In “Toward a Reconstruction of Utility and Welfare Economics,” Austrian-school economist Murray Rothbard (1926-1995) describes “demonstrated preference” as the idea that a man’s actual choices in action indicate to praxeological economists what he genuinely values. If a man in a given situation chooses A over B, this means that he values A more than B in that situation. When a man expends given resources on accomplishing a satisfaction, the principle of demonstrated preference implies that he prefers that satisfaction over any alternative use of those resources. A corollary to demonstrated preference is the recognition that we can never—in our capacity as praxeologists—know another’s valuations except as he displays them through his actions.   

            Rothbard’s view of “demonstrated preference” should not be confused with “mainstream” economist Paul Samuelson’s idea of “revealed preference.” Samuelson presumes that all of a man’s actions are based on an underlying preference scale that remains constant over time. The sum total of a man’s observed actions can then be used, according to Samuelson, to “map” his preference scale using mathematical techniques. Rothbard disagrees; he sees no reason to assume the value scale’s constancy over time. Rothbard’s view of demonstrated preference is thus more limiting than Samuelson’s; it only allows the economist to state that a given actor valued A over B at the time he made his choice. The economist can legitimately reconstruct only an extremely small part of the actor’s preference scale—not, as Samuelson suggests, the entire scale. 

            In describing preference, Rothbard warns us of two pitfalls that we must avoid in economic analysis. The pitfall of psychologizing consists of treating an actor’s preference scales as somehow inherently distinct and separate from his action. This erroneous view holds that utility analysis is psychologically based and that economists must study psychology in order to understand actors’ economic behavior. Rothbard insists on a distinction between psychology and praxeology; psychology analyzes how and why people value certain ends, while praxeology confines itself to studying the implications of the very fact that people value and have ends. It does not rely on the content of those ends and therefore does not need to rely on psychology to analyze economic action efficaciously.

            The pitfall of behaviorism is the desire to purge subjective analysis from economics. The behaviorist believes that ascribing any traces of motivation, volition, or consciousness to human action is unscientific. He rather wishes to mimic the practice of physics in dealing with inorganic, non-volitional matter. The behaviorist dismisses the idea of action itself, thereby throwing out the very core of all legitimate economic analysis and making true economics impossible. Praxeology is antithetical to behaviorism in that it is based on the assumption that humans act and are motivated, volitional beings who unceasingly choose means and ends.

            Rothbard then uses the principle of demonstrated preference in defense of economic laissez-faire. He wishes to claim that every transaction on the unhampered free market embodies Vilfredo Pareto’s Unanimity Rule: it makes some individuals better off and makes no one worse off. Rothbard seeks to show that every trade between two consenting parties is a Pareto-improvement in that each party voluntarily enters into the trade, expecting to benefit. If, however, it were correct that a third party could derive disutility from the consensual exchanges of others, then the free market would cease to embody Pareto’s Unanimity Rule and one would be unable to state that the free market is objectively more economically efficient than a system of state economic intervention. Rothbard must thus prove that no consensual exchange can be definitely known to cause economic disutility to non-participants.

            According to Rothbard, if a third party claims to disapprove of a given voluntary transaction between two others, this cannot be used as grounds for asserting that the third party derives disutility from the transaction. The third party has not acted on its alleged disapproval except to voice it, and all we know from that action is that the third party prefers to speak out against the transaction to not speaking out. From the action itself, we have no grounds to assume that the third party is not pretending, joking, or playing—or is not actually benefited by the transaction’s existence by having a subject matter to discuss in public as a result. The principle of demonstrated preference holds that a person’s values can only be observed through his actions, and the third party has not acted to directly thwart the transaction itself. On the free market, the third party would retain full property rights and prerogatives to use its property. It thus has the same range of legitimate action accessible to it as earlier; nobody has deprived the third party of its property or its ability to act. So long as no party coerces any other to act against its will, nobody actually loses in utility. Thus, the free market by definition cannot result in loss of utility to third parties not involved in a given transaction. Rothbard’s welfare economics thus arrives at a defense of consistent laissez-faire capitalism.

G. Stolyarov II is a science fiction novelist, independent filosofical essayist, poet, amateur mathematician, composer, contributor to Enter Stage Right, The Autonomist, Le Quebecois Libre, and the Ludwig von Mises Institute, Senior Writer for The Liberal Institute, and Editor-in-Chief of The Rational Argumentator, a magazine championing the principles of reason, rights, and progress. His newest science fiction novel is Eden against the Colossus. His latest non-fiction treatise is A Rational Cosmology. Mr. Stolyarov can be contacted at gennadystolyarovii@yahoo.com.

This TRA feature has been edited in accordance with TRA’s Statement of Policy.