By Philip Pilkington, a journalist and writer living in Dublin, Ireland
A prisoner kneels before the watchtower in a drawing of Jeremy Bentham’s ‘Panopticon’. The Panopticon was an architectural form that Bentham envisioned for a variety of social institutions. The idea was to have a central platform where an observer could cast their gaze over all the observed, thus making them feel constantly under watch and ensuring, in Bentham’s own words, “a new mode of obtaining power of mind over mind, in a quantity hitherto without example.” Jeremy Bentham is also the father of modern utility theory – a theory often associated with individual liberty, which is actually at heart a blueprint for social control.
It’s not hard to forget just how nonsensical, simplistic and childish the so-called theory of marginal utility is. Personally, I hadn’t encountered it directly for a number of years. But reading a review copy of Steve Keen’s excellent new revised edition of ‘Debunking Economics’ encouraged me to pull out the old Samuelson and Nordhaus textbook once more.
While Keen shows quite clearly in that book that even within its own narrow and absurd definitions the theory is internally inconsistent, I propose here to take a more general look at this intellectual masturbatory appendage that passes for a theory of individual and societal desire – and to try to substantially demonstrate that, far be it from being an expression of individual liberty, it is, in fact, a vision of a controlled and deterministic society, not unlike it’s father Jeremy Bentham’s other invention, the Panopticon.
“But it’s not psychological!”
The theory of marginal utility is, like most concepts in neoclassical microeconomics, quite simple. It begins, also like most concepts in neoclassical microeconomics, with a tautology. The economists claim that people choose that which maximises their pleasure and minimises their displeasure. They refer to this as people ‘optimising their utility’ – ‘utility’ here being this supposedly innate tendency to choose that which satisfies us most.
As any even a half-blind observer will note this is complete claptrap. People often make choices that turn out later not to ‘maximise their satisfaction’ (whatever that crude phrase might mean). Have you ever gone clothes shopping and bought an expensive pair of jeans that you never wore? Well, that’s hardly utility maximising behaviour.
In fact people often make choices that lead to less than satisfactory outcomes. This seems to be by design rather than anything else. If we always made the choices that ensured constant satisfaction we would soon find that we had no motivation to do anything new and would simply sit and stew in our own narrow and static world. That we occasionally make less than satisfactory choices allows us to continue to pursue satisfaction all the more. Nothing would smother our drives, our ambitions and our aspirations quite like a constant state of satiation.
But saying any of this is far too psychological for the average economist. After all, they insist that the theory of utility is not psychological. From Samuelson and Nordhaus’ ‘Economics’ (15th Edition):
But you should definitively resist the idea that utility is a psychological function or feeling that can be observed or measured. Rather, utility is a scientific construct that economists use to understand how rational consumers divide their limited resources among commodities that provide them with satisfaction. (P. 73)
The sheer amount of qualifying statements in those sentences is outstanding. But let us ignore such brazen tautology and meandering qualifying rhetoric for a moment, as there is something far more important and interesting going on here.
Why does Samuelson insist that this is not a psychological ‘function’? After all, we have just shown that the theory of utility contains a strongly psychological dimension in which it gives a very definitive view of human psychology.
This is a classic shunning of intellectual responsibility on the part of Samuelson. He assures us – and with us, himself – that he is not passing psychological judgement. He does this by insisting that we are engaged here in ‘science’ (whatever that means).
Of course, the critical observer can see that this is a strongly psychological argument with absolutely psychological foundations, but Samuelson doesn’t want to know anything about this.
Why? Because that would lead him to be questioned regarding the psychological basis of his assertions and that would cause his neoclassical worldview to crumble, strip him of scientific authority and show him to be doing what he is, in fact, doing; namely, using a scientific ‘style’ to try to convince the reader that the unlikely psychology that he puts forward is in fact objective, scientifically verified reality.
Ever diminishing returns
Adding to the theory of utility the theory of marginality doesn’t really make things any better. The newly constructed theory of marginal utility states that we will derive an ever diminishing amount of satisfaction (that is, utility) from any given product or circumstance.
Impressive, right? Not really. And not strictly true either.
An obvious counter-example would be that of the collector who derives an increase in satisfaction from accumulating a greater number of a certain item. Not to mention the eager capitalist who views money as an end in itself rather than a means to an end and so tries to accumulate ever-increasing amounts right up to infinity.
Eccentrics, surely? Not really. Many people have a passion for collecting a variety of different items and there are certainly no shortage of burgeoning capitalists in this age of popularised stock markets and online Forex trading.
There’s also the issue that advertising can often try to convince consumers to buy ever-increasing volumes of a product – even if the price of the product increases due to the brand becoming more popular. This is often remarkably successful and seems to fly in the face of the theory of marginal utility. In fact, it contradicts it at a very fundamental level. It shows that consumers are not the rationally calculating agents that marginal utility theory says they are. Instead they are agents caught up in trends and fashions and subject to irrational drives that marketers know well how to tap in to.
These objections are not quite as damning as those raised above with regards to utility theory more generally. Indeed, economists will often try to subordinate these secondary objections to their basic so-called laws. In doing so they will bend the ‘laws’ to contain clauses that accommodate for wholly contradictory phenomena.
Such a practice is, in itself, evasive and shows clearly that the theory of marginal utility is not an enterprise in science that attempts to broaden our view of reality. Instead it is an exercise in ideology that attempts to shut down our view of the world and channel all observable phenomena into a few neat assertions – assertions, remember, that were not derived experimentally.
This practice goes right to the heart of neoclassical microeconomics itself. It is, for the most part, a belief system imparted to people to close off how they view reality. In this it is like a strict religion or a cult. Everything can be explained through a few key precepts and when something seems to contradict these precepts we alter the interpretation of the phenomenon itself and make it fit with the precepts rather than questioning the precepts. It’s a bit like a religious fundamentalist endlessly reinterpreting scripture as new phenomena emerge, rather than simply questioning the scripture itself in light of the new empirical evidence.
Although we will look in more detail at this in a moment, it is worth noting here that much of neoclassical economics is in a fact a vast system of collective fantasy. In it the world in all its richness is turned away from and a narrow system of beliefs and assertions is upheld. For the most part, although we will discuss this in more detail in what follows, it appears that this fantasy system is – like many cult systems – designed to ward off anxiety in the adherent and give them a sense of place in the world. That this place is, in a very real sense, malevolent we hope soon to show.
Utility theory slowly builds towards determinism and death
Out of these ridiculous and obviously falsifiable precepts neoclassical economists go on to construct mathematical models. These models say very little beyond the original tautological precepts, but that is not their point. The real point of these models is that they are neat and easy to understand and that they convey the worldview in a way that covers up the dark vision that, in fact, is being imparted to the initiate.
The models show the constraints placed upon the consumer and the possible paths of action that can be taken by him. Samuelson puts it as such:
The fundamental condition of maximum satisfaction or utility is therefore the following: A consumer with a fixed income and facing given market prices of goods will achieve maximum satisfaction or utility when the marginal utility of the last dollar spent on each good is exactly the same as the marginal utility of the last dollar spent on any other good. (P. 77)
Let us remember first that the consumer is supposed to always follow the path to his maximum utility. With that firmly in mind the consequences of the above statement can be fully understood.
What is happening here – contrary to what many would have you believe – is that the economists are trying to establish a deterministic system. They are trying to quash the notion that we are actually individuals who make free choices. Instead we are being viewed here as calculating machines with static preferences that respond to price signals.
Here’s how it works. Neoclassical economists do recognise personal taste (although, as Keen shows in his book, they abolish it when it leads to contradictions), but they view it as fixed, innate and essentially static. We are seen to have fixed tastes in the sense that if we are given a table full of items and the prices of these items are held to be fixed we will always choose certain combinations of these items due to our own static personal tastes.
Change in behaviour only really comes from market signals. When the price of a given good rises or falls, we reorder our preferences – still in line with our supposedly innate tastes, but now accommodating the new price system.
The astute observer can see the determinism here. We are assumed to act, in essence, not only without any meaningful free choice but also as a completely static slave to our drives.
But the idea that people have wholly static tastes is not only offensive, but absurd. Any person who showed such characteristics would be considered beyond simply eccentric – indeed, they would be downright neurotic and chronically so.
Samuelson provides a caveat that sums up exactly this view of people:
What is assumed is that consumers are fairly consistent in their tastes and actions – that they do not flail around in unpredictable ways, making themselves miserable by persistent errors of judgement or arithmetic.(P. 78)
First of all, Samuelson is being far too modest here. If people are not seen to have almost wholly static tastes the theory of marginal utility is worthless. If peoples’ tastes are constantly changing due to personal development, outside influence etc. then price signals will be of secondary importance and psychological and cultural changes will have to brought to the fore as explanations for consumer behaviour toward anything beyond the most simple commodities.
This aside however, Samuelson’s vision of man is quite bizarre. He seems to assume that anyone who doesn’t have static tastes and who doesn’t lead an eccentric and neurotic existence must be ‘miserable’.
Once again we see the psychology that is so unquestionably at the heart of this theory. And what a strange psychology it is. It tells us that we have to learn to do the same thing over and over again ad nauseum, only changing our habits based on price signals (or other costs, such as time expended) and if we don’t do this we will suffer. Beyond being absurd, this is a rather morose vision where the individual is punished time and again for not treading the proverbial hamster wheel of destiny.
This reminds one of the horrifying concept of the ‘eternal return’ that can be found in the writings of the great German philosopher Friedrich Nietzsche. A wonderful depiction of this philosophical and literary device was put forward by the Irish writer Flann O’ Brien in his book ‘The Third Policeman’:
He said it was again the beginning of the unfinished, the rediscovery of the familiar, the re-experience of the already suffered, the fresh-forgetting of the unremembered. Hell goes round and round. In shape it is circular and by nature it is interminable, repetitive and very nearly unbearable.
O’ Brien is right, of course. Samuelson’s vision is not one of contentment, but instead one of suffering and interminable neurosis. It is a vision of the ‘compulsion to repeat’ that psychologists have recognised since Freud. The tendency for people – usually neurotic people – to repeat the same thing interminably without deriving any satisfaction from it. Freud, and those that followed him, recognised this as one of the most innately destructive features of the human psyche. Indeed, Freud himself came to view this as a movement by the organism toward death. And yet Samuelson assumes that something similar must be the norm!
Samuelson seems to assume that people will be miserable if they don’t engage in repetitive behaviour because they might make ‘mistakes’. At the risk of sounding a tad corny: are not the most satisfying experiences of life precisely those that come at the risk of error?
This vision, reaching back to Bentham but alive and well in the economics textbooks of today, is far more sinister and grim than the silly little graphs that represent it imply. It is, at heart, a deterministic doctrine that attempts to construct a world in which everything remains in its right place and almost nothing happens. A nihilistic vision of a world of death and purgatory that never truly moves or goes anywhere.
Pretty disgusting theory – why is it so popular?
When trying to understand the popularity of such a vision one cannot help but think of the more perverse of the old religious cults, because in many ways neoclassical economics is a cult of despair and abnegation. That it’s most fundamental psychological underpinnings manifest these characteristics is then of no surprise.
The primary reason that the theory of marginal utility – and to a large extent neoclassical microeconomics more generally – is popular is because it appeals to its adherents as a sophisticated fantasy of control.
This may seem strange. After all, haven’t we shown above that the theory of marginal utility is strongly deterministic? And wouldn’t this seem to imply that the adherent has, in fact, very little control of his life – subject as he is to primitive, static impulses and market price fluctuations? Certainly on the surface that would seem to be the case but scratch a little deeper and we find something a little different.
By being able to conceive of this great system one gains a great deal of power. Or, more accurately, in one’s fantasy one gains a great deal of power. In such a vision of the world everyone’s motivations are wholly transparent and one only need to think about so-called ‘market forces’ to understand the big questions of why everything happens – and where everything should go.
This also puts the neoclassical economist in a seat of power. Imagine for a moment the regal – nay, divine – position these people think they occupy. While the rest of humanity follows their marginal utility, the economists sit back with a panoptic, God’s eye view of the world. Like a sort of dark crystal ball that can be gazed in to in order to understand it all. The power!
The original theorist of utility was, of course, Jeremy Bentham who, as we have noted, also came up with the Panopticon. The Panopticon, as noted, was a totalitarian prison system wherein every prisoner was to be watched constantly by a central observer who monitors their behaviour. Bentham thought that this model could be extended to a variety of social institutions, giving rise to a terrifying vision of a totalitarian hell which was later to be captured in 20th century novels such as Orwell’s ‘1984’ and Huxley’s ‘Brave New World’.
Bentham’s vision was downright paranoid, of course. But it says a lot about the psychology behind his theorising. This man was not a prophet of human freedom and actualisation. No, he was the harbinger of a dark vision of totalitarian control. And his theory of utility was but another manifestation of his own slightly villainous technocratic tendencies.
This is why the theory of marginal utility is still so popular today. It satisfies the controlling desires of its adherents – if only in fantasy. It provides a sort of imaginary Panopticon in which the adherent can sit and watch humanity and ensure that they are acting in the appropriate manner. From such a position the neoclassical can then dictate to governments and populations what sorts of policies should be enacted to ensure that everyone acts as much in line with their fantasies as possible.
