By Philip Pilkington, a journalist and writer living in Dublin, Ireland
Store clerk in transsexual shop: “Oh, look who’s back… are you going to buy something this time, or are you just curious?”
Tobias Funke: “Well, I guess you could say that I’m buy-curious!”
– Tobias Funke, Arrested Development
Mitch Hurwitz, the creator of Arrested Development – possibly the best comedy show ever produced for television – once said that the funniest things about people are their blind spots. We all possess these psychological blind spots and yet we usually have no idea. Caught up in our own little worlds we see or hear one thing while just about everyone else sees or hears something else. Just like poor, confused Tobias Funke – except, hopefully, in most instances a little less extreme.
At a dinner gathering one day an economics student was somewhat nonplussed when I told him that I thought that pretty much the entire edifice of economics as taught in most university departments was rotten. He tried to convince me of the theory’s value, not through reasoned argument about certain tenets as I tried to engage him on, but by appealing to the authority of those who teach it.
“There are some very smart people teaching this stuff,” he told me candidly. “You should really give it more of a chance.”
I reminded him that smart people are often those who say the stupidest things. They, like everyone else, have blind spots but, being rather intellectually resourceful, they are even more apt at covering them up and rationalising them to themselves. They construct obtuse abstractions that even they themselves find hard to grasp in order to cover up their blinds spots. Add to this some ill-defined (or, conversely, too precisely defined) jargon, and they’ll set the heads of everyone in the room spinning so fast that everyone forgets what outlandish things they are in fact saying.
When you witness these fireworks of sophistry you cannot help but think that Freud was right: intelligence really is just one giant enterprise in repression.
And it was this that I kept thinking when responding to certain criticisms of my piece on the theory of marginal utility the other day.
“Dammit,” I thought as I typed replies. “I’ve made the mistake of being too subtle. I’ve made the mistake of getting caught up in the neoclassical discourse in order to try to poke holes in it. But in doing so I’ve become enmeshed in the giant repression of reality that is neoclassical economics – I’ve quite literally become entangled in this collective neurosis.”
Then I realised that I was not going to convince anyone who subscribes to the faith and that I would have been better off not engaging with the theory on its own terms at all. Instead, I should have just weighed it against reality and let the neoclassicals spin out their rationalising jargon to no end against my representation of how people really shop.
So, here instead are my confessions. The confessions of a shopper who doesn’t seek to maximise his utility. There are many like me – many billions. Most will not shop in exactly the same way as me; indeed, one would expect as many different shopping ‘styles’ as there are shoppers. And one would also expect that none of these shoppers try to maximise their utility in the way the neoclassicals say they do. Not even the neoclassicals themselves, I’ll bet! But they will not think in these terms. They will not test their intellectual constructions against their actual behaviour any more than poor Tobias Funke will tune into his actions and words and come out of the closet.
Where to shop?
Let’s look at something rather banal. Whereas we could have a look at how I shop for clothes, this would be far too complicated a discussion. So, let’s instead follow me on a trip to the food/grocery shop. This will be pretty standard day-to-day sort of activity and since I make these purchases every other day, so if I habitually try to maximise my utility anywhere it should be here.
There’s something of a selection of where to shop for food in my area. But it really comes down to three choices. I could go to the ‘high-end’ supermarket that has really nice stuff, but charges way too much; I could go to one of the many mid-range supermarkets that have reasonably good quality goods; or, finally, I could go to one of the German budget stores that carry stuff on the cheap.
I occasionally visit all of these outlets but mostly I go to one of the mid-range supermarkets.
So, far so utility maximising, right? Well, not really. Unless I make a very conscious decision to stock up on vegetable oil for some very specific reason – say, I’m having a large party – and I go to the budget supermarket, I will, in fact, purchase most of my vegetable oil in the mid-range supermarket along with my other purchases, as this will be more convenient. Again, in the case of the high-end supermarket, I will often only go there if they carry a specific product that I cannot get elsewhere.
The neoclassical will, of course, say that I’m maximising my utility in line with the time I wish to expend on shopping. He will say that when I don’t chase down the best value products like a creepy freak I’m trading off losing out on certain lower-prices against less time expended on making my purchases.
Fine, for the most part that is true. But in many instances it isn’t.
Occasionally I get a strange urge to go to the budget supermarket to just kind of poke around. I see many other people doing this too. Indeed, the marketers seem to have caught onto it because they sell a host of crappy, useless budget products from week to week that people buy and then throw in the attic never to be used. In fact, I would say that it is this occasional urge that drags me to the budget supermarket far more often than it is a rational decision to stock up on a certain product. To go even further, I’d say that the vast majority of the time when I do stock up on a certain product it is as a by-product of these unusual occasional visits to the budget supermarket.
This behaviour has nothing to do with utility maximisation. Absolutely nothing. I am not consciously trading off prices for greater time spent or anything else. I’m bored and, like many consumers, I’m acting on a whim that I can barely explain.
