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Peter Dorman's avatar

I agree with commenter Petrovic that the nation should not be understood monolithically; this to me is part of IPE 101. As for the more general point about relative vs absolute income, this is a subset of an even more general point about the representation of interaction effects outside the market in economic theory -- that such interactions do not exist. I've written about this many times over the years, but it's a message no one seems to want to hear. The problem is that incorporating interactions between agents (social) and goods (environmental/technological) generates nonconvexities in choice and production sets and therefore multiple equilibria. This is now deemed OK in spacial econ (urban, econ geography) but verboten elsewhere.

Incidentally, and also relevant to the complaint about economists in the OP, welfare econ becomes incoherent in a multiple equilibrium world. (Which may explain the disciplinary resistance: without welfare inferences, how will economists tell the rest of the world what to do?)

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Paul's avatar

The problem for mainstream econ is that if you take into account relative utility, simple utility curves get all messed up and mathematical models break down completely. Instead of simple declining marginal utility of one individual regarding one good you would have to take into account relative quantities of everyone else's utility curves simultaneously. Utility has to be an absolute atomic unit to be modeled (as if it was itself a commodity). Much of Milton Friedman's defense of unrealistic assumptions in economics is the attempt to ward this off. If you accept Veblen's position then economics begins to look like sociology or cultural history. Thus Veblen has been drummed out of econ, and Friedman's methodological views dominate. Veblen only lives on in the diluted form of institutional economics.

Oddly, even Frank Knight, who taught Friedman and Stigler price theory, actually recognizes Veblen's point about utility (and Stigler directly rejects this idea in Knight).

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