And then people tell me that neoclassical economics is the doctrine of individual liberty!? Please! Only a half-educated fool could think such a thing. Neoclassical economics is an advanced system of technocratic control. It has been since Bentham laid down its first postulates, since he first formulated his desires to establish “new modes of obtaining power of mind over mind, in a quantity hitherto without example.”
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Two nice talks that sort of fit with this topic are Dan Gilbert’s TED talks “Why are we happy? Why aren’t we happy?“, and the follow-up, “exploring the frontiers of happiness.”
While utility theory is not perfect, you seem fundamentally to misunderstand the concept in a way a passage you quote anticipates.
“But you should definitively resist the idea that utility is a psychological function or feeling that can be observed or measured. Rather, utility is a scientific construct that economists use to understand how rational consumers divide their limited resources among commodities that provide them with satisfaction.” (P. 73)
Economics does not claim that utility is a meaningful quantity. In fact, utility is not even really necessary for the theory, and can be expressed (and should be understood as) as a theory merely of preferences between any given consumption pairs at a given time/state. Sometimes, we can use utility functions to make the theory easier to state and more intuitive, depending on the preferences assumed, but one can always go back to the preferences point of view.
Furthermore, the axioms, are just that, axioms, and of course they do not always hold. Where they do not always hold we cannot use the simple proofs available when they do hold. This does not imply that the results of these usual proofs do not continue to hold approximately. Empirically, it has been found, for example, that the hypotheses of the welfare theorems can be significantly loosed without much affecting the outcome much. Extreme cases like violations of the transitivity axiom for preferences only occur in certain sorts of markets which can be studied specifically with this in mind.
Utility theory has it’s flaws (sometime expected utility theory does not seem to work as well as prospect theory), it is a useful tool when applied intelligently by economists.
As I said in the piece the theory does presuppose a psychology. This is then buried by its adherents. When you say:
“…can be expressed (and should be understood as) as a theory merely of preferences between any given consumption pairs at a given time/state.”
The ‘preference’ there presupposed a psychology and that is the psychology of utility. That is the psychology outlined in the first section of the post. The psychology of ‘maximum satisfaction’ and also the psychology of static tastes.
The theory literally means nothing without this psychology. It is assumed throughout. You can’t get away from it.
The funny thing is is that economists are taught to forget about it and push it to the background. But it’s always there.
This is why, when pressed on the matter economists often come out with tautologies like you just did here:
“Furthermore, the axioms, are just that, axioms, and of course they do not always hold. Where they do not always hold we cannot use the simple proofs available when they do hold. This does not imply that the results of these usual proofs do not continue to hold approximately.”
What does that mean in English? It means: “sometime utility theory is true”. Really? I would say never. But even if it is sometimes, that means it is not always true. And if one of the fundamental LAWS of economics is not true — I’m referring, of course, to the downward sloping demand curve that depends on the theory of marginal utility — then the whole foundations are rotten.
“The ‘preference’ there presupposed a psychology and that is the psychology of utility.”
There is a presupposed psychology only insofar as preferences between consumption bundles are assumed to follow certain fundamental preference axioms. These axioms make no mention of utility at all. The psychological activity that is assumed by the theory is merely for an individual to be able to specify whether they prefer one consumption bundle to another, or are indifferent between them. This is not an outlandish assumption about psychology. It can be shown that all utility functions represent a set of preferences, but not all valid sets of preferences can be represented by a utility function.
“What does that mean in English? It means: “sometime utility theory is true”.”
It means that but it means much more. The point is that in cases where it does not hold strictly, where it cannot be proven to hold absolutely because of a violation of an axiom, the result that is observed is reasonably close to the result that would be produced if the axioms were all true. This is obviously not always the case, but it has been shown to be under various circumstances, perhaps the most important being the extension of the Welfare Theorems to incomplete markets.
“But even if it is sometimes, that means it is not always true. And if one of the fundamental LAWS of economics is not true — I’m referring, of course, to the downward sloping demand curve that depends on the theory of marginal utility — then the whole foundations are rotten.”
When I say the axioms are not always true, I mean they do not hold for all types of markets. For some markets, the axioms are always true. In any case this is not the point.
The “law” of downward sloping demand (with respect to price) does not even appear as one of the most basic axioms of consumer theory. In fact, the failure of this “law” to hold for in some cases is a well studied phenomena, and such goods are called Giffen Goods. That said Giffen Goods are extremely rare, so in almost all instances, the “law” of downward sloping demand is true. I suspect you may also be referring to the “law” of “diminishing marginal utility,” which in cases where a utility function can represent consumer preferences says roughly that the second derivative of utility with respect to consumption is negative. This “law” also usually holds, but it is not a fundamental assumption and theory can be build without it. Also, it can still apply where no representative utility function exists, because stated generally, the requirement is only the preferences be convex, which does not depend on utility. This assumption is also not a fundamental “law” really. It is the preference axioms which are most fundamental.
“The psychological activity that is assumed by the theory is merely for an individual to be able to specify whether they prefer one consumption bundle to another, or are indifferent between them.”
It’s more than that. As Samuelson says (quoted above) these tastes must also be static. They must not shift through time.
“This is not an outlandish assumption about psychology.”
Yes, when you take into account that these tastes must remain static it is.
“The point is that in cases where it does not hold strictly, where it cannot be proven to hold absolutely because of a violation of an axiom, the result that is observed is reasonably close to the result that would be produced if the axioms were all true.”
Behavioral results have disproved this.
“The “law” of downward sloping demand (with respect to price) does not even appear as one of the most basic axioms of consumer theory.”
See comment below. Samuelson introduces downward sloping demand curves on the same page. The whole above quotes are pulled from the chapter ‘Demand and consumer behavior’ and this chapter deals with marginal utility and then moves onto ‘Why demand curves slope downwards’.
The two theories are dependent on one another. Look it up.
Another quote from Samuelson (same page):
“Therefore, a higher price for a good reduces the consumer’s desired consumption of that commodity; THIS SHOWS WHY DEMAND CURVES SLOPE DOWNWARDS.”
Note that the first half of the statement is the marginal utility theory, the second half leads is WHY DEMAND CURVES SLOPE DOWNWARDS.
Ben said, “Utility theory has it’s flaws (sometime expected utility theory does not seem to work as well as prospect theory), it is a useful tool when applied intelligently by economists.”
Utility theory can indeed be “a useful tool when applied intelligently by economists” but when it is the findings are shunned by the mainstream of textbook and “big name” economists.
The assumptions used in marginal utility theory — for example the rational maximizer of utility — are not at all realistic and economists will readily admit as such. But there are both strong and weak forms of the standard assumptions and one of the favorite evasions of the economist is to employ the strong form in the model and justify its quasi-realism with the weak form. The “strong form” and the “weak form” are chalk and cheese, though. There’s no correspondence between them. They are qualitatively different states, not different intensities of the same quality. Like blue and red are both colors but blue is not a “darker” red. The maximizer and the individual who “often behaves as is he was a maximizer” are incommensurable. The latter’s utility function cannot be calculated. It’s as simple as that.
The one case where utility theory makes the most sense is the one most studiously ignored by economists. This is the demonstration that rational actors pursuing their self interest in a perfectly competitive market can only achieve an efficient outcome with the additional (non standard) assumption of “complete information.” This means they would have to have perfect knowledge of not only their own utility curves but everyone else’s, along with knowing that each other person knew every other person’s utility curve.
Universal God-like omniscience is NOT a standard assumption of marginal utility theory. It is a tacit, supplementary stipulation required by the efficient market hypothesis as well as the mixed-economy mathematical hocus-pocus of the Samuelson neoclassical synthesis. The algebraists of the 1930s had to go through quite a few contortions and anachronistic diversions to cobble together their synthesis: “…a mobile army of metaphors, metonyms, and anthropomorphisms…”
Mr. Pikington
Even this –
Another quote from Samuelson (same page):
“Therefore, a higher price for a good reduces the consumer’s desired consumption of that commodity; THIS SHOWS WHY DEMAND CURVES SLOPE DOWNWARDS.”
– is incorrect.
In fact, raising the price of certain goods can often raise the demand for them. Can’t put my finger on the source right now, but I believe it was in The Economist where I read an article a few years back that showed people were more apt to buy wines and other luxury goods the more expensive they were. Obviously this is due to psychology. I’m not sure how scientific the study was or how big the sample size, but hey, it ought to be good enough for your typical economist!
This simple fact was known to me long before reading it in The Economist as I was a waiter for many years. I can attest that an extremely small number of people ever ordered the least expensive bottle of wine on the menu and I was able to use that for my own gain on many occasions. There is very little difference in quality between a $25 bottle and a $50 bottle of the same vintage yet it was not difficult at all to convince people that the $50 bottle would make their meal better since the vast majority of people know very little about wine.
If marginal utility were true, the restaurant industry would be next to non-existent since nearly everything at a restaurant costs more than simply buying the food and cooking it yourself.
Ben, you seem to be attempting to dazzle the crowd here with technical jargon. I don’t think many here are fooled. Mr. Pikington is correct in that these economic theories, and I use the term extrememly loosely, completely fall apart when human psychology is taken into account.
The only time that may be somewhat applicable is when people don’t have enough money to make ends meet and must buy the cheapest alternative. And even then people do not and will splurge on occasion so as not to be seen as poor.
Clearly having the majority of people in poverty is not the optimal situation from a purely economic standpoint as people will not be able to buy many of the goods and services others would like to produce. The less $ the majority has means less $ that can be extracted from them by the wealthy, who will eventually see their wealth diminished. Of course it’s all relative – if the economy collapses, even a billionaire reduced to a millionaire will still be able to buy and sell the majority many times over. But then it’s really a question of power more than amassing the largest sum possible for yourself, isn’t it? And then we’re right back to the psychology of what really makes people tick.
All I can say is you can try to blind people with economic “science”, but there is none so blind as he who will not see.
Excuse me, but utility is not axiomatic. In fact, the whole point is that human nature is full of contradictions and idiosyncrasies that make utility the exception instead of the rule. Even with basic commodities like rice and wheat there are personal and cultural preferences that override “price signals” and the claptrap that surrounds them. Philip is quite correct. The whole edifice of neoclassical economics is flawed.
That utility is not axiomatic in economic theory is precisely the point I am making. Preferences are axiomatic, in that they are assumed to follow a set of axioms which may not be true in every situation. They hold well enough in a large number of circumstances to produce useful results.
So preferences are axiomatic in that they follow from certain other axioms — and what pray tell are those axioms that form the basis of the preference axiom?
The four fundamental axioms are:
1) (Completeness) For any consumption bundles A and B, either A is preferred to B, or B is preferred to A or regarded as indifferent to A.
2) (Reflexivity) For any consumption bundles A and B, if A = B, then A is (weakly) preferred to B. Weakly means it A is preferred to B or A is regarded indifferently to B.
3) (Transitivity) For any consumption bundles A, B, and C, if A is preferred to B and B is preferred to C, then A is preferred to C.
4) (Continuity) For any consumption bundles A, B and C, if A is preferred to B, there exists epsilon such that if the difference between B and C is less than epsilon, A is preferred to C.
“The four fundamental axioms are…”
Note that all of these so-called ‘axioms’ depend on static and definable tastes — because all these axioms are based on utility theory. We dealt in a comment above about why static tastes are idiotic. And what about definable tastes. I’ll reiterate from the piece:
“In fact people often make choices that lead to less than satisfactory outcomes. This seems to be by design rather than anything else. If we always made the choices that ensured constant satisfaction we would soon find that we had no motivation to do anything new and would simply sit and stew in our own narrow and static world. That we occasionally make less than satisfactory choices allows us to continue to pursue satisfaction all the more. Nothing would smother our drives, our ambitions and our aspirations quite like a constant state of satiation.”
One more note on this aspect because I know some joker is going to chime in and claim that demand theory can be articulated without the utility theory. This is absolute nonsense. Consider Samuelson:
“A century ago, the economist Vilfredo Pareto discovered that all the important elements of demand theory could be analyzed without the utility concept. Pareto developed what are today called indifference curves.”
I’m not going to go into the nitty gritty here, but what follows shows just how sloppy a thinker Samuelson was.
On the very next page Samuelson talks about the ‘Law of substitution’. This is absolutely fundamental for the indifference curves to work. Now, remember indifference curves, according to Samuelson, show that “all the important elements of demand theory could be analyzed without the utility concept.”
But what does Samuelson do? Well, he drags back in the utility concept. Again note, this is literally a few paragraphs down from his assertion regarding the redundancy of utility theory.
“The slope of the indifference curve is the measure of the goods’ relative MARGINAL UTILITIES, or of the substitution terms on which — for very small changes — the consumer would be willing to exchange a little less of one good in return for a little more of the other.”
The indifference curve is, at best, another means of demonstrating the psychological assumptions of utility theory. At worst, it is just utility theory in disguise.
We still have the vision of the consumer that responds to static choices and prices, trying to get as much bang for their buck as possible. In short, we still have the lifeless parody of a neurotic bargain hunter who gets nothing else done because he spends his time stalking the budget shelves of outlet stores.
@PP 7:13
Err. they don’t?
The axioms say absolutely nothing about time. I could very well rewrite tham “at time t… ”
I haven’t met any economist who would say that the demand curve/preferences etc. are static in time.
What I can say is “there exists a set of people S, such that they prefer good A”. S doesn’t depend on individual people – members can leave and join (as they will), by either dying/being born or a simpler feat of changing preferences. As long as there’s good A, there are people who prefer it to some other goods (assuming it’s not the only choice) – otherwise there wouldn’t be A.