This is just the first of many instances in which we will see shifting psychological moods as being the key determinate of my consumption. They have nothing to do with utility maximisation and they cannot be explained by the theory. We will see much more of this as we continue shopping.
So, I’ve kinda sorta chosen where to shop in line with my utility. But then this wasn’t so hard as the choice was between three places. Things get a little more complicated when I hit the shop. But first, I’ll get a pen and paper and take note of what’s missing around the kitchen.
Shopping list
As a fairly irrational consumer I’m quite blasé about shopping lists. But as a fairly dreamy sort of person I do tend to write down a couple of things that I see definitively missing from the kitchen so that I don’t forget to buy them when I go shopping.
This all seems very rational, but is it utility maximising?
Today a friend of mine is coming over and I’ve promised to make them some of my excellent pancakes (none of this is true, but it could well be – I do make damn good pancakes). So, I write down the ingredients: egg, flour, milk etc.
I rarely make pancakes. And I wouldn’t be making them today were it not for a completely unpredictable encounter with my friend who was recently eating pancakes at lunch.
“I’ll bet I can make a nicer pancake than that,” I said boastfully.
“Oh, I’ll hold you to that,” she replied.
And so I’m stuck making pancakes today.
Now, I bought milk yesterday; but I drank it all. It’s important to note that the value I place on milk today has changed completely from the value I placed on it yesterday. Although – as we will soon see – I’m a fairly irrational consumer and so I’m not sensitive to price fluctuations, but in the case of a major fluctuation I might not purchase something. If for example, there was a targeted terrorist attack on dairies across the country by disgruntled sufferers of lactose intolerance and milk prices quadrupled, under ‘normal’ circumstances (whatever they might be) I might reconsider my milk purchase.
But today it doesn’t matter. I’m going to prove myself as a cook of pancakes and no matter what the price for milk is I’m buying it, damnit.
This, of course, substantially impacts my demand for milk on this particular day and will consequently have major effects, for example, on any indifference curves mapped against another commodity (say, apples). I contend that many consumer decisions are subject to such completely random variables. It could be a friend coming over for pancakes. It could be biscuits for a political meeting-cum-tea party. Or it could simply be a random whim or desire.
Beyond this though, it seems that such an example calls into question the very notion of ‘utility’ itself. The idea of ‘utility’ seems to imply that there is some fixed amount of satisfaction that we derive from each commodity and that we ‘map’ this against price when determining what to consume. True, the neoclassicals do not consider such satisfaction to have a numerical value, but it is still assumed to be relatively fixed. I contend that it is not fixed at all and that it is subject to an infinite number of random variable; from random occurrences (friend coming over for pancake), to ever-changing tastes and whims. And this indeterminacy, if we are to be honest, eliminates the concept of ‘utility’ itself.
How on earth are we, as consumers, meant to maximise our utility if our desires are so fleeting? If we don’t derive a fixed amount of ‘satisfaction’ or ‘utility’ from a given product, but instead desire this product for different reasons, in different quantities, at different times, then how are we supposed to do any ‘calculations’, implicit or otherwise, at all? Desire for goods and services is relative, but relative to the point where trying to consider it in terms of quantity is completely meaningless.
The simple fact is that ‘utility’ does not exist. It is a phantom. It is, to quote the great Bishop Berkeley, a ghost of a departed quantity. A quantity once vaguely thought to have existed which then went on to be allowed not to exist, yet was able to live on in a sort of afterlife where it sort of existed and sort of didn’t.
Let us exorcise this superstition right this moment: ‘utility’ does not exist and it never has. (And don’t tell me that indifference curves are an antidote to the shadowy concept of ‘utility’, they too are based on the premise that consumer will trade fixed numbers of one good against fixed numbers of another). Instead what we are left with is the random flux of consumer desire against a background of ever changing social and psychological reality.
Going shopping
I arrive at the shop. I have no very pressing financial constraints and I am likely to browse readily and pick up a few things that catch my attention. Thankfully, the sales-people in the shop are helping me in this regard. They’ve placed the milk and eggs at the back of the shop so that I have to trawl through various isles to get to them. This will, of course, get me to buy more stuff and… erm… generally ‘enhance my shopping experience’.
The retailers display special offers all around me. There’s one on for donuts today. I don’t usually buy donuts, but now that I see they’re on special offer I think I’ll pick up a few.
“Aha!” says our eager economist. “Since the price has fallen on donuts they are now in your ‘basket of maximum utility’. The price decrease has incentivised you to buy them where you found greater utility in other goods and services before.”
Alas, such is not the case. In actual fact I never knew how much donuts cost before. And I didn’t even look carefully at the price as I pulled them off the well-highlighted discount stand. In all honesty, the retailer could be tricking me; they could well have raised the price and simply said that they’d lowered it and I’d still be suckered in. Why? Because the idea that I might be saving money overlapped with a weak desire for donuts and so I bought them.
