that auctions, corresponding with what you said, favor those with the most income. This seems to boil down to observing that it's good to have money.

QuesnayJr 7y ago

Economics specifically does not make that assumption. You will see it in cost-benefit analysis, but it is not anything like a fundamental assumption in economics. I don't know where you got the idea that it was -- if you learned it from your econ 101 class you should demand your money back. The fundamental idea in economics is "Pareto efficiency". Something is Pareto efficient if there is a no way to make someone better off without making anyone worse off. An idealized perfectly competitive market would be Pareto efficient, but the bulk of microeconomics these days studies market imperfections. A level of production is "optimal" if it's Pareto efficient. Again firms in idealized perfectly competitive markets will produce a Pareto efficient output, but real markets can fall short of the ideal. For example, a polluting industry will overproduce, unless pollution is taxed. IIRC, there are conditions where your alternative criterion matches Pareto efficiency, but they are somewhat special.

oarabbus_ 7y ago
Pareto efficiency might be more useless than "calculate the physics problem assuming air resistance is negligible"
- QuesnayJr 7y ago
  It is exactly as useful. Macroeconomics was completely tangled up until people understood that in a perfectly function economy there was be no business cycle, that even a serious shock would only temporarily slow down the economy. So the focus turned to understanding the market imperfections that make temporary dislocations have such long-term effects.
- solveit 7y ago
  Physics in idealized situations is incredibly useful, and more importantly, absolutely necessary for understanding non-idealized real situations, so I'm not sure what you're getting at here.
tossaway17 7y ago
Can one prove that an idealized perfectly competitive market is Pareto efficient or is this taken as a definition?

rkagerer 7y ago

Interesting, but if I interpret your assumption correctly it would remove the incentive for people to accumulate more wealth (if everything costs me a % of my net worth, why bother to own more than $1?). Continue the thought experiment and I suspect you'd arrive at some form of Socialism - a topic with a lot of academic material (as you inquired). Neither does it take into account the ease at which one person can replenish their wealth compared to others (e.g. if rapid enough I can spend 100% of my wealth on every purchase). But I get where you're coming from in terms of the entrenched economics being imperfect. I thought the end of the article offered some interesting ideas (even if they don't solve your problem), like: A simple example would be a system where quadratic funding is done retrospectively, so people vote on which public goods were valuable some time ago (eg. even 2 years), and projects are funded up-front by selling shares of the results of these deferred votes; by buying shares people would be both funding the projects and betting on which project would be viewed as successful in 2 years' time.

Majromax 7y ago

> It could very well be that the other person values the coffee a lot more than I do, but because I have so much more disposable income than they do I am willing to pay more for it. In doing this (for any resolution of the question), you're making a quantitative comparison of utility between people. That transformation, that $1 for me is the same as $1 for you, is not at all a given -- but it doesn't have to be given, either. > For example, the definition of an "efficient market" or the optimal level of production of some good both embed this assumption that willingness to pay equals utility. You're neglecting that there are many possible definitions of 'optimal'. In fact, the fundamental theorems of welfare economics (https://en.wikipedia.org/wiki/Fundamental_theorems_of_welfare_economics https://en.wikipedia.org/wiki/Fundamental_theorems_of_welfar...) -- which give us the "market equals optimum distribution" idea -- only give us a Pareto optimal outcome, such that there exists no redistribution of products that would make everyone happier. Only when we start comparing utility between people can we talk about ways of selecting between Pareto optimums. For example, a market distribution where I owned everything as god-king would be a (morally reprehensible) Pareto optimum, since you couldn't make anyone else happier without leaving me relatively worse-off.

sideshowb 7y ago
Am I right in thinking that the concept of a social welfare function - which gives us a chance to specify that having you or anyone else as God-king is not the solution we want - is also considered part of welfare economics?

6gvONxR4sf7o 7y ago

You could imagine measuring in terms of each customer's annual incomes. In a year, you might provide value corresponding to 1% of ten customers' annual incomes, or you might provide value corresponding to 1% of a thousand customers' annual incomes. In some sense, in the former case you created a tenth of a person-income of value, whereas in the latter you created a hundred person-incomes worth of value. It'd be an interesting measure. It would be difficult to make meaningful for a large group because a transfer from A --> B --> C --> D won't measure the same as a transfer from A --> C --> B --> D even though the outcome is equivalent.