Indeed, the whole demand curve stuff is based on the set not being static – you just say economy allows it to change due to the price only. I’d strongly dispute that (if nothing else, economy recognizes supply/demand shocks, which drive price – so it’s not the price that is driver, but something else).
@ vlade
For the last time… Samuelson says that consumer tastes must be relatively static. So, if you want to hear an economist say this READ SAMUELSON or just READ THE QUOTES IN THE PIECE.
AGAIN AND FOR THE LAST TIME. Samuelson:
“What is assumed is that consumers are fairly consistent in their tastes and actions – that they do not flail around in unpredictable ways, making themselves miserable by persistent errors of judgement or arithmetic.”
If tastes are not assumed to be fixed for every individual person then the term ‘utility’ (i.e. maximum satisfaction) is completely meaningless because their satisfaction with a given product will change through time.
If this is true then they are clearly not making decisions based on so-called ‘utility’ but instead are making decisions based on whims and the like. Thus they ARE NOT CALCULATING. And they are NOT CONSUMING IN THE RATIONAL MANNER THE THEORY ASSUMES.
This is not complicated at all. It really isn’t. Either people have set preferences which they try to maximise through price movements (the utility argument) or they do not. If they do not, the utility argument is bunk. Really simple.
Again this shows that it isn’t that economists cannot understand, it’s that they don’t want to understand because it f&*ks with their totalitarian worldview where they can ‘understand’ people’s consumption decisions.
(P.S. Your supply/demand argument is tedious. Everyone knows that market prices [supposedly] reflect suppl/demand. That was implicit in all my statements.)
“…so it’s not the price that is driver, but something else…”
Actually I should clear this up, because that supply/demand stuff you just wrote is very sloppy.
Yes, the price is driven by ‘something else’. That is (if you’re a neoclassical): the interaction between supply and demand. Since we’re only dealing with the demand side in the piece we can say what the driving force is (supposedly)… wait for it…
Marginal utility… duh! That’s what we’re talking about.
I’m saying that the term ‘marginal utility’ is meaningless because people don’t consume in line with ‘maximum satisfaction’. They don’t consume in line with static preferences. And — hence — they don’t consume in line with so-called ‘marginal utility’. Because ‘marginal utility’ is a meaningless phrase that attributes a dumbass psychology to the individual which they do not possess.
Wow, the swearing and the CAPITAL LETTERS are finally out.
I’ll tell you what is tedious…
I mean, seriously, look at one of the first paragraphs here: “As any even a half-blind observer will note this is complete claptrap. People often make choices that turn out later not to ‘maximise their satisfaction’ (whatever that crude phrase might mean). Have you ever gone clothes shopping and bought an expensive pair of jeans that you never wore? Well, that’s hardly utility maximising behaviour.”
Do you really not see the lapse there? That’s not a counterargument, do you see that? Requiring that everyone have a crystal ball about the future does not disprove the idea that people often make choices that they think will be better than the alternatives, even if they don’t work out as the future unfolds. The future is uncertain, you do understand that, right?
You do understand that even if the fundamental basis of economics (and most economic analysis) is flawed, you can still look really foolish by writing paragraphs like you did above?
And your responses to these commenters…it’s not helping. Seriously. Your lack of humility and your lack of appreciation for the huge ideas you are trying to grasp is…well, foolish is the only word I can think of.
Whatever. If this is maximizing your utility, go ahead.
The axioms are carefully chosen so one can do math with preferences, not because they reflect what people really do or how they behave.
The big problem with macroeconomics in particular is that it is VERY hard to do experiments, and without experiments its very hard to test the predictions of your models, and if you can’t test the predictions of your models, you can’t figure out which models are wrong and which ones make sense.
All the hand wringing by macroeconomists (at least the ones who have been paying attention) is, I think, due to the fact that their models utterly failed to even hint at the current mess the worlds advanced economies find themselves, and they fail to provide any useful guidance on what to do about it. It’d be like proposing Newton’s law, only to find that it doesn’t predict anything, and that you can’t use it to do any engineering. In other words, the models are wrong.
“Requiring that everyone have a crystal ball about the future does not disprove the idea that people often make choices that they think will be better than the alternatives, even if they don’t work out as the future unfolds.”
Yes, it does. because utility theory depends upon people deriving the ‘maximum of satisfaction’. That’s really very clear.
The fact that the future is uncertain does, in fact, do it damage. Because we need to be pretty much certain about what satisfies us if we are to be able to ‘maximise our utility’. I don’t think you’ve grasped the arguments here…
You are correct only in the narrowest way possible. There are many economic models which use different assumptions. Some models use such simple agents and they can give us very useful predictions. Some other models use much more complex assumptions to account for time lag, uncertainty, etc… You are complaining that economics is not describing reality. But that’s not the goal. The goal is to model reality. Models necessarily involve some simplifications. The important question is not whether those simplifications are realistic, it is whether those simplifications give us good predictive models. Sometimes, the answer is yes, sometimes the answer is no. It’s that simple and involves neither totalitarian tendencies nor stupidity or dishonesty.
“Furthermore, the axioms, are just that, axioms, and of course they do not always hold. Where they do not always hold we cannot use the simple proofs available when they do hold. This does not imply that the results of these usual proofs do not continue to hold approximately.”
As I was schooled during my PhD candidacy exam, if the assumptions underlying the proof do not hold exactly, the results of the proof cannot be assumed to be even approximately correct. You can’t say anything about them: in particular, saying “the assumptions are sort of correct so the results are approximately right” is pure junk reasoning and easily refuted. In the case of microeconomics, the results must be judged empirically. Finding counter-examples to the theoretical results of marginal utility (which exist) implies that assuming the results generally hold is just a hobby, not science.
You are misunderstanding me. Of course, one can not make such a logical leap. What I am saying is that their is empirical and theoretical evidence that in a number of particular cases, the small deviation in assumptions produces small deviations in results. This is by no means assumed. It is shown for any such case.
Also, the statement you quoted is absolutely true from a logical perspective. In it I made no claims that the axioms were unnecessary for the truth of theorems based on them. I said only that the theorems may hold without some axioms. They may not as well, and I did not state otherwise.
You are saying less and less with more and more words. What axiom is at the basis of this phenomenom?
Let me try to make the statement more clear. It is really something with which I’m sure you’d agree. If a set of axioms A can be used to prove a logical statement S, and an a subset B of A is false, S is not proven with the original proof, but whether or not S is true we cannot say based on this information alone. It is possible in particular instances that we may be able to produce a proof that S is always false if B is false. It may also be possible in some instances that we can prove that A\B is sufficient to prove S. Or we may know of know proof either way.
Be careful. You’ve sent him into ‘economist spouting tautology mode’. It’s a downward tailspin from here…
In other words, something may be true or may not be true, and we might be able to prove its true, or might not be able to prove its true.
It seems to me you are just saying that context is everything and therefore the “laws” that Samuelson and neoclassical economics take for granted are not laws at all — they are mere assertions that may be more false than true.
Thanks for the warning Philip :) And thanks for more of your excellent debunking of the utter claptrap that is neoclassical blah blah economics.
We should be able to clear this misunderstanding up with a little bit more Samuelson. (It’s amazing how many economists don’t ACTUALLY understand why certain theories are necessary for the neoclassical edifice to function as theoretically sound).
I quote Samuelson above:
“The fundamental condition of maximum satisfaction or utility is therefore the following: A consumer with a fixed income and facing given market prices of goods will achieve maximum satisfaction or utility when the marginal utility of the last dollar spent on each good is exactly the same as the marginal utility of the last dollar spent on any other good.”
He continues:
“Why must this condition hold? If any one good gave more marginal utility per dollar, I would increase my utility by taking money away from other goods and spending more on that good…”
Do we see what is happening here? Tastes are assumed to be fixed. As the price falls the FUNDAMENTAL RULE (yes, Samuelson calls it this, give me a moment…) states that people must ‘automatically’ take money away from the now more expensive goods and channel it into the cheaper good.
This assumes a very specific psychology and that is the psychology of the utility-maximizing individual. The individual whose choices are based on utility-gains above all else.
Now why is this so fundamental. Well, as I said above the ‘LAW’ — absolutely fundamental for neoclassical economics — of the downward sloping demand curve depends on this. Samuelson again:
“Using the FUNDAMENTAL RULE [of consumer equilibrium based on marginal utility and prices] for consumer behavior, we can easily see why demand curves slope downwards.”
And voila! Neoclassical economics finds its downward sloping demand curve. To remind everyone this is the first half of the supply-demand equilibrium that neoclassicals hold up as a holy law. If one side of this is even remotely flawed, the whole edifice falls apart.
Shocking though that most economists don’t even understand this. They really think that all the pillars in neoclassical economics stand or fall on their own.
It is rather obvious to an observer that this law does not work. We do purchase items on the basis of price only partially, namely if products are really 100% equal. To name a product that is successful on the exact opposite of this economic law, look at Rolex. People want a Rolex exactly because it is expensive and because the firm instilled in the market that prices will only go higher not lower. This idea makes the product very attractive to many buyers. It would be easy for this company to produce many more watches and at much lower prices but they use an upside down approach when looking at this economic theories.
Meaning, they may produce a higher quantity of watches for a short period after which they will lose that most important advantage and I am certain, the short term profits of producing higher volume would expire rather soon and volume would collapse even as prices are much lower.
In other words, we buy a product on the basis of what it represents emotionally and on what we think is the society’s value scale associated with a product. The actual value often becomes secondary but the image it transports is more important in many cases.
The important thing to realize is that economics makes no claim of what the “actual value” of a Rolex watch is. Utility properly understood merely ranks goods according to preferences. Whatever preferences people have over Rolex watches determines their “value” as far as consumer theory is concerned. These preferences can take into account any emotional value you like.
I think that luxury items – like a Rolex watch – are anything but rational purchases, unless the rationale is to increase your social standing (like a more brightly feathered bird) thereby bettering your position in the pecking order and attracting a better (trophy) mate.
The rational utility here is pure reptilian biology. Our most primal yearnings have long been used by marketeers to shill just about anything.
The very idea that psychology plays no part in our buying decisions is truly insane.
If classical economics is built on such a shaky foundation then it is not hard to understand why so many people who believe that Adam and Eve frolicked with dinosaurs 6000 years ago in the Garden of Eden also claim to be Free Market fundamentalists. A rotten apple doesn’t fall far from the Tree of Knowledge.
Samuelson is being slightly loose in his use of language, in that much of what he says could be expressed without resorting to the concept of utility, but leaving that aside, your problem with consumer theory appears to be that “preferences are fixed” (I presume you mean with respect to prices). Imagine if this were not the case. Then construct new consumption bundles which are pairs of what were previously considered consumption bundles, and prices. The preferences over these new consumption bundles will be fixed in the necessary manner. In any case, as I have already said, demand curves which are not downward sloping are handled just fine and are called Giffen goods.
“Samuelson is being slightly loose in his use of language, in that much of what he says could be expressed without resorting to the concept of utility…”
No, it cannot. People need to respond to prices almost perfectly in line with their static preferences in order for demand curves to slope downwards. If they responded in any other way, the demand curve would be unpredictable. Which leads to…
“Imagine if this [i.e. non-static preferences] were not the case. Then construct new consumption bundles which are pairs of what were previously considered consumption bundles, and prices. The preferences over these new consumption bundles will be fixed in the necessary manner.”
No, by definition they would not be fixed. You’ve just said: “Imagine if the bundles were not fixed. Now constitute new bundles. They are now fixed.” That’s a tautology (once again).
The point is, if you send someone into a shop and ask them to choose fifty items and then send them in shopping again they will probably come out with different bundles. This wreaks havoc on the theory because it means that people respond to other factors that are far more important than price movements. They won’t just be watching prices. Instead they’ll be responding to different personal choices as their tastes change through time.
I’m not discussing Giffen goods here. That’s off topic.
We’ll quote Samuelson (again), note that this is included in the piece:
“What is assumed is that consumers are fairly consistent in their tastes and actions – that they do not flail around in unpredictable ways, making themselves miserable by persistent errors of judgement or arithmetic.”
Economists make no claim that preferences must be fixed over time. I took you to mean fixed over price. Over time, nothing prevents someone from changing his or her preferences.
“You’ve just said: “Imagine if the bundles were not fixed. Now constitute new bundles. They are now fixed.” That’s a tautology (once again).”
If this is your interpretation of what I said perhaps I have not been clear enough. First we have a bundle, say a vector of good quantities Q. Now what I am saying is that if we construct a new bundle B = {Q, P}, where P is the vector of good prices, and look at preferences over B, they are fixed relative to time.
““What is assumed is that consumers are fairly consistent in their tastes and actions – that they do not flail around in unpredictable ways, making themselves miserable by persistent errors of judgement or arithmetic.””
Here Samuelson is again using loose language. Strictly we only need consumers not to flail around in the decision they would make at the exact same moment. Stability of preferences over time can be used to prove various additional things, but it is by no means necessary for consumer theory.
“Strictly we only need consumers not to flail around in the decision they would make at the exact same moment.”
That doesn’t make any sense. How would a consumer ‘flail around’ in a decision that is already made? If they make a decision at a given moment then, by definition, they are not flailing around. The above is a meaningless sentence insofar as it doesn’t seem to understand what the term ‘decision’ means…
“Stability of preferences over time can be used to prove various additional things, but it is by no means necessary for consumer theory.”
