I’ve found a number of the comments on my post about utility maximization to be helpful and clarifying, and I’m convinced as ever that we need to throw it out. I’m mainly focusing here on posts that either confirm or deny my assertion that it should be thrown out, and leaving out the certainly relevant and helpful comments on why economists rely on it/what it implies.
First, Tom Hickey wrote:
the subliminal worldview of most people is not internally consistent, because it is not consciously constructed or intentional arrived at. A lot of people don’t pursue goals that they would if they had different norms, for example.As a result, most people are conflicted much of the time. They control their “base nature” through the imposition of value-structures, religious and moral codes, ethical standards, and positive, for example, and this is an internal conflict that manifests in decision-making. Some of these decisions are economic choices that are not necessarily utility maximizing in the rather simplistic way that many economists consider, e.g., pursuit of self-interest.
Kevin disagreed with both Tom and me:
On the other hand, assuming someone doesn’t maximize over preferences seems very, very strange. Surely we are guided by passions, but we are not machines. To the extent that we have what philosophers call “human agency”, then we are attempting to do what we think is best for us. That simple idea turns out to be a very powerful paradigm of the world…
Social science is too complicated to know *exactly* why something happened. As such, our models will, by definition, be wrong sometimes. A better criteria for models is whether they are useful!
And later:
Note further that max u does not require people to do what’s “in their best interest”: as an economist, I don’t even know what term could mean. I only care that they have some preferences and maximize over them, harmfully or beneficially.
Even if you find that restriction too strong, max u may still be salvaged to the extent that most economic models only care that people act “as if” they maximize utility…I think it’s madness to say that humans aren’t purposeful. It is very, very easy to get people to react to incentives
David Youndberg jumped in:
I’m surprised you say “it’s hard to argue that individuals are maximizing anything.” People are maximizing things all the time! They buy more during sales…
Does this risk being tautological? Perhaps, but if you want to expand the number of things economics explains, that’s a natural danger.
My reply:
This fallacy, that humans are so purposeful, is what is woefully misguided. This may be a cheap shot, but I think the main reason it persists is because people who are attracted to economics tend to act so “purposefully” themselves…
I meant to say, they aren’t consistently maximizing anything, at least not in a measurable way…The tradeoff of simplicity for a tractable model is not a worthwhile one when the model turns out to do an awful job of predicting how the economy actually works. Yet economists cling to it…
I was too strong when I said humans aren’t purposeful. I meant they are not consistently purposeful. They also consider a host of changing norms and ideals that cannot be modeled. These things can neither be measured (at least right now) nor assumed away.
Finally, I think Sandwichman really brings it to the table. His comment is the sort of thing I would like to write if I understood these things much better:
The gestalt theory of figure and ground is apt here. What counts as figure and what counts as ground is a cognitive choice the mind makes based on subjective experience. Maximizing utility is something that only occurs after we’ve identified what we think the figure is. The illustration of Rubin’s vase demonstrates what happens when the information is ambiguous and could be read either way. It’s also a simplification in that the ambiguity is only two-way. There can also be multi-layered ambiguity. This is what people mean when they talk about uncertainty.
Kevin presents a very articulate defense of utility maximization that sidesteps the fundamental nature of uncertainty. It’s not a matter of satisficing meeting the criteria of maximization, it’s a matter of not knowing and not being capable of knowing what one’s preferences are. The problem with neoclassical economics is that economists have picked some trivial examples of consumer preference and generalized from them. It seems intuitive if you’re talking about preferences between, say, beans and brocolli. The whole preference ordering game works there only because… it doesn’t really matter. For all intents and purposes it’s “reversable”.
On big ticket items, though (things like career, life partner, domicile), the distinction between figure and ground is fundamentally uncertain. Economists have swept that huge difficulty under the rug by treating these as a “normal goods” the preferences for which can be modeled by generalizing from trivial and totally dissimilar examples of commodity preferences. Even the choice between war and peace can be trivialized to choosing between guns and butter.
Steve Keen addresses utility theory in Chapter 2 of Debunking Economics (2001). His argument attacks that the presumption is that pursuit of individual utility aggregates to social welfare in terms of maximum utility. This is an objection that philosophers have made against utilitarianism for a long while. Keen provides an economic argument, reiterating points make previously by Piero Sraffa.
Showing that individuals act to maximize utility does not prove anything about what happens in aggregate and to argue it does without showing this empirically, especially, in a scientific discipline that claims to be scientific, falls victim to the fallacy of composition — especially when there are good theoretical reasons and empirical grounds suggesting that individual utility does not lead to social welfare based on maximum utility.
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Uncertainty, norms, institutions all matter and will shape preferences without a doubt. The real issue IMHO is whether or not individual preferences map accurately to individual utility. It’s JS Mill’s “better to be a human dissatisfied than a pig satisfied” problem. Mill implies that there is some objective state of the world that corresponds or “should” correspond to human happiness. Were we rational, it is the state of the world we would prefer to that of satisfaction of irrational, short-term pleasures.
We economists ignore the normative aspect and assume that if someone is a “pig satisfied” his/her preferences correspond to the highest utility that person can or would want to attain subject to their income and prevailing prices (even if there is another feasible to attain (with a little rearranging of resources) state of the world in which the person would have health insurance, retirement security, and better nutrition). We also assume that in forming those preferences, the individual is rational (defined rather narrowly as having preferences that don’t change or switch around at least in the short run and that more is always and everywhere preferred to less), self-interested (maximizing his/her own idea of what is best for him/her), and fully-informed (s/he knows everything and I mean everything about the good and bad effects of consuming some good, the side effects to others of consuming or producing the good, and the future states of the world that will result from consuming or producing the good). (And, of course, the prices s/he faces are assumed to reflect the marginal social cost of all goods and services.) If any of these assumptions do not hold, then the consumer’s preferences most likely do not map directly and accurately to a state that could be characterized by JS Mill as a “human satisfied”, i.e., individual utility by some objective standard is being maxed. When the assumptions do not hold, the consumer is a preference maximizer, not a utility maximizer. The effect will be to distort demand for things that max (uninformed, possibly irrational, maybe even bad in the long run) preferences (e.g., granite counter tops and large homes with en suite baths purchased with no money down and pick-your-payment mortgages) at the expense (opportunity cost) of things that would actually improve the long-term prospects and lives of both consumers and the economy. In the extreme, “a pig satisfied.”
All solutions to this will involve some paternalism to a greater or lesser extent. The solution that is least paternalistic and that allows the most consumer autonomy is preferred. It will probably involve education, full information, transparency, and some regulation.
Discordance between revealed preferences and utility may also be created by long-term disenfranchisement of a class, gender or race. To the extent that individuals in the disenfranchised group “internalize” their diminished (in terms of opportunity and perceived contribution) state, i.e., adapt to it, their preferences may come to reflect the larger society’s (under) valuation of their own self-perceived utility. This would matter most in situations where such individuals are asked to assign values to changes in, say, their own health or productive capacity. If they undervalue such changes, their self-reports and self-chosen behaviors will perpetuate the discrimination of the larger society, rather than reflecting the true change in utility they would experience if their lot were improved. I would expect this to lead to (self-chosen) under investment in human and health capital. This last is an adaptation effect, which I believe your first post alluded to.
The solution for the last will probably require more pro-active remedial social policies.
What Maxine said- great post.
Thank you, Nick. I wrote a more complete and I hope more coherent blog on the topic over at my blog. Thanks for forcing me to finally put some of this into writing. I’ll write about adaptation in another blog. I think it’s important, too. I haven’t had time to think it through, but it fits with some work I’m doing in my day job.
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