The vague idea that one is saving money is more powerful than any real price decrease that is badly marketed. And marketers know this well.
I move from the donuts stand to the fruit section. Again, I’m not really sure what I’m looking for but I follow my whims. “Apples,” I think, “I ate the last apple in the kitchen this morning and more apples would be nice.” Little do I know that spontaneously combusting apple trees have caused the price to rise by 40% since yesterday. Do I even take note of this? No. I, like many consumers, don’t even check the prices of things in the supermarket. Indeed, I’ll never know of this particular price increase because when I glance at the receipt after paying (if, indeed, I do) I will not even notice the increase as I have literally no idea what apples generally cost.
On I march, picking various items off the shelves that appeal to me on some fuzzy level of sentiment. At one point – purely coincidentally – I notice that coffee has gotten more expensive and I opt for the cheaper brand. But it was pure coincidence. I looked in my basket at how much crap I had that I didn’t truthfully need – indeed, some of it I barely wanted – just before I approached the coffee section and when I looked down at the price (coffee being a fairly expensive food product) I opted for the cheaper brand.
A utility maximising operation, surely? I’d like to think so, but if I’m honest with myself it was more so to make me feel better about not having spent too much on this particular outing. It was more so a reaction to protect myself from guilt feelings than it was a rational utility-maximising action undertaken with full clarity.
I get to the checkout. Damn! I forgot to take money out of the ATM.
“We take credit cards,” says the helpful shop-assistant.
But I promised myself that I wouldn’t charge anything else to my already overburdened credit card. After all, the interest rates are a rip-off these days. But hand over the card I do – even though I’ll regret it next week when I get the bill.
The economists will chastise my actions today. They will call me a heathen and a profligate. They will insist that I will bankrupt myself someday with my debauch non-utilitarian ways. Yet, so many others in the shop were doing likewise – and I would never be so stupid as to bankrupt myself.
But I need not justify my actions in front of the neoclassical authorities, because do you know what? It was a rather enjoyable shopping trip. Much better than if I’d turned up in a raincoat and dishevelled hair with a list of yesterday’s prices in my pocket cross-checking every purchase like an obsessive loner.
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Contrary to Phillip’s claims, the fact that some purchases derive in part from his desire to nose around in retail outlets which he does not normally visit does not disprove the utility idea. Where “nosing around” is part of the motive, he is deriving utility from the nosing around experience.
Retailers (who I suggest are one step ahead of Phillip) realised long ago that the actual purchase of goods and services is only part of what consumers are after: it’s the whole shopping experience that really counts. E.g. people will pay good money for cr*p food in a posh looking restaurant. And if the waiter speaks with a fake Italian accent, they’ll pay even more.
Where “nosing around” is part of the motive, he is deriving utility from the nosing around experience.
Well, you may be right about that BUT is it really possible to build a theory that should give some kind of useful information on such flimsy arguments? Is it not rather obvious that that many aspects are involved that such theories are completely useless for achieving any conclusion that will provide useful data?
Right, it’s not valid and not meaningful to define utility as “whatever we want”.
Doing so would result in absurd results: is suicide, murder and terrorism really maximizing utility? Are bad mistakes maximizing utility? Is the conscious act to act on a whim maximizing utility? Is our often blind trust in others maximizing utility?
Precisely. If ‘utility maximising behavior’ is actually descriptive of something it needs to be well defined. It is well defined in the textbooks. It is the process of trading price off against some sort of static ‘preference’.
The key here, to reiterate, is that we have a set preference that ensures that we are only willing to spend X on Y amount of a given product. If that holds in real psychological life, utility is a real concept. If it doesn’t it isn’t. Simple as.
“If ‘utility maximising behavior’ is actually descriptive of something it needs to be well defined. It is well defined in the textbooks.” R.G.Lipsey’s 600 page “Principles of Economics” defines it as “the satisfaction a consumer receives from consuming a product”. And J.L.Hanson’s “Dictionary of Economics and Commerce” defines it as “The amount of satisfaction a person derives from something, without any reference to its usefulness.”
Human beings engage in a VAST range of what are arguably totally useless activities: bungee jumping, eating in posh restaurants, nosing around shopping malls, getting drunk, and so on. If that is what gives them “satisfaction”, then they derive utility from those actions.
Eh, that’s perfectly in line with what I said in the piece and in the comments. Now add ‘marginality’ to that and you have to trade this fixed ‘satisfaction unit’ against price. It doesn’t make any sense. Because people do not possess an abstract ordinal unit of satisfaction called ‘utility’ that they weigh up against price.
I contend that this is because the ‘satisfaction’ derived from goods and surfaces is completely fluid and cannot be thought of in either cardinal or ordinal terms.
I cannot understand why I have to keep reiterating this fundamental and rather simple point for certain people. It’s so intuitively obvious it hurts.