It absolutely is and Samuelson says it — but you dismiss this as if he doesn’t know what he’s writing.
That doesn’t make any sense. How would a consumer ‘flail around’ in a decision that is already made?
Obviously they are referring to multiverses. Neoclassical economists were intuitively (devine inspiration?) aware of theoretical cosmology before cosmologists. In an alternative universe another you would make the same decision at any given simultaneous moment when confronted with the same good bundle. Duh!
For this very reason I would not have chosen the phrase “flail around,” but think of it as meaning, roughly, that preferences are not random variables.
Samuelson is basically referring to a special case of a more general theory than he explicitly outlines, and he is not making his statements with absolute mathematical rigor, because his goal is pedagogical. Frankly, a better source document would be a more rigorous statement of the general theory from the literature.
“Frankly, a better source document would be a more rigorous statement of the general theory from the literature.”
I’m not playing that game. Then no-one would understand what I was criticising. Evasion of the Schoolman variety.
“…but think of it as meaning, roughly, that preferences are not random variables.”
Yeah, I think of the concept that way too. The problem is that many preferences are pretty much random variables. People often make choices fairly randomly and not subject to any rationality or utility-maximising preference. That was precisely the point of the piece. That is the ‘psychology’ I keep talking about and you keep evading by bringing up irrelevant technical details.
The thing is many of the technical details are relevant to your argument.
If you are arguing that someone who has read only Samuelson’s textbook may sometimes misapply economic theory and come up with incorrect results, I agree with you. Fortunately, economists usually know better.
Actually, that last comment deserves a requote from the piece — because this is just SOOOO typical:
“Of course, the critical observer can see that this is a strongly psychological argument with absolutely psychological foundations, but Samuelson doesn’t want to know anything about this.
Why? Because that would lead him to be questioned regarding the psychological basis of his assertions and that would cause his neoclassical worldview to crumble, strip him of scientific authority and show him to be doing what he is, in fact, doing; namely, using a scientific ‘style’ to try to convince the reader that the unlikely psychology that he puts forward is in fact objective, scientifically verified reality.”
@Ben
Please respond to this and stop naval-gazing about how much more you know about the abstract entity known as ‘economic theory’:
“Ben: …but think of it as meaning, roughly, that preferences are not random variables.
Phil: Yeah, I think of the concept that way too. The problem is that many preferences are pretty much random variables. People often make choices fairly randomly and not subject to any rationality or utility-maximising preference. That was precisely the point of the piece. That is the ‘psychology’ I keep talking about and you keep evading by bringing up irrelevant technical details.”
@Phil: It does seem pretty dishonest/lazy to pick out small bits of a text from a single economist’s text, claim that idiosyncrasies in his explanation are widely held and fundamentally the core beliefs of economists, and then critique all economics based on a few sentences you sniped from the book……all because you think economics is so simplistic/atomistic as to be absurd.
I mean, hypocrisy doesn’t make you wrong, it’s just weird that what you have such a problem with when it comes to economics, its oversimplification to the point of not even reflecting reality and thus being useless, is how you chose to set up an argument against economics: oversimplification to the point of not reflecting the theory, but then claiming it doesn’t matter.
@ Erv
I didn’t just ‘snipe’. I critiqued the major introductory text. Referenced other critiques and responded to critical comments. I don’t see how I could do more.
Your comment is very wishy-washy. It just assumes that ‘somewhere out there’ is a sufficient rebuttal. In that it is akin to faith rather than reasoned argument. If you are happy with faith and find it well placed in a watery and depressing doctrine that’s fine. My arguments are aimed at people with open minds that are receptive to reasoned argument.
@Phil: You said “I critiqued the major introductory text.” So this is a good point. You did critique A major INTRODUCTORY text. By Samuelson. So at best, you have critiqued introductory ideas in a given textbook from a single economist. I think it is suspect for you to try to pull out a critique of all economics from such a directed critique, even assuming that you have done a perfectly adequate job of such a critique, which I don’t think you have.
Ben in turn tried to argue with you and engage on this broader level that you seemed to want to go…that is, talking about economics as a whole. When he presented you with a richer understanding or interpretation beyond what an introductory text had to offer, you defended yourself by falling back into Samuelson alone. So either you want to debate whether Samuelson is right or you want to have a broader discussion about economics as a whole. But if you want to broaden the scope of your points, it seems like a mistake to keep insisting that we only discuss Samuelson. If that’s all you want to do, congrats, again you have at most critiqued a single, if widely used, text by a single economist.
Many economists would agree with you that introductory texts are insufficient (Brad Delong posted on this recently) and in some cases worthless for the most part. Some are not much more than right-wing propaganda (looking at you, Mankiw). I would agree that most need to be rewritten to address concerns like yours. That is, we agree, the text is wrong, but that doesn’t make economics wrong.
I’m sorry you want to only discuss Samuelson, because it seems like there is a rich discussion to be had here. But if you can’t move beyond insisting we only talk about the exact words of Samuelson, then all we’re doing is talking about one introductory textbook.
That said, I do have opinions on this beyond simply a meta discussion…I might actually go a different direction from Ben and flat out disagree with you that people are as unique as you claim for the most part. The freedom to choose a different set of 50 items each time I enter a wal-mart isn’t a very appealing idea of freedom or idea of what makes me a unique individual. At the same time, I still mostly buy the same crap over and over: detergent, pbj and bread, tshirts, shoes. The world can still be a beautiful and complex place even given my banal purchases that economics does a good job of modeling.
“So this is a good point. You did critique A major INTRODUCTORY text. By Samuelson. So at best, you have critiqued introductory ideas in a given textbook from a single economist.”
So, then the theory of marginal utility that is being taught in the most read introductory textbook ever written is incorrect? Okay. Fine. I’m cool with that. That, to me, raises questions about the theory. If you’re happy to believe otherwise then carry on…
You are being remarkably obtuse. Samuelson was one of the most important forces in defining what proper methodology was for economics. And Pilkington is 100% correct in saying tastes must be static over a consumer’s lifetime. I discuss how that is necessary for the proofs to work in my Appendix 1 in ECONNED. Steve Keen has a longer-form discussion in Debunking Economics.
It’s even worse than he suggests: tastes are consistent across ALL consumers. The classic proof rely on a single consumer to stand for all! I am NOT making this up.
Your statement is simply untrue. The onus is on you to show Pilkington is wrong He’s provided references. Where are yours?
“Extreme cases like violations of the transitivity axiom for preferences …”
Hilarious. In everyday life, of course, transitivity of “preferences” is violated massively and constantly.
Yes, it’s true that Samuelson was trying to banish the dependence of economic theory on utility (and Philip is perfectly correct to say that the psychological assumptions merely went underground). So now we have “revealed preferences”. That’s supposed to be “scientific”? How about “magical”?
RP has been taken apart by internal critiques by Sen and especially Stan Wong. But that doesn’t end the problems. It rests upon a complete logical fallacy, for one thing. Secondly, “preferences” are intensely context-dependent, as a moment’s thought will demonstrate. And anyone who has actually done empirical and historical work to determine what the goals, aims, intentions, desires, etc. (“interests”, “utilities”, “preference orderings”, “probability assignments”) of real people are knows damn well how hard it is, even with a deep familiarity with and examination of all the available historical evidence. And how ridiculously facile it is to infer a specific set of “preferences” from actual behaviour (simplistically and often falsely rendered as “choices”) — let alone to then take that inference and generalise it as some portfolio of preferences that agents take with them and consult from one context to another. I’m not a big fan of blanket philosophical theories like the so-called “Duhem-Quine” thesis, but here it applies with spades. There is literally an infinite number of perfectly consistent and perfectly plausible sets of “preferences” one could attribute to a person based on examination of any one set of actions.
“This does not imply that the results of these usual proofs do not continue to hold approximately.”
Oh yes, “approximate truth”, that all-purpose get-out-of-jail-free card. What “approximate” actually amounts to is never defined, of course. The fact that slight changes in parameters can completely reverse causal patterns is never acknowledged. The fact of the matter is this: axiomatically derived conclusions hold only — only! — in systems which exactly correspond to the model’s assumptions. “Approximation” and “external validity” can *never* be assumed, and must be demonstrated, empirically, case by case; even then, “empirical fit” doesn’t necessarily say anything about the correctness of the model. (Actually, I’d make a stronger argument, but that’s enough for now….)
You seem to have a peculiar definition of the word “axiom”.
I have the definition used in math and economics. Axioms are assumptions on which a larger theory is built. We do not claim that they must hold, but only show what can be inferred if they do.
Even in the mathematics of set theory, there are multiple axiomatizations. This is not a flaw.
I call bullshit.
An axiom is a statement that is posited to be true. You can’t have axioms that are only true when it is convenient for people like you.
Let’s look at Euclid’s axioms of geometry. One of them, the parallel postulate, can be removed, and we can develop a non-euclidean geometry which is the basis of much of modern physics. Was Euclid wrong? No, his theory is absolutely correct for his chosen axioms, which are in turn extremely reasonable in many situations. I think you likely agree with what I am trying to say in defining axioms, as what I mean to say has no important consequences, but is merely a question of semantics. Perhaps I am being insufficiently clear.
By the way, while many of your comments suggest that we probably have a number of disagreements, I look forward to reading your book, in part because one must always guard against confirmation bias, especially in areas about which one has long-held views based on his training in a particular field. My respect for Harry Shearer also compels me to take your book seriously enough to read. I suspect I will be making a lot of notes with my kindle on points of disagreement, but such a process is a healthy exercise.
Wow! Your belief in the superiority of your intellect is downright delusional.
From your grandiose perspective, do all the counterarguments to your faith presented here simply corroborate your exceptionalism instead of encouraging any reassessment of your beliefs?
Mille regrets for reminding you that you are just another biased and mistake-prone human being like the rest of us.
You seem to have interpreted my post to mean roughly the opposite of what I intended. It is because I recognize I am not all-knowing and have bias that I intend to read ECONned. I want to expose my beliefs to criticism to test and modify them as necessary.
Independent of Ben’s other statements, but his usage of “axiom” is indeed the standard modern one, and should not be so criticized.
The purpose of axiomatization is usually organizational, to clearly identify assumptions and rigorously & systematically present arguments in standard terms and forms. The truthiness, the applicability of these assumptions and their consequences in a particular situation is another question.
I vaguely recall the Theory of Marginal Utility as a justification for PMs for money. If I recall, once one has enough shiny metal to satisfy his need for shininess then it makes sense to use any additional shiny metal one obtains to trade with other people so they can satisfy their need for shininess.
Great analysis, Yves
you should probably look at the title of the post again. ;)
oh, sorry
It’s a bit like a religious fundamentalist endlessly reinterpreting scripture as new phenomena emerge, rather than simply questioning the scripture itself in light of the new empirical evidence. Philip P
Actually, according to Christianity, Scripture itself is “Living”. That could mean via new inspiration from the Holy Spirit or perhaps the actual text changes if one assumes that God can act in the past as some do. For instance, if I pray for a $100 today and a check for that amount arrives 15 minutes later in the mail, did God know a few days in advance I would pray for $100 or did He act in the past as soon as He heard my prayer so that the check would be sent early enough?
But I note that Calvin “reinterpreted” away the prohibition against usury between fellow countrymen in Deuteronomy 23:19-20. He turned out to be wrong, imo. So Scripture 1, Calvin 0.
Calvin can reinterpret my ass hairs as his fur coat. A hateful man with a hateful plan.
A hateful man with a hateful plan. YankeeFrank
If you mean “Dominionism”, I agree. Christians are to influence by example not by unjust power over others.
Dominionism is bad, yes, but predestination, “total depravity”, all of it, is a life-denying horrorshow based on notions of an exclusive “elect” versus those “not elected”. Jesus was way cooler than all that.
Agreed. People should just read the Bible for themselves, in my strongly held opinion. Every church I’ve attended from Roman Catholic to Baptist including the Calvinists have managed to misinterpret Scripture. The Calvinists are the prickliest and most arrogant though. Poor things!
In all fairness to Bentham, the Panopticon was supposed to be a humane way of reforming criminals, not a Brave New World.
Bentham was responding to the fact that people convicted of a variety of crimes were subject to all kinds of bizarre and brutal punishments that did nothing to actually ‘help’ them to adjust to normal behaviour (i.e. *not* stealing, *not* killing, etc.).
The Panopticon was supposed to help people internalise the prevailing norms of society as to what was acceptable and what was not *without* there being any physical brutality or coercion. You always had the option to *not* internalise social norms, but then you’d not be let out.
I’m not saying that that this isn’t a frightening vision, but it wasn’t a system of control and should be understood in its proper context.
Bentham is quoted directly above:
For him the Panopticon is “a new mode of obtaining power of mind over mind, in a quantity hitherto without example.”
You can tell Jeremy Bentham to ‘get stuffed’, but it would be redundant; he is displayed fully stuffed at the University College of London.
Actually, its a system of total psychological control. Imagine always being watched and judged, and in a cage. If you behave in that cage according to the accepted norms (whatever they are for someone in a cage) you may be let out at some point in the future? Its a softer form of brutality that doesn’t perhaps leave physical marks but I’d imagine many people would rather be whipped and water-boarded than have to put up with that for any amount of time.
