Thursday, June 07, 2012

What is Schlefer Talking About Here?

Recent Books for the Current Conjuncture
"One problem is that, following Jevons, I have been discussing goods in isolation... The problem with this story is that the marginal utility you derive from an additional gallon of gasoline depends not only in the amount of gasoline you already have but also on the other goods you own. An additional gallon of gasoline gives you far more utility if you own an Airstream camper than if you own only a motorcycle.

Once economic theory accepts this principle, Jevons's assumption of declining marginal utility no longer seems persuasive, and - trust me, again - it does not even guarantee that individuals maximize utility40. Theorists patched up this problem by inventing a more intricate assumption about preferences. (I'll spare readers by not delving into it.)

40 This result is well known, but, for example, see Nicholson 1989, 90, footnote 10."
--Jonathan Schlefer, The Assumptions Economists Make (Harvard University Press, 2012): pp. 87.

I do not have ready access to Nicholson's microeconomics textbook. Is Schlefer talking about diminishing marginal rates of substitution? Complementary goods? Is there a reference showing how choosing goods such that marginal rates of substitution and prices ratios are equated (other than at corners) does not maximize utility? What is this more intricate assumption? I'm fairly sure that he is not talking about Giffin goods here; that's the next page.

I was surprised to find that this was a Post Keynesian book.


BruceMcF said...

Gross substitutability? Concavity vs Convexity? Its fine to spare the reader the details, but sparing the informed reader the name that the details go by is annoying.

Robert Vienneau said...

Schlefer also refers to textbooks (e.g., by Stephen Marglin or Lance Taylor) for details of Post Keynesian models he likes. And he doesn't say much about the relative dominance of neoclassical models in the profession. So a reader might understand from his book that a textbook tradition exists in which economists can teach models that are not upside a down. This impression would be true, in some sense, but I find this a somewhat odd presentation.