Erlich_Bachman 7y ago

> one is willing to pay for a good is equal to the utility provided by that good [...] then I value the coffee twice as much as the other person > And because this assumption is so fundamental to economics, That's just plain incorrect, it is not. It might be one of the thoughts that has been used by some economists some time. It is far from any bedrock economic theory. > Econ 101 is the most I've ever studied the subject. Well there you go, that is the reason you would think that.

dcolkitt 7y ago

> To me, the assumption should be something like the amount of money as a percentage of my total wealth that I'm willing to pay is equal to the utility of the good. I think you raise a good objection, but this metric overlooks the concept of leisure as consumption. Say Alice doesn't like working and chooses to only work 10 hours a week. Whereas Bob really likes material goods and doesn't mind working a lot, so he works 80 hours a week. Bob will have eight times as much money as Alice, and therefore much more money to spend on things like coffee. But this disparity really does reflect different utility levels for coffee (and other consumer goods). Alice does have less money to buy coffee but that's a downstream manifestation of the result that she genuinely prefers leisure over coffee. To really get into it you have to start figuring out which wealth disparities are due to genuine differences in preferences (like higher savings rates, longer hours worked, studying harder in school, compensation for stressful or unpleasant jobs, more risk-taking, etc.), and which are due to exogenous factors (like higher intelligence, more opportunities, getting lucky in some endeavor, etc.)

littlestymaar 7y ago

> But to me that doesn't make much sense. What if I am a billionaire and the other person is very poor? It could very well be that the other person values the coffee a lot more than I do, but because I have so much more disposable income than they do I am willing to pay more for it. To me, the assumption should be something like the amount of money as a percentage of my total wealth that I'm willing to pay is equal to the utility of the good. You're right, it doesn't make sense and it's even worse than you think, because even a given individual doesn't give the same value to something depending on whether they have it (and are asked a price to sell), or not (price to buy).[1] [1]: https://evonomics.com/resolve-fights-reclining-airplane-seats-use-behavioral-economics/ https://evonomics.com/resolve-fights-reclining-airplane-seat...

gorgonical 7y ago

There's a branch of economics, usually lumped in with "heterodox economics" that says that interpersonal comparisons of utility are impossible. This is called the Austrian school of economics, whose figures are von Mises and Rothbard. Their basic unit of the market is the transaction. You know you value the coffee more than $2 and the coffee seller less than $2, and the other person values it more than $1, but until you and the other person actually make a trade you can't figure out the relationship between your preferences. That is, you are exactly right that you cannot say you prefer coffee twice as much. Here's a video that explains this idea, called "praxeology" in these circles. He explains it in the first five minutes: https://www.youtube.com/watch?v=TI5fjTz1Rbw https://www.youtube.com/watch?v=TI5fjTz1Rbw

QuesnayJr 7y ago
This is an example of a weird phenomenon where the heterodox schools of economics argue against a position that hasn't been mainstream in years. In this case, years and years and years. Economics stopped requiring interpersonal comparisons of utility a hundred years ago.
selectionbias 7y ago
Among the first things you learn in microeconomic theory are the expected utility axioms (developed by Von Neumann and Morganstern), and Afriat's theorem. These results give conditions under which an agent's behavior is indistiguishable from utility/expected utility maximization. This is the standard justification for the use of utility maxmization in economics: that it is a good mathematical model of decision making, not that it captures what actually goes on in people's heads. This is not a heterodox idea, it has been mainstream since at least as early as the 1950s. Of course, modern economists like to empirically verify whether these models of decision-making are accurate or whether other behavioral models are more consistent with the data, because economics is a science. Praxeology, on the other hand, is the opposite of science.

selectionbias 7y ago

As someone has already commented, the definition of an 'efficient market' in no way equates willingness to pay with utility, and in fact economists seldom make this assumption. Pareto efficiency is very deliberately not utilitarian. A Pareto efficient outcome needn't be a 'good' outcome, it is just an outcome such that no other outcome would make everyone better off. If an outcome isn't Pareto efficient then there is room for improvement. It's worth noting that while Pareto efficiency is central to some very neat foundational concepts taught in introductory econ, modern ecenomic research uses a range of welfare measures to quantitatively evaluate policies. This includes utilitarian welfare analysis. These maybe better capture the actual ethical goals we should have when making policy decisions, but they are usually a bit ad hoc and don't lead to such neat results.

dragonwriter 7y ago

> A bit of a tangent, but something that bothers me is the assumption in economics that the amount of money one is willing to pay for a good is equal to the utility provided by that good. Some economic analysis uses that (or, rather that willingness to pay is linearly proportional to utility) as a simplifying assumption to make particular problems tractable (or, because the systematic bias it introduces is ideologically preferred by the actor doing the analysis), but it's fairly basic—like, 101 level—economics that aside from the biases introduced by variable wealth that this isn't true because money, like anything else—or, rather, a a direct consequences of this being true for everything money can buy—has declining marginal utility.