It seems that every time a British philosopher promoted some school of thought to underwrite the power and wealth of the empire, they were rehashing Plato. Of course, no person would pick what is anything other than what is good for him/ herself, even trying to maximize benefits of the choice. The problem is: How do you know what is really good for you, and not what seems good? And of course, what if what is good for me in reality comes at the expense or loss for someone else? Cui Bono?
>> But you should definitively resist the idea that utility is a psychological function or feeling that can be observed or measured. Rather, utility is a scientific construct that economists use to understand how rational consumers divide their limited resources among commodities that provide them with satisfaction. <<
Wow! So much bullshit, all tightly packed in two average length sentences! Now, that's quite an accomplishment.
Thank You Philip Pilkington … I have long followed Steve Keen and you have captured a most important point, the fallibility of the basis of the neoclassical economist.
My only response to economists these days: show me your experimental data.
It’s quite a funny exchange; from the commenters and the post author we hear plenty about axioms, utility, the sloppiness of Samuelson, etc. The level of the discussion reminds me of high school arguments where the smart kids didn’t show up.
For the record, I have used utility and marginal utility for estimating performance of systems that have nothing to do with economics. The theoretical results correlated well with experimental results. Or may be I was sloppy.
Good input. Not. Essentially amounted to ‘I’m smarter than you childishness’. No coincidence you mentioned high school.
“The theoretical results correlated well with experimental results. Or may be I was sloppy.”
Yes, you were probably sloppy in your experimental data and probably massaged it to fit. This guy sums up the intellectual crimes committed by the people you refer to as the ‘smart kids’:
http://www.google.ie/url?sa=t&source=web&cd=2&ved=0CCUQFjAB&url=http%3A%2F%2Fwww.tcd.ie%2FEconomics%2FSER%2Fsql%2Fdownload.php%3Fkey%3D236&rct=j&q=econometrics%20massage%20data&ei=Xa-JTpCkLJOS0QXHxangDw&usg=AFQjCNG-K_dx-1phSZl_mgsg-OYnz3pr6A&cad=rja
“For example, econometrics is often characterised by data mining and a prioristic conclusions; researchers massage results so as to produce an outcome that accords with personal opinion. This means that the theory has not been tested and therefore has not been subjected to the falsification principle. Econometricians rarely try to find out if there is another fit to the data, “acting as if the data admitted only a unique inference”. This was described by Solow (Blaug, 1992), in discussing the significance of econometrics for economics as “the biggest sin of all”. In Kenen’s (Blaug, 1992) words “It is not enough to show that our favourite theory does as well as-or better than-some other theory when it comes to accounting retrospectively for the available evidence”. It is difficult to disagree with Mayer (Mayer, 1993), who reports that the practice of running 30 regressions and only publishing the one that confirms a hypothesis is widespread, when he concludes that “this shouldn’t be done in hard testing”.”
Econometricians themselves — when they are honest and self-critical (many aren’t because they aren’t scientists) — often admit this. Bill Mitchell is always harping on about it and doing posts showing how certain economists massage data to ‘prove’ that certain policies work or don’t work.
Great post and fascinating exchange.
Samuelson’s non-sense is evident in his claim that utility is a “scientific construct.” Where is the data to affirm his claim that consumers really have fixed preferences that lead to maximum satisfaction? No human I’ve ever met conforms to this economic phantom.
The National Institute of Health (NIH) announced that they were going to start using economists instead of rats in their experiments. Naturally, the American Agricultural Economics Association was outraged and filed suit, but NIH presented some compelling reasons for the switch:
1) NIH lab assistants become very attached to their rats. This emotional involvement was interfering with the research being conducted. No such attachment could form for an economist.
2) Economists breed faster.
3) Economists are much cheaper to care for and PETA won’t object regardless of the experiment.
4) There are some things even rats won’t do.
However, it is difficult to extrapolate test results to human beings.
That’s the funniest post I have read in a long time. Thank you for bringing some levity to the unleavened discourse of economics.
Perhaps the first experiment should be to put economists in a Panopticon and see if they “reform” their behavior. Who could stomach watching them endlessly though?
All you need to know about utility is
1) that maximising it based even on the consumption of a small range of good: as little as 10, is too complex and time consuming to do.
2) People demonstrably don’t maximise utility when faced with making choices between a range of commodities.
3) There is no way of aggregating individual utility maximising decisions to a market demand curve.
Point 3) means that it remains in the realms of psychology rather than becoming an economic concept. The extent to which it is useful psychology is another matter.
Interesting post. If people are rational shoppers, then the gigantic amounts of money spent on advertising and marketing are a waste. I think people often are rational, but simply not interested in comparison shopping; and they maximize their pleasure by not thinking about the pros and cons of — say — different health insurance programs or different hospitals. A lot of buying is done because it’s convenient — the close store, rather than the more distant store; because you’re bummed out and want the lift that come from spending money; because you’re angry at having to be careful with money; because you are made anxious by what you will have to learn to make a rational choice — this brings us back to health plans; because an ad had told you that this object will make you happy; because you don’t have the time to make a careful decision… And on and on… All these can be rational decisions that maximize pleasure, but they do not lead to prudent buying.
Eleanor,
Excellent points and they remind me of a joke I heard back in the 90’s.
Two Russian mobsters are at a night club chatting and then they both realize that they are both wearing identical Armani suites. One says to the other, “I paid five thousand dollars for this suite”. The second mobster says “Hah. I paid seven thousand dollars for MY suite”. A third person nearby overhearing the conversation says to her friend, “see
Natasha, with good marketing you can get almost anyone to believe anything, want anything and pay whatever price”.
OK, joke on me, I meant suits not suites. Been thinking too much about some upcoming hotel reservations.
A lot of buying is done because it’s convenient — the close store, rather than the more distant store; because you’re bummed out and want the lift that come from spending money; because you’re angry at having to be careful with money; because you are made anxious by what you will have to learn to make a rational choice — this brings us back to health plans; because an ad had told you that this object will make you happy; because you don’t have the time to make a careful decision… And on and on…
Eleanor, I think you’ve hit on something really important here. Samuelson imagines a perfect consumer; someone who reacts in a completely appropriate manner to price signals and doesn’t buy anything without reading the most recent “Consumer Reports” article on such objects, thus maximising his/her satisfaction in terms of features, price, quality, durability, etc. This is probably a useful theoretical construct, but it breaks down badly in the real world as it runs into actual people. (Note that signals about “features,” “quality,” and “durability” are not the same as signals about price, but they do relate to the ideal of a “perfect consumer.”)
Now let’s go a step further and imagine that everyone is a “perfect consumer.” This is probably still a marginally useful construct. However, when we get to the real world, consumers receive signals about many, many more issues than price, which is where Eleanor’s post comes in – she identifies the important issue of noise, which frequently overwhelms the other signals.
So as I see things, an economist can build a graph of marginal utility, but to be intellectually honest, s/he must also build in a level of “noise” and identify each of those “noisy” inputs; the “perfect consumer” lacks sleep, doesn’t like American cars, hears enormous amounts of advertising, has an awareness of what is fashionable and what status signals a purchase might send to the other educated apes in his/her tribe. The “perfect consumer” also prefers blue to red (and therefore buys the blue Camry for twice the price of the red Corolla s/he set out to buy…)
“has an awareness of what is fashionable and what status signals a purchase might send to the other educated apes in his/her tribe.”
Consumers are actually even more complicated than that. Constituents of different classes and subcultures are as often signaling to other UNeducated apes in their tribes. Hence the unaccountably enduring popularity of mullets and baseball caps.
How big of an industry is chiropracty or homeopathic medicine?Why do people still buy in to the junk science when it has been debunked OVER AND OVER AGAIN AND AGAIN? A lot of those self-help people peddle BS too. How many copies did the book “The Secret” sell? The l Law of Attraction is complete horse shit. What is the exact difference between a pair of DKNY jeans and a pair of well-constructed no- name jeans that look exactly the same and cost much less? Why are there some people refusing to maximise the health of their children by not vaccinating (for free no less) their children? The theory is really easy to shoot down. It astounds me that people can assume consumers are rational, when a great many people in our society betlieve that the world is going to end in our times, and they are going to float off in heaven with jesus and Pat Robertson or some shit. Does not compute.
“This is why the theory of marginal utility is still so popular today. It satisfies the controlling desires of its adherents – if only in fantasy. It provides a sort of imaginary Panopticon in which the adherent can sit and watch humanity and ensure that they are acting in the appropriate manner. From such a position the neoclassical can then dictate to governments and populations what sorts of policies should be enacted to ensure that everyone acts as much in line with their fantasies as possible.
And then people tell me that neoclassical economics is the doctrine of individual liberty!? Please! Only a half-educated fool could think such a thing. Neoclassical economics is an advanced system of technocratic control. It has been since Bentham laid down its first postulates, since he first formulated his desires to establish “new modes of obtaining power of mind over mind, in a quantity hitherto without example.”
Mr. Pilkington:
This is an incredible leap in logic for which you offer no evidence. Neoclassical economists understand that you cannot sum individual utility functions to create some notion of societal utility that can be maximized by technocratic control. The classic and neoclassic economists that followed JS Mill (who followed Bentham) understood that utility functions cannot be summed across all individuals to form “societal utility”.
You use Bentham as a straw man here. Please show us where in neoclassical or classical economic literature economists use his theories of utility in their models. Samuelson models of individual utility have nothing to do with “utility” as Bentham saw it.
“Neoclassical economists understand that you cannot sum individual utility functions to create some notion of societal utility that can be maximized by technocratic control.”
That’s not true. Samuelson again:
“Having analyzed the principles underlying a single individual’s demand for coffee or videocassettes [using the marginal utility theory and indifference curves], we next examine how the entire market demand curve derives from the individual demand. The demand curve for a good for the entire market is obtained by summing up the quantities demanded by all the consumers.” (p. 79)
Assuming that these critics are, in fact, economists one would wonder how they got their degrees.
Of course, the cleverer among us know the secret: most economists do not have a thorough understanding of the models they use. They just take them on faith.
Also, another caveat on this — because Samuelson himself did bring the argument to it’s logical conclusion as Steve Keen shows in the new revised edition of his book. I won’t quote Samuelson as it is rather long. Here’s Keen’s summary of Samuelson’s 1956 paper:
“Samuelson had ‘proved’ that social indifference curves exist — and therefore that market demand curves behave just like individual ones — by assuming that in a capitalist society, incomes are continuously adjusted so that an ethical distribution is achieved. Did he even live in the US!?” (P. 62)
It’s very funny really. When you push the technocratic utility theory to it’s limits you do, in fact, get a justification for centralised income control. My article above wasn’t just hyberbole and those that look into it deeper will find what I’m saying is there…
Mr. Pilkington:
You can sum the demand of individuals, but not the utility they derive from their effective demand.
Because you ignore this subtle but important distinction, you leap to unwarranted conclusions.
Samuelson discussed utility in terms of individual revealed preferences. He never discussed a “societal revealed preference”. We arrive at specific (as opposed to general) market equilibrium via demand/supply, not utility/supply.
With due respect sir, you are conflating effective demand and utility. You can sum one, but not the other.
Many of your arguments against MUT are interesting and possibly true. But your conclusion is unwarranted. Capitalism may deliver all kinds of social evil, but neoclassical and classical economics specifically reject this notion of “summing utility functions”.
“We arrive at specific (as opposed to general) market equilibrium via demand/supply, not utility/supply.”
We have to be very careful here. In neoclassical theory the demand side of the supply/demand curve is derived out of ‘utility’. If people are not pursuing their utility and they are making fairly random choices — especially in response to price shifts — the demand curve goes very wonky altogether. It can, in essence, take almost any shape.
So the societal demand curve does depend on a bunch of individuals purchasing in line with marginal utility (or social indifference, which is essentially the same thing). If they don’t actually purchase in this way the demand curve will not be perfectly downward sloping.
Actually Samuelson does try to derive a ‘societal demand curve’ in his 1956 paper (quoted in Keen) — he does this through the analysis of the family and then goes on to treat society as ‘one big family’ (a concept that me and Keen had a right laugh over). Look:
“Income must always be reallocated among the members of our family society so as to keep the ‘marginal social significance of every dollar’ equal.” (My emphasis)
And then he goes onto society at large:
“The same argument will apply to all of society if optimal reallocations of income can be assumed to keep the ethical worth of each person’s marginal dollar equal. By means of Hick’s composite commodity theorem and by other considerations, a rigorous proof is given that the newly defined social or community indifference contours have the regularity properties of ordinary individual preference contours.” (My emphasis)
Hick’s theorem is rather drab and adds nothing here. (It states that if the price of a group of commodities change it is the same as if a single commodity price changed). But Samuelson’s goal is clear: to show that people in the aggregate (i.e. at a social level) will act in the same way as an individual consumer.
Again I’ll say, I may be an ‘outsider’ when it comes to neoclassical claptrap, but such is probably for the better. Think of it as a critical rather than a faith-based review…
One last thing. On a slightly different, but related point:
Steve: “Neoclassical economists understand that you cannot sum individual utility functions to create some notion of societal utility that can be maximized by technocratic control.”
In the case of me arguing that the technocratic control is imposed we don’t even need ‘societal utility curves’ (although Samuelson et all were seeking these). All we need is the individual curves.
Now, since we ‘know’ from our ‘proofs’ that these curves are the path to (what we neoclassicals consider) maximum satisfaction/utility we find ourselves with a political mandate. What mandate? Why, neoclassicism, of course.
