by From Lars Syll We are told nowadays that since utility cannot be measured it is not an operational concept, and that ‘revealed preference’ should be put in its place. Observable market behaviour will show what an individual chooses … It is just not true that market behaviour can reveal preferences. It is not only that the experiment of offering an individual alternative bundles of goods, or changing his income just to see what he will buy, could never be carried out in practice. The objection is logical, not only practical … We can observe the reaction of an individual to two different sets of prices only at two different times. How can we tell what part of the difference in his purchases is due to the difference in prices and what part to the change in his preferences that has taken
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from Lars Syll
We are told nowadays that since utility cannot be measured it is not an operational concept, and that ‘revealed preference’ should be put in its place. Observable market behaviour will show what an individual chooses …
It is just not true that market behaviour can reveal preferences. It is not only that the experiment of offering an individual alternative bundles of goods, or changing his income just to see what he will buy, could never be carried out in practice. The objection is logical, not only practical …
We can observe the reaction of an individual to two different sets of prices only at two different times. How can we tell what part of the difference in his purchases is due to the difference in prices and what part to the change in his preferences that has taken place meanwhile? There is certainly no presumption that his character has not changed, for soap and whisky are not the only goods whose use affects tastes. Practically everything develops either an inertia of habit or a desire for change.
We have got one equation for two unknowns. Unless we can get some independent evidence about preferences the experiment is no good. But it was the experiment that we were supposed to rely on to observe the preferences.
As so often, Robinson hits the nail on the head.
The very raison d’être for developing revealed preference theory in the 1930’s and 1940’s was to be able to ascertain people’s preferences by observation of their actual behaviour on markets and not having to make unobservable psychological assumptions or rely on any utility concepts. This turned out to be impossible. Samuelson et consortes had to assume unchanging preferences, which, of course, was in blatant contradiction to the attempt of building a consumer and demand theory without non-observational concepts. Preferences are only revealed from market behaviour when specific theoretical constraining assumptions are made. Without making those assumptions there are no valid inferences to make from observing people’s choices on a market.
But still, a lot of mainstream economists consider the approach offered by revealed preference theory a great progress. As people like Robinson, Georgescu-Roegen, and Kornai have shown, this is, however, nothing but an illusion. Revealed preference theory does not live up to what it claims to offer. As part of the economist’s tool-kit, it is of extremely limited use.
If we want to be able to explain the behaviour and choices people make, we have to know something about people’s beliefs, preferences, uncertainties, and understandings. Revealed preference theory does not provide us with any support whatsoever in accomplishing that.