This is really a reply to Ralph.
How can merely doing a textual substitution of “satisfaction” for “utility” count as any kind of definition ?
When criticised for the use of the word farbleglub (as I frequently am) and asked for a definition I could, by this token, reply in terms of gondifree.
Utility is tautology.
It happens to be a necessary tautology, because it is the central mystery of this particular religion. That doesn’t mean you’ll ever get a non-circular definition for it.
Hay can defectives join in?
I always thought is was manufactured, you know cortex injections, you want this stuff or feel bad about not having it, too put it in splainlish.
Skippy…Damn right definitions matter and furthermore whom makes them and to what purpose. All this can be laid at the feet of those arm chair economists from the past. I hope Dante’s embrace informs them, of their thoughts embrace, of us today. Mystics…bah!
Per ECONNED:
The problem is that a theory that is twisted to justify any sort of behavior means it is no theory. Acting in your own interest is quite different than acting for others’ benefit. A construct that justifies actions that can be diametrically opposed cannot give practical guidance. And remember, per the discussion of Milton Friedman’s “get out of reality free” card of endorsing “unrealistic” assumptions, predictive power was one way that seemingly absurd assumptions might nevertheless pass muster. If the model yielded an accurate prognosis, it was treated as a black box, and therefore the axioms don’t matter. But here we see a clear failure of the model, with people in fact behaving contrary to its predictions. Instead of abandoning the framework and finding explanations that work better, all sorts of complicated rationalizations are invoked to disguise the fact that the emperor, or in this case, the model, is wearing no clothes.
The ‘nosing around’ discredits the idea that I act in line with marginal utility. If marginal utility is the weighing up of price vs. utility, then ‘nosing around’ undermines this. It’s a fundamentally irrational action that has nothing to do with utility maximisation.
As Yves says, we can keep expanding the scope of what ‘utility’ means. We can expand this so far as to argue that people with OCD are undertaking irrational actions in line with ‘utility’ insofar as there is a ‘utility/anxiety trade off’, but this gets patently ridiculous.
Simply put, the further we get away from the main theory — that is, people weighing up ‘satisfaction’ against ‘price’ — the more meaningless and rotten a theory becomes.
Mr. P:
If you come to New York, the wife and I will make you great pancakes and sort out your problems with microeconomics.
While I disagreed with most of your last article, you were on to a great and important point: microeconomic theory should not be extrapolated to social prescriptions without considering context and social goals.
I wish you would amplify your views on that point rather than dwelling on the arcania of demand theory. I got enough of it for a lifetime in grad school.
Ah, but you must not see where they overlap. The microeconomic theory of demand has lodged within it unrealistic assumptions about how people behave. These assumptions are in line with what the old critical theorists used to call ‘Instrumental rationality’:
http://en.wikipedia.org/wiki/Instrumental_rationality
It is the very nature of instrumental rationality — that is, suppressing certain truths about what humans are and how they behave — that leads to totalitarian applications.
The microeconomic theory of demand is fundamentally totalitarian because it represses certain truths about Man. In doing so it facilitates rationalisations of actions that are totalitarian/authoritarian.
The point about Bentham and the Panopticon and all that cannot be made separately. The theory itself is the virus. The Panopticon — and other social ‘effects’ of having authoritarian neoclassicism applied — are simple the symptoms.
“The microeconomic theory of demand is fundamentally totalitarian because it represses certain truths about Man. In doing so it facilitates rationalisations of actions that are totalitarian/authoritarian.”
Mr.P: I think that these theories are empirical, not philosophical. After all Samuelson’s utility (dare I bring up the sore subject again) was based on revealed preferences (an empirical concept). I prefer to think of these models as incomplete, not repressive as you suggest.
Poor old Samuelson isn’t responsible for what Dick Cheney does with his harmless, empirically-based theory any more than Marx is to blame for Stalin.
Well, I wouldn’t be so kind. Marx and his ‘dictatorship of the proletariat’ do bear some responsibility for Stalin (quite directly, if you follow some of the policies put in place by Lenin). And Samuelson (or whoever) does bear some responsibility for Pinochet or Putin. Meanwhile, Nietzsche undoubtedly bears some responsibility for Hitler and Mussolini (the latter through the conduit of D’Annunzio).
You don’t want to believe that, fine. I judge actions louder than words. And I fancy that I can always tell when a theory about politics or ‘human nature’ is rigid enough to cause chaos.
There are clearly folks that enjoy shopping in Safeway, wandering up and down the isles. I personally find that I want what I want and I want to get home and cook it and eat it and that Safeway has 95% of it’s isles full of stuff I don’t want that’s essentially the same as the stuff next to it and supplied in a number of different, small and inefficient sizes offered at increasingy outrageous prices. I think the shelf stocking methods of Safeway are proof of non-utilitarian shopping as the standard.
That is exactly what I feel about those economic theories that are not based on real world actions.