We (neoclassicals) find ourselves with a mandate to try to maximise the pursuit of individual ‘utility’. We do this by imposing neoclassical social-control policies. These are usually implemented (a) by trying to turn non-market sectors in society into market sectors by selling them off or (b) introducing pseudo-market structures into non-market structures, as they did in the NHS in Britain; these usually involve targets and the like and they are definitively totalitarian and destructive.
Oh, the technocratic heart of this doctrine runs deep. It is thoroughly technocratic. It is a discourse of control and power, never fool yourself of that…
I see this in international development, in which informal markets/economic activity (where lots and lots of women work) are not really counted as indicators of economic activity. The goal in economic development is to formalize markets/economic activity, i.e. bring it into the global sector and, thus under technocratic control. It’s one reason why I think much of Africa is viewed as so impoverished. The economic activity that exists is most often informal and out of reach of policy (and power), and one way to delegitimize it is to pretend not to see it (or rather, pretend as if it doesn’t exist)….and then, of course, that helps to feed a whole discourse about the backwardness of Africans and legitimizes the necessity of economic imperialism.
Steve,
You can read Chapters 2, 4 and 5 of ECONNED. Pilkington is 100% correct.
Yves:
He’s not. He has advanced a worthy and fascinating argument. But it is inconsistent with modern economics.
At the risk of being too technical, the demand curve is well understood to be a flow over a given time interval. The interval is held to be “a moment in time” as a simplifying assumption. So old school professors (like my Dad) drew it on the blackboard as D/T to remind students of this fact.
Demand doesn’t have to be static; it is just assumed to be static over the TIME INTERVAL relevant to analyzing the supply-demand equilibrium of a given market.
Also, the Slutsky Decomposition of Marshallian Demand and Hicksian Demand explains the paradox of shifting preferences in response to relative price changes over a given time interval.
Also, you can infer marginal utility via revealed preferences in indifference curves. Why is this so obnoxious to Mr. P? Marginal utility is not total utility.
I will go back and finish your excellent book when the market calms down.
“Demand doesn’t have to be static…”
Jargon aside. Yes it does. Otherwise measurement makes no sense. If something is 100% in flux it is not measurable (barring major chaos maths, which economists have no grasp of). So, if consumption is 100% in flux you should give up now.
Is consumption 100% in flux? Yes.
I’m trying to be more open minded about Pilkington…but this post was a meandering muddled mess.
It’s too bad because there are some interesting issues at play here.
But instead of wading through this Pilkington idiocy, I suggest that the discerning reader just watch Groundhog Day.
There you will get a modified treatment of The Eternal Return, more in line with what Samuelson meant. And yes, one can still disagree…but at least the treatment of these issues are insightful and interesting. And watching Bill Murray bullshit the Andie MacDowell on his path to Buddhist Enlightenment is more amusing than this Pilkinton blather….
[The scene where Murray and MacDowell are having drinks and he hits her with:
It always makes me think of Rome,
the way the sun hits the buildings.
Still funny to this day.]
And the reference to Bentham’s Panopticon as a paranoid vehicle for “social control”???
What a f*cking joke.
Prisons at that time were large holding pens of men and children in a single enclosed area. It was barbaric.
The Panopticon was a humane attempt to alleviate these horrific conditions. It wasn’t a totalitarian attempt at social control. [Sorry, but I have to state it again: What a f*cking joke to suggest otherwise.]
Later, it was used as an inspiration for Charles Sanders Pierce (a true genius) to develop the blueprint for the first penitentiary, (ie based on penitence instead of mere pen), Eastern State Penitentiary.
Eastern State Pen was run by the Quakers to reform rather than punitively punish. Eastern State turned out to be an extremely successful advance in prison design, and it became the model prison all over the world.
Yeah, I know…prison trivia…pretty boring. But don’t blame me for having to correct Pilkinton’s vapidity.
Typical Pilkington: Distortions layered upon insipid “analysis”…while getting it all wrong…while being completely unfocused…while spending the better part of days–DAYS contesting any reader dumb enough (like me) to take the bait and actually respond to this guy.
OK, Phil…you got the first word and you’ll get the last… You posted this at 4:15 am on Monday. Since we’re talking utility, von Neumann and betting comes to mind: My over/under bet is that you’ll go at this–nonstop–until at least Wed. afternoon.
Any takers?
Go Phil Go! Go Phil Go!
Other than an ad hominem diatribe alongside a potted history of incarceration would you care to actually address the points the author makes in the post?
At least Ben defended his stance in favour of marginal theory with coherent argumentation, even if one did not necessarily agree with his arguements or conclusions.
Rain:
Ben above demolished Mr. Pilkington. Ben is simply far more grounded in economic theory than Mr. P. If it were a fight, the Referee would have stopped it.
But Ben did not address what I feel is Mr. P’s main point, which is a good one: thinkers need to be careful in worshiping economic theories that are mere paradigms, as opposed to scientific truths.
I wished Mr. P would have remained on this solid ground instead of delivering a flawed critique of Samuelson.
He(Ben)did nothing of the sort.
Actually Ben stopped responding when I pointed out consumer choices may be subject to complete uncertainty. Which was 100% one of the main points of the article.
And don’t confuse using the lingo and saying ‘axiom’ a lot as being more well-versed. I find that many economists aren’t actually very sure of their own field because they’ve taken so much on faith. Steve Keen finds the same thing.
“Actually Ben stopped responding when I pointed out consumer choices may be subject to complete uncertainty. Which was 100% one of the main points of the article.”
I stopped arguing when I decided I really ought to get some sleep. In most cases, there is not much uncertainty of the sort you posit over preferences. Keep in mind that I am speaking only of uncertainty over preferences at a fixed point in time.
That said, I have long been interested in the theoretical extension of consumer theory to include a sort of uncertainty over preferences, especially when future consumption is involved. As I have already stated, expected utility theory has its flaws, and this is one of many ways of addressing some of them.
But really, this is a problem at the margins. Expected utility handles uncertainty sufficiently in most situations.
“complete uncertainty”
Mr. Duncan:
You are a little too harsh, but I agree that Mr. Pilkington has made a crucial error.
And you are correct on Bentham’s Panopticon, as Bentham’s treatise on prison reform makes clear (a treatise well ahead of its time). Perhaps Mr. Pilkington will go back and read it.
But, in his defense, the tendency for some to worship economic models without appreciating their social context, or without appreciating the recent advances in behavioral economics, is worthy of his critique.
But he should have left it at that instead of leaping to indefensible ground as he did.
Dan Duncan:
It would have been quite difficult for CS Peirce (not Pierce) to have designed the blueprint for Eastern State, which opened ten years before he was born. The prison was designed by , based on the
Notwithstanding the good intentions of the Quakers, Eastern State was quite simply a mental torture chamber, the goal of which was to coerce inmates into contrition by denying them all human contact (so that they would focus their minds on salvation, according to the theory.) Inmates were hooded on the rare occasions they were let out of their cells and forbidden any correspondence with the outside world. A great many of them went insane as a consequence, a fate which surprise no one who has visited the prison, which still stands today.
One such visitor, Charles Dickens, wrote afterward:
“I hold this slow and daily tampering with the mysteries of the brain to be immeasurably worse than any torture of the body; and because its ghastly signs and tokens are not so palpable to the eye,… and it extorts few cries that human ears can hear; therefore I the more denounce it, as a secret punishment in which slumbering humanity is not roused up to stay.”
There is no evidence of its relative success in coercing inmates toward chagrin for their deeds.
The idea of the panopticon as an instrument of social power and coercion goes back to Foucault, who articulated “Panopticism” in great detail. Whether or not Bentham meant well is hardly the point. What matters is whether or not it is true that social systems (not just prisons) are constructed to marginalize the private sphere, and to foster paranoia and suppression in the surveilled population. This was part of the explicit design of the original Panopticon, which concealed the jailer from view so that the inmates, not knowing whether they were being actively watched at any given time, were forced to internalize their own surveillance. This is the *essence* of totalitarianism.
I’m sorry, I left a sentence unfinished (where’s the comment preview?)
I meant to write that Eastern State was designed by John Haviland, based on a program developed by Benjamin Rush.
Before anyone makes more uninformed claims about Eastern State Penitentiary, I suggest they visit it, or speak to those who have. It’s become something of a tourist attraction in Philadelphia.
It was a well-documented failure as a penal institution.
Simply walking inside the walls and halls of Eastern State is truly horrifying.
Does the the failure of this example of Benthamite prison reform undercut neo-classical marginal utility theory? I’m not sure, even though I admit that in my heart, I hope so.
It could be an ad hominem to say ‘yes,’ but at least the history of Eastern State provides another data point to consider.
The author boils down the flaw in marginal utility to “buying an expensive pair of jeans that we never actually wear”. Meaning it obviously does no long term good. I don’t necessarily agree. Marginal utility means it make us feel the best about our use of limited resources at the moment of the transaction in my read of it. Since no one can tell the future how can you say whether there is maximum utility at that moment. Sure hindsight is 20/20. But if we measure the utility right now (for something we did in the past) it may look bad. But 10 years from now it may be the best thing ever. And maybe when you look at those unused jeans a year later maybe the lesson learned about impulsiveness IS the marginal utility we are looking for.
That’s another reason that ‘marginal utility’ has no meaning. Once we take temporality into account we see that we constantly change our opinions about commodities. There is no ‘set’ or ‘static’ utility — this is what I’ve been saying.
And once we admit this the very notion of a ‘utility’ that can be ‘maximised’ is nonsensical, because it is ever-changing. One day we may love something (or someone) the next we may hate it (or them). This is how people are. There is no point called ‘utility’ that is definable and can be grasped or theorised about. It’s just a fantasy. A fantasy of control. Both over our own lives and over the lives of others. It is, and I’m sorry to say it, a neurotic fantasy. And that’s why certain people are so loath to give it up.
No time for more than a drive-by comment here, but to add a little fairness to the deconstruction, a theory which is dismal when applied to a single person, may be much more tolerable if applied to a population. Populations over time can be extremely predictable and repetitive in certain choices, such as recipe choices for home dinners which can persist for generations.
As a one-time newspaper reporter, nothing is more conducive to developing a drinking habit than realizing that most news stories are written over and over with only the names changed, that letters to the editor chart the same logical fallacies in nearly the same words for decades at a time, and that though many people grow in wisdom and sense, many don’t, and there is always a new phalanx of untutored fools filling the breach. Thus, the need for public service announcements and national Fire Prevention Weeks, world without end, amen.
Having said that, there are many other flaws in marginal utility. Carry on.
Noni
“…a theory which is dismal when applied to a single person, may be much more tolerable if applied to a population.”
Funny. I just responded to a comment (about three up) that says the exact opposite.
Anyway, no, the theory becomes worse when applied at an aggregate level because, as I quote Samuelson above, the aggregate theory is derived from the analysis of the single individual. Here’s the quote again:
“Having analyzed the principles underlying a single individual’s demand for coffee or videocassettes [using the marginal utility theory and indifference curves], we next examine how the entire market demand curve derives from the individual demand. The demand curve for a good for the entire market is obtained by summing up the quantities demanded by all the consumers.” (p. 79)
The fact that so many different angles turn up in the discussion of an essay, tells me that economics is probably rather an art than science. Sorry to say this, to be able to apply mathematical equations to a picasso painting and measure other paintings in relation to it does not make painting a science.
funny that it has been an eternal project of artists to mathematicize composition, from the Greek Golden Rule to use of the Fibbonacci sequence and spatial arrangements.
It’s well know by artists that living organic forms assume a spiral character with growth — e.g. conch shells, dna, tree branches twisting from the roots to the light of the sky. Even Michaelangelo made his torsos, arms and necks twist in subtle or forceful spirals.
But yet it never works to the point it can be quantified because the primary artistic energy comes from the birth, intrusion and balance of Form itself and not from the static arrangement of forms.
same problem in economics. which is why math will never be the answer. funny how this stuff just all sorts out with the same patterns. spirals up and spirals down in rough circles through time.
[longish post coming: apologies]
While I basically agree with PP’s conclusions, I would suggest he has actually made a less rigorous case than is necessary. The problem isn’t really that marginal utility is is “psychological” — indeed, this is Pilkington’s first self-contradiction. For he early on insists that Samuelson grants the consumer “psychology” (which is clearly implied to indicate individual preferences) and then shows that that this leaves us with a view of humans as mindless maximizing machines. Well, can’t really have it both ways. If your first critique is that this model requires people to be different, individual, subjective (that is, to have psychologies), your second critique can’t really be the exact opposite of that.
But again, I think PP is right about marginal utility theory. Here’s what I think is missing from the mix. First of all, he doesn’t insist enough on the tautology. I read Samuelson as simply defining “preference” not as a psychological desire, but as the retroactive name for what people turn out to have done. It turns out, in marginal utility theory, that people do things that can be expressed retroactively as having followed some relatively consistent and coherent logic of desire. And it is simply assumed, in MUT, that the thing they did, at the moment of purchase, was the thing that maximized their utility. This is the tautology at the heart of MUT: that consumers maximize utility because maximizing utility is the definition of consumption choices. PP would do better to focus on that maneuver than worrying about the matter of psychology, which verges on being a non-issue.
