Subjectivity and Demonstrated Preference: A Possible Paradox

A few years ago, I bought a unique item. When I first became aware of it, I was intrigued and interested, but the price was $50 more than I was willing to pay ($450 versus $400). Wanting it, at my price or less, I kept watch over various websites looking for a sale price that matched my price point. After a number of months searching, I found a site that offered the item for $390 and I bought it.

Now, since the manufacturer has gone out of business—a victim of covid—the value of the item on the used market sometimes exceeds twice what I originally paid. Since mine is in great condition, I assume it could garner the higher price. However, I also claim that I wouldn’t now pay that price for it—I value my $850 more than the item.

At least that is what I claim. And I am not making that claim to just you, the reader, I am also making it to myself. I tell myself—repeatedly—that I value $850 more than the item, yet I haven’t sold it. A seemingly strange paradox that appears to expose a core flaw in Austrian subjective value, and economics in general. To recap: I have an item with a price greater than what I am claiming is its value to me. But I won’t sell it.

Enter Rothbard—Demonstrated Preference

If asked, I could assemble some preference ranking, ranking the options for lunch versus the money in my wallet and the alternative uses of that money. I could tell you that I rank pizza over hamburger, but then I return to my desk with a hamburger. This could lead to a question, “Jim, I thought you were getting pizza?” The questioner’s understanding of economics wouldn’t be challenged if I replied, “Yeah, I changed my mind.” No paradox here. Subjectivity is subjective, and at the whims of the individual.

Nevertheless, both the questioner and I would know that, at the lunch counter, I demonstrated my preference for hamburger over pizza, whatever I may have said. I couldn’t claim that, given the situation at the counter, I preferred pizza but bought the hamburger instead. Certainly, I could claim that, on the way back to my desk, I regretted my action and now wish I had purchased pizza, but that is only a claim of preference, one that was never demonstrated.

It doesn’t matter what I claim or list as my preference ranking, what matters is how I demonstrated that ranking at the instance under consideration. As noted by Rothbard, “But demonstrated preference only treats values as revealed through chosen action.” So we (myself included) can only speak of my values and preference ranking in context of an action at some point in time.

But I really don’t value my item at $850. I swear.

The Paradox

Consider this situation: you are on an auction website, looking at something you’d like to have. You say to yourself, and everyone nearby, “I’d really like to have that for $40, tops.” The current bid is $12, so you bid $15—a steal. You wait, watching the timer tick toward zero. Then the outbid notice pops up, noting the current bid is $16, with a minimum $17 rebid. You go with $25, but get outbid in moments. You rebid at $36 and outbid once again. Without any pause, you enter $45, because now you really want it.

Seconds tick away and it’s yours! You will soon possess for $45 that which you swore was only worth $40. Maybe, even quickly, elation from winning turns to remorse, “What was I thinking? $45 for that thing? What a waste.”

Now, you could contact the seller and say, “Look, can I just send you $4.00 and you can relist it?” That way you can get the next item in your preference rank. But you don’t.

Back to Rothbard, “The concept of demonstrated preference is simply this: that actual choice reveals, or demonstrates, a man’s preferences; that is, that his preferences are deducible from what he has chosen in action.”

All we can say is that, at the instance you bid $45, you valued your $45 less than the item in question and this is what your actions revealed. It could be that winning the auction was worth, say, $6 to you, at the moment of action. Maybe, at the instance of your last bid, you valued the bundle that included both the item and the win more than $45. Value is subjective and includes psychic value. As Rothbard puts it, “In all cases whatsoever, of course, each man will move to maximize the psychic income on his value scale, on which scale all exchangeable and unexchangeable goods are entered.” Again, no paradox here.

Today is the Given

I claim I wouldn’t today pay $850 for my item, yet I have it. Since marginal valuation is real, I can claim I do not value a second item at $850. This is an uncontroversial statement. Nevertheless, I possess one unit of it, so I do not need to purchase it. The only way I could test the current validity of my claim would be to sell the item for $850 and then buy it again for $850. This will remain untested, but we are not burdened by me already having the item when addressing what I claim is its current value to me.

But I Haven’t Sold It

I do not intend to sell this item, at least not right now. Therefore, regardless of what I say, we can conclude, both you and me, that I do value the item more than $850, when including psychic value and costs that I seem to refuse or am unable to recognize. Now, of course, I haven’t been presented with cash in hand, so my preference hasn’t been tested in that manner. Nevertheless, given what is required to sell and ship my item, the bundle that includes the item and any associated psychic value, net psychic costs, exceeds the potential $850 I haven’t been offered.

Paradox Lost

When I say it’s not worth $850 to me, don’t take my word for it, and I won’t either. We’ll both just observe my actions—or inactions—as demonstrated proof of my preference ranking.