To some extend I can agree with those theories but it works actually only if and when people have such low financial means that they are unable to meet all their needs. In such a case, they might probably really calculate in how far they might be able to meet most of their needs with the available funds and act therefore in an economically “correct” way.
Our family watches grocery prices and will product switch or overbuy to take advantage of sales. We would do more of it if we had the time. I would say that most people for whom groceries constitute a portion of their “budget” (most people) have to watch this stuff closely. I bet you shop more closely for clothes, cars, apartments, ie. bigger ticket stuff, and I would venture to guess that you pay a pretty penny for your preferred “aesthetic”.
Everything i read you doing seemed to be about maximizing utility. Your statement on your insensitivity to donut prices so you could impress your friend was hysterical, by the way, and a classic case of utility
maximization. In fact there is an entire industry designed to capture just this utility preference. It is called “jewelry”. I bet you cleaned your
apartment before she came over for a change, as well, even though it was “work”
Basically, your point is “when you do something, be it completely stupid, whimsical, altruistic, suicidal, religious, counter-productive, etc., you do it “for some reason” ; that “reason” corresponds to the “maximizing utility” concept of the neo-classical theory.”
I’m sorry, but I don’t buy it. You’re just fiddling with the theory. The human mind is much too complex to be translated into simplistic equations assuming that a carefully planned shopping list and a whimsical purchase of an iPod are the same thing : “maximizing utility”. Don’t fool yourself.
The “utility function” is a variant of the “no true Scottman” fallacy:
“No true utility function fails to account for human behaviour that the utility function fails to account for.”
“Utility” is defined as “the motivation behind whatever humans do” – even in the very common case where there’s no utility and no real motivation.
Worth linking to for our neoclassical friends:
http://en.wikipedia.org/wiki/No_true_Scotsman
Will they ever overcome their blindspot in this regard?
http://www.youtube.com/watch?v=cEsdLNG3u6I&feature=related
Doubtful…
I would love to hear examples of things you do of which you are unaware(?).
Well, that would be rather hard to do by definition now, wouldn’t it?
People are constantly doing things they don’t realise they do. They’re the ‘blindspots’ I talk about. Psychologists call them ‘unconscious actions’.
http://www.varchive.org/tpp/free.htm
(They also point out that people who deny the existence of unconscious actions most strongly are usually those most subject to them…).
A business professor discovered consumers buy more stuff when the smell of vanilla is in the air. (That’s why many stores in the mall stock vanilla candles.)
Watch “The Corporation”. Businesses employ psychologists/scientists to take advantage of people’s blind spots.
@ wunsacon
There’s plenty of tricks like that. Increasing the oxygen content in the air supply promotes consumption. Some shops put the bakery near the door in order to lure in customers. Hanging up Christmas decorations increases sales. The list goes on.
Presumably the neoclassicals factor in nice smells to their utility models. So, that ‘utility’ is increased due to the air smelling nice. Ha!
“Everything i read you doing seemed to be about maximizing utility. Your statement on your insensitivity to donut prices so you could impress your friend was hysterical, by the way, and a classic case of utility maximization.”
Ha! You didn’t even read it properly. You just scanned it. I didn’t use the donuts example in relation to my lady friend.
You just cast a fuzzy eye over the piece chalking everything up vaguely as a ‘utility maximising’ operation. Typical sloppy economic thinking with no respect for the facts.
I read it, but yes you are right. I should have said milk instead of donuts to make that point. You were on a mission to impress, so that was the utility curve you were trying to satisfy. My guess is that consciously or not, your additional purchases (donuts and apples) were to demonstrate a semi- stocked larder for your friend and provide additional choices for her.
So, how were the pancakes?
You’d almost say that typing ‘donuts’ there was an unconscious action that you undertook without being aware of it…
Well, either that or you didn’t read the piece properly!
It’s also worth noting that optimizing for utility does occur as well: you probably made a pretty good, rational decision when you bought your last laptop.
The point is not that utility optimizing does not exist – the point is that it is not the only – and for many important industries not even the main process that influences human economic decisions.
Thus the classical model is both incomplete and often outright wrong. It’s like trying to describe the colors of the rainbow via the color of red alone.
Bruce,
Transference can jump up and derail even the most ardent fanatic off the utility curve he so fervently believes himself to be on. Someone is indeed on a mission to impress in your post, but it does not seem to be Mr. Pilkington.
Please try to engage with the content of Mr. Pilkington’s post rather than trying to lure the rest of us into the not-so-fun house of perpetually self-reflecting mirrors that you appear to be trapped inside. As for your guesses, they are not nearly as entertaining to the rest of us as they are to you. Silence is an underrated skill.
“Everything i read you doing seemed to be about maximizing utility. Your statement on your insensitivity to donut prices so you could impress your friend was hysterical, by the way, and a classic case of utility”
maximization.