Indeed, a devoted marginalist can always say nonsense like, “well, Billy actually got some deep satisfaction from having some jeans he had never worn, just from knowing he had a pristine pair in reserve, so that was his utility.” That’s silly, but un-falsifiable. The critique of MUT doesn’t and shouldn’t pursue the character of “the psychological,” because it retains its unfalsifiability, and because MUT doesn’t actually depend on it as much as PP suggests. [As a side note, MUT and most other economics, pace Malthus, discards the technical category of luxury goods, which simply doesn’t make up enough of the world market to be relevant. Even if we assume that luxury good purchases — the fancy jeans, the Rolex — are not goods that provide utility, it doesn’t skew the structure. MT and most economics is based on constrained individuals].
But there is actually a far more serious flaw with MUT, which is its focus on what happens in the marketplace as an independent phenomenon. This is a terrible description of the world. Here’s the famous marginalist model, a little Pareto model you might recognize from NPR. Put tne kids in a room, pass out ten different candy bars at random, have each kid rate his candy bar from 1 to 10. Now let them make trades until everybody no longer wants to trade his candy bar, and ask them to rate their treats again: the value in the room will always have increased! This is the parable of marginalism.
Bu there are several absurdities with this experiment. One would be the constraint of the numbering system itself: what if a kid wants to say that his candy bar is worth eleven, or fifty? The only thing that stops the value of the total goods from ascending toward infinity has nothing to do with the character of the goods, but only with an arbitrary imposition of a numbering limit. So already we have a very funny market place, where “desire” is subject not to a bad model of “what desire is,” but to an external set of limits which by definition do not correspond to the experiences or feelings or etc of the kids in the room.
But the other problem, and here we get to the real magic of MUT, is: um, er, who made the candy bars? Where did they come from? What was the cost of production? Who made the machines that were needed to make the candy bars? Where did the material for those machines come from? How much did these things cost? How do we know they are priced well? Do these kids have jobs? What constrains their pay? Is it the price of candy bars, or something else entirely? Do they get paid according to a market preference? Really? Can they be paid less than it costs for their subsistence?
In short, the fantasy of the kids in the room, which is a parable for the independent marketplace — an enabling fantasy of marginalism — has no actuality. The question of whether the kids are automatons or desiring humans, controlled or not, is an interesting one, I guess. But it does not get at the basic flaw of MUT, which is a logical separation of the processes of production and consumption. I actually think MUT is pretty good at explaining haw the marketplace works in a given instant. It is terrible for describing how it works over time, how it develops, its relation to anything outside the marketplace, and so on
“If your first critique is that this model requires people to be different, individual, subjective (that is, to have psychologies), your second critique can’t really be the exact opposite of that.”
Not really. The theory of marginal utility theory isn’t strictly anti-psychological (nor is Skinner’s behaviorism, which I assume you’re thinking of here). It just rests on a VERY simplistic psychology which I summarise here:
“Here’s how it works. Neoclassical economists do recognise personal taste (although, as Keen shows in his book, they abolish it when it leads to contradictions), but they view it as fixed, innate and essentially static. We are seen to have fixed tastes in the sense that if we are given a table full of items and the prices of these items are held to be fixed we will always choose certain combinations of these items due to our own static personal tastes.
Change in behaviour only really comes from market signals. When the price of a given good rises or falls, we reorder our preferences – still in line with our supposedly innate tastes, but now accommodating the new price system.”
People can be ‘subjective’ in this theory. But their ‘subjectivity’ is static and fixed. And all of their actions are basically determined by market price fluctuations.
That IS a psychology. It’s a crappy psychology that isn’t remotely true. And it leads to totalitarian conclusions. But it IS a psychology.
Do we really understand our eco system on various levels? Do we really understand compehensively global warning e.g.?
I do believe that their is a scientific basis for all of it but I doubt that you know sufficient variables to prove any of in conclusively without some assumptions that may or may not be true.
Similarly, in economics, there are that many variables that simply make economic theories questionable for being of any use in the practical sphere of things. They often are based on nice formulas and try to sound logical and might even be logical BUT real life and real historical as well as political aspects are impossible to put into some kind of frame work.
I am probably talking beside the point here and you know what, I do not care.
Thank you Linus. I was beginning to wander over here too. I like PP’s stuff; I always read it and enjoy it even tho’ it is completely over my head. But I always think: how do we get out of the terrible fix we are in? We need a new way.
Excellent essay! I’ve copied into my folder for important articles. The concept of utility is at the heart Imperialist Economics and it’s all about denying that human’s are creative socially evolving creatures. By asserting that man is just a digital calculator of utility rather a free individual with freedom to act outside the definitions of apriori of the status quo the British School has denied the very foundations of not only a free society but the very identity of man as creative living being from which all economic value must start.
I really liked you pointed that man acting under MU must a truly pathetically neurotic creature and not a man. One must wonder further how such belief themselves create neurosis in population that believe in such ideas. MU is not only a vision of social control but method of brainwashing itself as the very idea consumes those believe it.
There is a problem with your critique. Namely, that according to economists, people maximize their EXPECTED utility. This does not translate into ACTUAL utility. The example of the expensive jeans is a good one. At the time you buy the expensive jeans, you anticipated wearing them and benefiting from them. This example shows that people are not always good at anticipating what things will benefit them. Of course to say this is not very psychological is crazy.
Also, the collector is not an example of increasing marginal utility. At best it is an example of non-decreasing marginal utility. It is possible in economics for marginal utility to do anything except go up.
It is possible in economics for marginal utility to do anything except go up. HS
Really? I don’t think so. Suppose I have no money and find $5.00. For $5.00 I could get a decent meal. But I’m not hungry. Instead I am cold and wet and would prefer shelter. Another $30 and I can rent a room. Thus the marginal utility of that additional $30 is more than the original $5.0.
Let me retract than example and present another one:
Suppose I have no money but then find $34. That is enough for quite a good meal but again I am not hungry; I desire shelter. However the shelter costs $35 not $34. So I beg and get the needed $1. In that case, the marginal utility of the last $1 is greater than the marginal utility of the first $34.
An interesting though experiment. However, I think it is too simplified here. The choice is not just between a hot meal and shelter, it also includes the optionality provides by the universe of choices now available for 34 dollars (buying clothes, paying off a would-be mugger, taking transport through a bad section of the city, etc.).
I agree to an extent, if there is one overriding concern (i.e. you need this amount of money or you will die), then I agree–perhaps the marginal utility is temporarily increasing. However, this is still very much the exception rather than the rule. The theory still provides a strong evidentiary framework for the human experience, particularly when taken to larger extremes (the marginal utility 20 billion and first dollar is small, for example)
I think in gerenal, it is something you have to do, perform, owe a duty or responsibility to, the last one is the best.
For example, the last day of the school, the last step of the journey, the last tile of your bathroom, the last spark spug, the last mortgage payment.
If, one the other hand, it is something you consume, collect, etc, the first one is the best.
For example, your first love, your first kiss, your first pay check, your first car, your first Picasso, etc.
The last day of school.
I don’t have a dog in this fight, and I’m an engineer and not a economist by trade. I only ready this post because I invoked the law of diminishing returns in a conversation last week involving religion.
The law of diminishing returns describes a very real phenomenon. You can fault the description of the phenomenon, but you need to come up with an alternative description. I don’t see that here. In fact, you almost presume that by tearing into the description, that you somehow abolished the phenomenon?!? All I see is you tearing into something on technical grounds and then turn around and construct your own theory of ‘why people like the theory of marginal utility’ utilizing nothing more substantive than what you just dismissed. I see too much appeals to emotion and I just tune out.
The law of diminishing returns describes a very real phenomenon. Mike
But there is also the phenomenon of critical mass. One gets a lot more bang for the buck from the 2nd half of a critical mass than from the 1st.
The Theory of Marginal Utility was created for one purpose: to debunk the labor theory of value and thus Marx. Since utitlities cannot be measured and probably shift endlessly, it has utterly no predictive value. Thus, it has no use whatsoever beyond providing a theoretical support for classical micro, and undermining Marx’s arguements built on the almost equally ridiculous labor theory of value.
@psp, had you actually read Marx, you would know that — in the very first chapter of Capital! you could have gotten to it rather quickly! — he offers a fairly damning critique of the labor theory of value, which comes of course from Smith and Ricardo.
Marx in fact did not have a labor theory of value (it has sometimes been referred to as a “value theory of labor,” which is suggestive but not very explanatory). Every time someone endeavors to debunk Marx by claiming he had a labor theory of value (a common enough effort) it’s really embarrassing.. For them, I mean. And in this case, for you. Read the fuckin’ book if you;d like to have a critique — how’s that for a policy?
Most fully indoctrinated capitalist idealogues attribute some personal pet-peve quackery to Marx. Dosent some proto LTV go back to Aristotle? The quackery its associated with for most of those people, is the 19th century Anarchist/Libertarian/Utopian/Fantasist take on it.
Actually, the first few chapters of Das Capital were some of the most mind bendingly boring things I’ve ever forced myself to read. Although it has been about a quarter century, I doubt I’ll give it another shot. However, whether Marx’s labor theory is different than Adam Smith’s or Ricardo’s is essentially irrelevant to the motivations of Marshall and the late 19th century popularizers of marginal utility theory.
My particular point of view is that the whole problem with all theories of value is that it a weird, sort of neo-platonic (like the perfect table,) endeavor of dubious “value”. I see the simplistic conclusions taught in first year micro to be far more dangerous to society than marginal utility theory by itself.
A video examining the means of social control, no longer exercised through the exploitation of work, but by means of domination through social integration by way of consumerism.
http://www.youtube.com/watch?v=BAKGEXQUymo
I think you’ll find this interesting, Philip.
Two words: straw man.
The author refers back to a textbook from the 60s to make his case. Perhaps the primary advance in economics in the last 20 to 30 years has been the incorporation of expectations–thus most frameworks now maximize “expected marginal utility.” The author spends an entire section fighting windmills and phantasms, asserting the truism that the utility from actions cannot be known ahead of time. Simply put: duh. Incorporating expectations rebuts his entire section.
Moreover, his attack on the diminishing quality of marginal expectations suggests a poor understanding of the fundamental concept. To briefly address a few of his “examples,” the stamp collector and the capitalist may indeed have increasing utility from each additional unit of money or stamps which they acquire (once again: duh). However, it is the RATE of the increase that matters. An extra dollar will not matter to you as much when you have 20 billion as when you have 2; likewise for stamps. This too is a section which completely misinterprets the theory and attacks a false construction.
I will leave the hysterics at the end alone, as they are indicting of the author’s position by themselves.
An extra dollar will not matter to you as much when you have 20 billion as when you have 2 Paul
Suppose I have an engine with 4 cylinders but have lost the spark-plugs. Am I happier to find the first 3 plugs or the last one?
Spark plugs are not fungible.
Spark plugs are fungible for a particular engine because engines use identical spark plugs.
I admit that I do not know enough about internal combustion engines to adequately answer your question. However, I responded to the same point to raised above.
Sorry, your not winning anything with this gobbledygook your putting down. Lets start from the state of neoclassical economics at this juncture in time: it has utterly failed to achieve a balanced and stable economic system. Some of the main tenets of neoclassical economic:
rational preferences FALSE
individuals maximize utility FALSE
people act on basis of full and relevant information FALSE
Now we can argue over the little things all day long, but when three of the main tenets of a theory are utterly false, its futile to try to erect a stable structure with these as its foundation. Unfortunately its one that mainstream economists have spent many wasted years tilting at. Are we really going to have to wait for all of you to die before we can move on to a better approach? Or will you all humble yourselves and admit that you were wrong so we can MOVE THE FUCK ON?
I will show you how its done. I humble myself and admit that I used “your” where I should’ve used “you’re” in my first sentence…
Okay, your turn…
I am unsure how asserting that something is false makes it so. These precepts are still accepted by most of the world.
“These precepts are still accepted by most of the world.”
What world? Who are you talking about? Governments?
The thing is, they are so obviously false they could be considered “anti-axioms”. Obviously humans don’t always or even mainly “maximize utility”. They very often buy frivolous crap that has absolutely no real utility at all. Now if you tell me the utility is in the psychological relief the purchase may provide I will respond then that utility has no intrinsic value and so it is irrelevant to describe human behavior.
Rational choice theory is deeply flawed in that humans do all sorts of things that run against their better interest all the time. They may weigh benefits versus drawbacks of any given path of action, and they may not. In fact, most often they do not, or if they do at all, the logic they use is deeply flawed and not useful, unless you consider the tracing of tea leaves useful.
Full relevent information in markets is, as well, absurd on its face. The recent real estate bubble and collapse is a massive example of the ridiculousness of this “idea”. Insider trading, which is rampant and apparently unstoppable, is another refutation.
As I say, for anyone not indoctrinated into the dogma of neoclassical economics these premises are absurd on their face. For anyone who has been indoctrinated, they will apparently go to no end of effort to build a logic castle around them to “prove” their virtue, not realizing the castles they build are made of sand.
The fact that “most” or many people (students of neoclassical economics) subscribe to this claptrap dogma is a sad fact, not one to be applauded, or used as some kind of twisted “proof” that therefore it must be true.
I think we also need to see the marginal utility theory in some historical context. There is no doubt that the abstraction Samuelson had to make sets him up for some obvious criticisms.
At any rate, the theory came into acceptance during the rise of the consumer goods society and the “problem” of determining how a consumer might choose Product A over very similar Product B, as well as market basket analysis.