Originally Posted at https://mises.org/

zerohedge
Economics , News , Politics , Science
November 22, 2024
2 views

Utility Companies Are Not On Our Side

Authored by Linnea Leuken & H. Sterlin Burnett via RealClearPolitics,

When electric power was a novel idea and just beginning to be adopted in urban centers, the industry had a Wild West feel to it as multiple companies strung wires, opened power plants, and sold electricity on an unregulated market. Competition was fierce, but state and local governments concluded that the inefficiencies and redundancies endangered the public and imposed higher costs.

So states set up service territories with monopolistic or oligopolistic service providers, who were entrusted with providing reliable power and sufficient reserve for peak periods in return for being guaranteed a profit on rates proposed by the utilities but approved or set by newly established state public utility commissions (PUCs). These commissions were charged with ensuring public utilities served the general public universally within their territory, providing reliable service at reasonable rates.

Much has changed since then. Politicians began to supplant engineers to decide, based on self-interested calculations, what types of power should be favored and disfavored, and what types of appliances and modes of transportation Americans could use. As the 21st century dawned, a new consideration entered the picture: Climate change.

Under the banner of combatting global warming, utilities were at first encouraged and then coerced into adopting plans and policies aimed at achieving net zero emissions of carbon dioxide. The aim of providing reliable, affordable power – the rationale for the electric utilities’ monopolies in the first place – was supplanted by a controversial and partisan political goal. Initially, as states began to push renewable energy mandates, utilities fought back, arguing that prematurely closing reliable power plants, primarily coal-fueled, would increase energy costs, compromise grid reliability, and leave them with millions of dollars in stranded assets.

Politicians addressed those concerns with subsidies and tax credits for renewable power. In addition, they passed on the costs of the expanded grid to ratepayers and taxpayers. Effectively, elected officials and the PUCs, with a wink and a nod, indemnified utilities for power supply failures, allowing utilities to claim that aging grid infrastructure and climate change were to blame for failures rather than the increased percentage of intermittent power added to the grid at their direction.

Today, utilities have enthusiastically embraced the push for renewable (but less reliable) resources, primarily wind and solar. PUCs guarantee a high rate of return for all new power source (wind, solar, and battery) installations, which has resulted in the construction of ever more and bigger wind, solar, and battery facilities. The costlier, the more profitable – regardless of their compromised ability to provide reliable power or the cost impact on residential, commercial, and industrial ratepayers.

A new report from The Heartland Institute demonstrates the significant financial incentives from government and financiers for utilities to turn away from affordable energy sources like natural gas and coal, and even nuclear, and instead aggressively pursue wind and solar in particular. All of this is done in the name of pursuing net zero emissions, which every single major utility company in the country boasts about on their corporate reports and websites. Reliability and affordability come secondary to the decarbonization agenda.

Dominion Energy is a good example, as they are one of the most aggressive movers on climate-focused policy. Dominion CEO Robert Blue speaks excitedly about government-forced transitions to a wind- and solar-dominated grid in interviews. During one interview with a renewable energy podcast, he said:

“[S]ometimes the government needs to focus on outcomes. We’re trying to address a climate crisis, and we are going to need to move quickly to do that.” In the same interview, he expressed enthusiasm about federal policy that would achieve a government-directed transition.

And why wouldn’t he? Dominion, like most utilities, is granted government tax credits and guarantees on returns for investing in large, expensive projects like offshore wind, the most expensive source of electric power. The bigger the project, the bigger the profit with guaranteed returns.

Also, onshore wind companies have received special “take limits” from the Fish and Wildlife Service to kill protected bald eagles and golden eagles, while prosecuting oil companies if birds are injured or killed on their sites.

Net zero policies are not the environmental panacea that climate change activists proclaim. Industrial-scale wind and solar use substantially more land than conventional energy resources, disrupting ecosystems and destroying wildlife habitats in the process.

And despite recent technological advances, wind and solar are still not dispatchable resources, meaning they cannot provide consistent power at all times needed. Refuting claims made by environmentalists and utilities that wind and solar are the cheapest sources of electric power, costs have risen steeply as the use of wind and solar has increased. Customers of Duke Energy in Kentucky, for example, are paying 78% higher rates in the wake of coal-fired plant closings.

Politicians and utilities are pushing for even more electrification for appliances and vehicles despite the fact that Federal Energy Regulatory Commission officials have repeatedly warned in recent years that adding more demand for electric power while replacing reliable power sources with intermittent renewables is destabilizing the power system.

It appears that the utilities prioritize short-term profits over grid reliability or keeping costs reasonable – and the government officials who are supposed to keep them in check are only encouraging them. It doesn’t need to be this way. The U.S. grid was not always this way. Only in recent years, with the obsessive pursuit of net zero, have rolling black and brownouts become so common.

Today, utility companies are sending lobbyists to conservative policymakers in order to convince them that the utilities have our best interests in mind. Their track record tells another story. Meanwhile, Americans have less reliable electricity at higher costs.

Linnea Lueken (llueken@heartland.org, X: @LinneaLueken) is a research fellow with the Arthur B. Robinson Center on Climate and Environmental Policy at The Heartland Institute.

Tyler Durden
Fri, 11/22/2024 – 06:30