Yes, I suppose it as as long as economists continue to define “maximizing utility” any way they damn well please.
It’s all about the bunga-bunga?
How to quantify…
Trust me, if he’s buying Cuisine de Tallaght donuts at ANY price, utility doesn’t even come into it. The worst donuts on the planet.
Phil
Not Mr. Pilkington Phil, my old doorman Phil. He was one of those Brooklyn guys that went from high school to the union and stood there all day in his grey uniform being pleasant. Then he got drunk after the shift.
When he got paid, he’d go around the corner to the deli and hit the lotto. He’d spend $100 without blinking and then he’d spend another $100. We laughed that if I never saw him again I’d know he won.
But he was always there the next day. Eventually he couldn’t take it anymore and got a job in Jersey working at a Wal-Mart, so he said anyway. Who knows? I guess it’s a bit like Haiti. You decide whether you want to stay and die, or leave and die.
If you leave, at least you can live in your mind for a few brief days before you die. I guess that’s worth something, but I’m not sure it’s a theory of anything.
Um…maximizing utility.
http://www.youtube.com/watch?v=i9WMh18YF2o&feature=related
Skippy…did Lester maximize, I hope so…lol.
Unfortunately, you have to really understand economics to know it is entirely bogus. Fifty years ago I received an honors degree in economics from a leading liberal arts college, got an A on my comprehensive exam, and graduated with the realization that I had wasted the best part of four years immersed in a world of nonsense. The only economists worth reading remain Veblen, Henry George and Keynes. The others are all charlatans and the number one charlatan of all time is Milton Friedman. Knowing this has been quite profitable over time, and I remain grateful to all those who continue swallowing all this bunk and act accordingly in financial markets.
If I could recommend only one book to serious students of reality it would be Veblen’s Theory of Business Enterprise (1904), which explains the stock market perfectly without having intended to do so.
Is he the guy who made up that story about the two men buying monkeys from villagers for $15, $25, and then conning the villagers into a reverse repo for $35 before skipping town? /*Genius*!/
(Okay, I doubt that. But, thanks for the tip. I see the book is available for free from Google: http://books.google.com/ebooks?id=EugJAAAAIAAJ)
“Then I realised that I was not going to convince anyone who subscribes to the faith and that I would have been better off not engaging with the theory on its own terms at all.”
Exactly! Neoclassical economics is just another faith based reality system that, whenever in doubt, turns to magic to explain the mysteries of the world. Happily, most economists probably do think the earth is more than 6,000 years old but I am not sure that does much good given their systemic failures in thinking about and understanding human society and history.
Although seemingly invalidated as a general theory of human motivation (by the actions observed to be taken by individuals), nevertheless, in the context of discussions and debates amongst those who have power, as to which public policy ought to be followed in the collection and disbursement of tax receipts, the general utility of the programs proposed (as to the proposal’s likely effects on the public welfare) seems a very acceptable basis for distinguishing between such proposed policies.
Better than simply stating “The King (or God) wants it that way”, and then implementing the policy, anyhow.
Then theory may be false – but that doesn’t remove the need for Governors to justify their action, or inaction, as the case may be. And that justification will have some “utilitarian” aspects – how could it not?
“Utilitarianism” is a theory of governance, disguised as a general theory of human motivation. And I personally think that useful policies are better than useless policies…others may disagree, but I can’t think why.
Remember, the theory of “utilitarianism” arose at a time when Monarchs were widely considered to hold the right to rule others arbitrarily and absolutely , with such power coming from God as their unquestionable divine right – in THAT context, utilitarianism as a theory of governance represented a great advance in human thinking.
But as a theory of general human motivation?
IMHO, what people think others will think of them, if they did or didn’t do some specific act, would seem more important in determining how people conduct themselves, than dry calculations of some abstracted notion of “utility”.
Perhaps that changes if nobody else is watching, or if nobody else cares what you do – then , perhaps, thoughts of personal gain, or utility, may come freely into play to determine people’s actions.
People in general seek not utility, but the esteem of others, or themselves…which is not what the Governors ought to pursue, IMHO…their duty is to set policies that benefit, that do some good, that have some utility, for society as a whole.
A couple of links relevant to thinking about motivation, and the role which “utility” may play in determining conduct, human or otherwise:
http://esciencenews.com/articles/2011/10/06/why.does.conflict.arise.when.social.identity.threatened
http://esciencenews.com/articles/2011/10/06/is.chivalry.norm.insects
Sad to say, the only useful economists for our times are criminology experts.
A suggestion, featured on NC often. From Bill Black’s web page:
University of Missouri-Kansas City School of Law
William K. Black
Associate Professor of Economics and Law; A.B. (University of Michigan); J.D. (University of Michigan Law School); Ph.D. (University of California at Irvine)
Bill Black is an Associate Professor of Economics and Law at the University of Missouri – Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007.
Ah, but of course, collectively we all act “as if” we are maximizing utility.