At a micro level for some very controllable scenarios, marginal utility theory/models can provide some insights. But the extension of the theory into a conceptual framework for driving economic behavior fails, and fails utterly.
That’s actually quite funny when you think about it. Because the concept of marginal utility doesn’t work, the recourse is to modify it with expected marginal utility, an even vaguer concept. It seems to come to eventually that people buy what they buy for whatever reasons. Some may spend a great deal of time considering what to buy, but it is not clear this represents a set of priorities or marginalities or that these are applicable to anyone else. Others may spend little or no time thinking about what they buy. Still others may shop as a form of entertainment where the shopping not the item purchased is utile item (although this happens less in the current economy or is confined to the looting classes).
In any case, here’s the thing, if we are seeking a theory of why people make the economic decisions they do and our criterion for such decisions is so broad as to include everything and nothing, what have we accomplished? Other than some securing academic sinecures for themselves and spreading pablum that the looting classes can use as cover for their looting.
“The author refers back to a textbook from the 60s to make his case.”
1993. Get off it.
[1] Marginal utility, perfectly self-maximizing agents a la Kenneth Arrow … A lot of tired beating of very obviously dead horses here.
[2] The new orthodoxy among relatively sensible economists is neuroeconomics.
Even there, as Linus Huber and craazyman suggest upthread, attempts to mathematicize every aspect of the emergent — thus never fully predictable or measurable — phenomenona of human behavior will mean that economics will in part remain irreducibly ‘art not science.’
[3] Pilkington is adopting here Michel Foucault’s reading of Bentham’s Panopticon as an expanded system of general social control. This has become the accepted modern convention/cliche, which isn’t to say that Foucault was not onto something.
Nevertheless, to be fair, Bentham himself — as others have commented — was simply trying to create a more humane, effective brick-and-mortar prison than those that existed in 19th century Britain.
Prisons didnt exist in the form we think of now, before Bentham. Before Bentham they were merely holding pens where the accused awaited trial, and the convicted awaited punishment. Punishment before the prison reform movement hadnt changed much since the Iron Age really, it was, death for capital crimes, corporal punishment such as flogging or stockading, or it was a Fine and or forfeiture of property. I was always taught that the Penitentiary system was inspired by altruism (a more humane punishment), which idea seems absurd to me now. The more I know about Bentham the less likely it seems that a kinder and gentler system of punishment is what he was up to. Grotesque medieval punishments were of course, cruel and frequently unusual often with origins in pre Christian Germanic rituals of Sacrifice (such as the hideous English practice of scaffolding), but I think that people like Bentham were more appalled by their apparent disorder and failure to acheive the intended mass coercion,than by the cruelty inherent in them.
This whole kerfuffle can be put much more simply. The neo-classical economists want to postulate a theory of auction-like price formation that will yield a set of price/quantity relations which will guarantee a market-clearing equilibrium of supply-and-demand. From that requirement utility preference functions and their maximalization or optimalization-under-budget-constraint are the deduced, as if they would provide a prior foundation for explanation. But, of course, this explanatory “logic” is backwards, which renders the theory circular and tautological. And not a particularly empirically compelling or realistic explanation of nominal price formation, being rooted in a rather abstruse assumption of “consumer sovereignty” rather than production costs.
However the claim that the whole theory is then “totalitarian” because deterministic seems quite a leap. Rather the theory is just confused and inadequate in its epistemic foundations, since it is caught up in an unclarified, and erroneous, implicitly physicalistic account of social action.
Hannah Arendt in On Totalitarianism stressed the importance of fantasy to the totalitarian project. Her idea was that totalitarianism to establish its power needed to break with the normal world, hence the totalitarian fiction. In the normal world, there are constraints. In the totalitarian world, there are none. Reality is replaced by an unchallengeable story, the totalitarian fiction: racial superiority, class struggle, or as here marginal utility.
Nicely argued.
Certainly, the theory itself is just unrealistic — doesn’t even clear the bar of Karl Popper’s falsifiability test — but enables totalitarian formulations.
I too think thats a great argument although Im not sure the 3 examples of “unchallengeable stories” are equivalent “fantasies”. Racial superiority, definately, Marginal Utility, apparently, but class struggle? How is that a fantasy?
When Hannah Arendt — whom Hugh is quoting — was writing, Stalin and the Soviet Union were in their heyday. The USSR’s particular totalitarian myth centered on a specific expansive interpretation of “class struggle.”
Hence, Arendt wrote it as she saw it.
Here is what Krugman thinks about Neoclasical economics (rational expectations) in his thoughts on the Gold prices and I quote:
“…because they are rewarded with a rising price. Abstracting from storage costs, this says that the real price must rise at a rate equal to the real rate of interest, so you get a price path that looks like this:
(missing curve)
Obviously there are many such paths. Which one is correct? Given rational expectations (I know, I know)…”
end quote.
MUT = Pens and Chutes…to and within an economic prison complex.
Skippy…neoclassical economists are the guards and wardens of it. Do not bend-over to pick up the soap…somethings can not be undone…some even *learn* to like it…and pass it on.
> The four fundamental axioms are:
>
>1) (Completeness) For any consumption bundles A and B…
A department store or a supermarket typically has about 50000 products on sale. This means there are (2^50000)-1 possible bundles. Try it at wolframalpha, and see yourself what this really means.
Except for absolutely trivial situations, determining the utility of consumption bundles is purely and simply infeasible.
>3) (Transitivity) For any consumption bundles..
Transitivity of preferences has been time and again disproved in scientific experiments. Yes, people do prefer A to B, B to C, and C to A.
It is difficult to comment on continuity and reflexivity, as they do not seem stated accurately enough. But with half the axiomatic basis in the trash bin, the whole theory crumbles anyway, as their absence makes utility computation, let alone maximization, impossible.
@wolframalpha…great resource!
Skippy…I released my son into it.
This is where the human brain is superior than the computer.
It goes into the department store, and recoginzies it’s looking for a coat and goes straight to that department. It then says to itself that it has a limited budget and goes about comparing at most 2 or 3 items, for men in general, and maybe 20 or 35 items for women, again, in general. I don’t want to stereotype:) OK, OK, make them the same for both men and women.
Precisely.
Nobody ever attempts to compute and then optimize or maximize utility over all possible bundles of goods. Considering a limited number of possibilities is called “satisficing” and is the normal, rational behavior in the face of limited time to do chores, and limited computation capabilities. Which also means that axiom (1) of the marginal utility theory is disproved (it does not correspond to any realistic, efficient behavior).
Furthermore, people go sequentially. First the coat, then the shoes, then groceries. It is not difficult to prove mathematically that even optimizing purchases sequentially will not lead to an optimization on the overall bundle of goods thus acquired. The MUT is once more irrelevant.
Most economists do not actually believe that people somehow computer all the possible alternatives. What most neoclassical economists say is that the rational agent assumption is a useful assumption that allows one to derive testable predictions. Many economists take the position that it’s ok to use a wrong assumption because the goal is predictive theories, not pure perfect knowledge.
> What most neoclassical economists say is that the
> rational agent assumption is a useful assumption
> that allows one to derive testable predictions.
The post discusses the marginal utility theory. Which is based on assumptions that are outrageously incorrect or demonstrably impossible.
Notice we are not talking about assumptions that are “close to correct”, or “match observed facts and behavior 99.8% of the time”; the problem is not one of inaccuracy or imprecision. The axioms of marginal utility must apply in 100% of all situations as specified.
Notice that we are not talking about assumptions that are specified to apply under limited conditions, under restricted scenarios: axioms do not apply to “all bundles of goods chosen among at most 6 items” (which would already require computing 63 different bundles!) but “for _any_ consumption bundle”, no matter how many goods to select from.
These assumptions are presented to be of general applicability, and serve to derive supposedly valid conclusions about the entire economy.
But they are based on physical impossibilities (computing the utility of arbitrary consumption bundles, for any set of goods), and contradict scientifically observed behavior (transitivity of preferences has long been known to be an invalid assumption).
Garbage in, garbage out.
If the assumptions are known to be wrong, known not to hold in the real world, then there is no way that this can result in any kind of worthwhile “predictive theories”.
“The original theorist of utility was, of course, Jeremy Bentham who, as we have noted, also came up with the Panopticon. The Panopticon, as noted, was a totalitarian prison system wherein every prisoner was to be watched constantly by a central observer who monitors their behaviour. Bentham thought that this model could be extended to a variety of social institutions, giving rise to a terrifying vision of a totalitarian hell which was later to be captured in 20th century novels such as Orwell’s ‘1984’ and Huxley’s ‘Brave New World’.”
The American Penitatiary system was constructed in the late 19th century and early 20th exactly so. Litterally, if one examines the original structures of those buldings which survive, thats exactly how they were built. The guards could see into every cell, on every tier for a full 360 degrees. This was one of the pillars of the prison reform movement of that age.
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attention attention
This is Officer D.T. Tremems of the Noospheric Thought Police Patrol
I’m giving this entire thread a ticket for specious self-aggrandizement, word foggery, pettifoggery and solipsistic synecdoche.
Since this is a first offense your fine will be the lesser of $150 per paragraph or 1 hour per paragraph community service reading academic papers on game theory and discussing them with their authors.
Fines are be paid by cash to:
D. T. Tremens, Esquire
Exechequer of the Treasury
Thought Enforcement Bureau
PO Box 8
Magonia Station
I don’t want to get rich of youze guys and I know you don’t want to do community service so watch it, OK.
Requesting permission to securitize that debt.
Oh My! We might be getting to something here.
It seems to me that attempts to rationalize human behavior can be usefull and can make some sense from a significant distance. But it’s also clear to me that in industrialised societies most human decisions are not made on the basis of “economic utility” and that economic utility is different than emotional utility. Then we get to the question of whether Global Corporations merely respond to the needs of rational humans or whether they “manufacture” the the emotional needs of supposedly rational humans. Are consumers responding to their needs or something else when they respond to advertising (free speach of corporations)?
And a pony too.
In a normal consumer market, the lower the price, the MORE purchasers there will be, and the higher the price the fewer purchasers. The demand curve has a negative slope because MORE buyers enter the market, not because one buyer buys more as the price decreases. The idea of one “agent” buyer and the concomitant theory of marginal utility is like a magician’s flim-flan distracting us from examining the importance of SHIFTS in the demand curves and the business clout exercised in bringing about these shifts.
But that is clearly wrong. There are often items that, despite their price, people must have and will buy them. Other people have no interest in those items at any price. The famed “Cabbage Patch” dolls of my youth come to mind. No one bought those dolls because the price was low, and yet they all sold out in a matter of minutes any time they appeared on the shelves. Today there are many items just like that. And among a certain cohort, a higher price often leads more people to buy something, because for them a high price signals quality. So it appears you can’t even say that much with any consistency.
True. I should have defined “normal market” as one that is not a Giffin goods market.
Great post Philip. Thanks for providing a forum for discussion around this topic.
I agree with the absurdity of, what is ultimately a philosophy, utility theory. However, I disagree with the conclusion: that the goal of the theory was/is totalitarian control. I think that the proponents of economics have assumed rationality and determinism because they hope to translate their philosophical views into mathematics.
And yet, if actually applied, the theory of marginal utility would call for massive, repeated wealth redistribution, because the marginal utility of money is greater for those who have less of it.
Like every other economic theory, this is used when it is convenient to the people in power, ignored when it is inconvenient.
“The primary reason that the theory of marginal utility – and to a large extent neoclassical microeconomics more generally – is popular is because it appeals to its adherents as a sophisticated fantasy of control.”
Though I agree with your point, I’d add that a big part of the reason why the theory of marginal utility and neoclassical economics overall are so popular is also because they are simple.
They allow people to simplify the world around them, especially those things that are very difficult to understand.
Economists are simple minded creatures who like to think of themselves as heavy hitting academics. They don’t take the information and try to understand what it says, and then devise a theory that can be tested and retested. Instead, they take the theory, and find data that proves their theory. Absolutely anti-scientific.
“After all, they insist that the theory of utility is not psychological.”
That’s because utility maximization is not meant to be a finding that is to be empirically tested. It is meant to be an assumption on top of which one can build a model which itself can be tested. This is no different than doing physics while assuming a frictionless vaccum. Is it an accurate representation of reality? Of course not. But can you use it in many cases to predict physical phenomena? Yes.
@Nathaneal:
“And yet, if actually applied, the theory of marginal utility would call for massive, repeated wealth redistribution, because the marginal utility of money is greater for those who have less of it.”
The theory of marginal utility does not call for anything. It is simply an assumption which allows one to make testable predictions.
Somewhere way back up the thread, when Ben was saying things like “They [the tenets of marginal utility] hold well enough in a large number of circumstances to produce useful results”, someone should have asked him to submit whatever study he was referring to. I would also love to see the “extension of the Welfare Theorems to incomplete markets” study. When economists try and get empirical (ie prove that their theories work in practice and are thus of any use) the results can be entertaining.
Ultimately, the world they analyse bears no relation to the real world. They invent a fictive world, made up of fictive concepts based upon ludicrous assumptions and then try and convince us there world is the real one.
Like fundamentalism, I think economics should be considered a form of anti-thinking, more of a mental illness than a science.
Having attended Catholic School, I supposed “panopticonality” to be one of the Creator’s Perfections… Now, as an unbeliever, it comes down to cell phone video.