Well, don’t we?
Not always, it depends on how far back you’re standing when you make your observations.
And as far as what’s going on today…well, how far back can you stand from the present ?
One thing holds good: an inch ahead is darkness; that is to say, the future is ALWAYS uncertain.
Maximize your utilities (for there are more than one, and sometimes they conflict) accordingly!
I figured it out just now. If I’m maximizing my utility function that must mean I’m doing math in my head. And since you can’t do math in your head while you do other things, you must be doing math up to the point where you are indifferent between more math and less utility, which you clearly only maximize AFTER you’ve done the math. Which means that doing math and maximizing utility are mutually inconsistent. Hello? Do I get a Nobel Prize or at least a Baloney Prize. I’d prefer the baloney prize, frankly. :() -Mr. Monkey
>> indifferent between more math and less utility
I think people make that tradeoff. And the goal of the corporate marketer is to trick people into ending their math computations as early as possible or maybe never even starting them in the first place.
Typical Shopping Day (for an unmarried 50 year old):
I need to stop at the Grocery Store for some Half ‘n Half
Look at that, GatorAde, 10 bottles for $10.00, great deal if you like the stuff, I don’t.
Hey! Oreos, 2 packs for $5.00, I’m in!
Holy Cow! Half and Half is 3.89 a quart! Oh well…
Hey, Sam Adam’s on Sale, $10.00 a 12-pack. All right!
That reminds me (why?) I gotta get some cat food and peanut butter.
Speaking of peanut butter, do I have any bread left, better buy a loaf. Damn, shoulda grabbed a basket, I’m gonna crush this bread. I better get out of here.
In the grocery line I find that my 3.89 purchase of Half and Half just turned into a $28.00 expense.
Get home and throw away a half loaf of slightly stale bread sitting on the kitchen counter, push aside four bottles of Guinness and think about throwing away a 3/4 full, 1 month old, tub of cottage cheese to make room for Sam Adams.
My (utilitarian? rational?) trips to Khols and Sears don’t go much better.
when I see a banana tree, I eat all the bananas until I puke, then I start eating them again until I sleep. :() -Mr. Monkey
(OK that’s enough fun for one day. My utility function needs to earng a living. ha hahahahaha )
Yeah, it’s important to keep those bananas flowing.
yeah!
OK, one more thing.
Phil P. I bet you’re a lot of fun at a dinner party!!!
bowahaha ahahaha haahahaha hahahahahahaha
Just ribbbin’ ya. As always, I appreciate your articles and your effort.
Yes, at dinner parties I try to calculate how everyone derives their utility and then try to focus my discourse in order to produce ‘utility maximising’ affects. For some strange reason, I don’t get many invites… ;)
That’s *Dr*. Tobias Funke (with an umlaut over the e, don’t know how to make it), to you, buddy ;-)
“Arrested Development” is one o/t few bright spots in the last decade of blighted television. Hurwitz is talking about a movie and an 8-episode mini-season. We’ll see if Fox/Murdoch manage to screw it up.
Two more brilliant comedies: “Action”, a series that Fox cancelled after airing two episodes, about a ruthless Hollywood producer (in the opening minutes of the first episode he steals his uncle’s prescription for heart medicine and uses it to get Xanax); and “Hot Metal”, a BBC production from the late 1980s the sends up Fleet Street in a way that eerily foreshadowed the present News Corp scandal – starred Robert Hardy (yes, that Robert Hardy) in dual roles as Twiggy Rathbone, Rupert-esque owner of the paper and self-described lifelong socialist, and Russel Spam (sic), editor of the flagship tabloid of Twiggy’s empire.
Both worthy of sitting alongside “Arrested Development” on any malcontent’s video shelf.
Phichibe
Well, Arrested Development was clearly much better than almost all other sitcoms on the major US networks (which are stultifying), but I must confess I do not understand the fanbois on this one. Never thought they quite caught the right tone, but whatever, to each his own.
Wow, you really got us economists. We sure don’t know nothing…
My Dear, he most assuredly is trying to tell you that yous know far too much and have far too much confidence in what yous know.
If only economists were computers we could scrub their drives and start over. Perhaps we could even give you a mature sense of sarcasm without the petulant hauteur.
That guy in the trenchcoat with the disheveled hair… he’s death. He carries a shopping list in one hand. And I am the creepy freak chasing down a bargain, even tho’ I’ve seen him enter the store. I know he’s there, but I can’t stop. If I don’t get my fix I will agonize for days, and only have to come back again and again.
You are my loss leader.
Various things going on here. The computer science subdiscipline of AI (artificial intelligence) is based on emulating “rational’ cognition, pretending that Spock has the only valid form of intellectual activity.
This distaste for the reality of being human is an expression of a core American trope: hatred of the body.
Look at the state of the world around us? That’s all you need to do to settle the idea of humans beings as rational beings.
For example, consider the atomic bomb. Or consider this, why would companies spend so much money using sex, babies, and star athletes to entice you to buy a product, if products were sold on the merit of value? I suppose you could argue the person derives utility or pleasure from wearing underwear “like Mike (Jordan)”, but is that rational?
“I have no very pressing financial constraints”
“… already overburdened credit card.”
Does not compute.
Perhaps the utility of Phil’s irrational behavior is that he got to write a post about it here?
You can’t have a credit card with too much on it while having a healthy bank balance?
I think you can actually, smartass…
I think you can, if you are an IDIOT!!!
Smartass… feh.
What, do you want to rack up “points” so you can get some golf balls or a Bose stereo for 175 cents on the dollar??
There was someone who bought a house on a credit card (and paid it off at the end of the month, obviously) in order to rack up points and get a LOT of free stuff.
The banks didn’t like that so they’ve pretty much made it impossible now.
It would seem that amongst hunter-gathers and some pastoralist tribes utility maximisation was often of the status seeking kind where being a good woman, or man, was to posess the virtues of generosity, non-quarrelsomeness and reliablity to name but a few virtues. Today many of us no longer status seek virtues but largely shallow material things. We are very “sad” and antagonistic people as a consequence.
The concept of greed does not exist in a world without scarcity. Money works to create artificial scarcities.
Perhaps the importance given to “utility” by economists is to keep us from realizing its implicit meaning. At the extremity, “desperation.” Cannot not greater “utility” be a polite way of saying saying more price inelastic? Perhaps the most price inelastic (greatest utility?)items are those which are addictive. Cocaine, anyone?
Suppose one is in the market for a house. The desperation of the seller to sell or the buyer to buy is as much a measure of the “utility” of the house (or of the money the house could bring), as it is of the usefulness of the house.
We think of “utility” as something positive, but too often it is not. We are always happy if a counterparty to our trade is more desperate (values with a greater “utility”) our good (or money) for sale than we do his. “Utility” can be viewed as the inverse of bargaining power.
The concept of marginal utility (or optimal consumption, which seems to be what Philip is actually trying to debunk) in no way depends on the assumption that consumers always seek to maximize utility. First, marginal utility is about preferences when consuming *more* of a product, not just consumption per se (hence “marginal”). Second, the meat of the concept is, to quote a standard text (emphasis mine): “*when* a consumer maximizes utility in the face of a *budget constraint*, the marginal utility per amount spent on each good or service in a consumption bundle is the same.” The keys here are “when,” and “budget constraint,” operative concepts that Philip’s explanation above ignores. Regardless, many many economists recognize that the “rational consumer” assumptions required to really make this work are deeply flawed (hence lots of behavioral economics), but that the concept of marginal utility still provides valuable insight into consumer behavior, particularly when trying to model large numbers of consumption choices, as across an entire economy. That’s basically it, and overcomplexifying it with a lot of argument about whether it is psychologically valid (or arguing whether it is intended to be prescriptive or proscriptive, rather than descriptive) doesn’t really have a lot of utility (pun intended of course).
Kabosh, you’re getting it.
The pricipal of diminishing returns…
Banking and finance creations that are so complex that no one really knows what’s going on. Just in time manufacturing that gives us virtually custom products like automobiles that will go 100K miles and them are throw aways. Medical Insurance that even the insurers don’t understand and that providers don’t care about – try to find someone who cares about double billing. They’re making too much money off it all to even think about it.
Then we get to Microsoft – mandatory upgrades that we don’t understand, don’t need and will never learn how to use before they are obsolete. What a system….
After reading all of the above comments, I think Ariel Fernandez got it right and faster than he thinks. Our complexity is leading us to a prion type of death, figure it out.
http://www.project-syndicate.org/commentary/fernandez1/English
Oh my! Look at all the comments. I love it.
I live in an affluent California coastal community about 30 miles So. of San Francisco. 2 major markets; Safeway and “New Leaf” (an organic store). Our favortite store is a small hispanic owned store where yellow onions are like $.39/lb compared to $1.29 at the other stores. I noticed the pear tomatoes were $.29/lb and the crate they came in said “organic”, but they weren’t even advertised as organic. “Big Box” seems to have run out of room to run everyone else out of business. I intend to shop online and at small stores and roadside stands whenever I can. I’ll go to Safeway when I have no other choice. there are usually other choices. BTW Safeway cilantro sucks.
I happen to be an exceedingly rational shopper who could probably be modeled by utility maximization… but the fact is I know that practically nobody behaves like me when it comes to shopping.
I’m useless for generalizing from, and in fact every marketer knows this; stores operate according to psychological theories which have nothing to do with utility-maximization. They’re mostly targeted at suggestible people with “impulse shopping” mentalities (the most profitable group), with a significant minority of stores targeted at people with “trust based” mentalities.
Perhaps someone should ask stores how they actually work, and study what the results are, and make a theory of shopper behavior based on that.