One of the first lessons for any economics student is to meet an imaginary species called Homo economicus, who is 100 per cent rational.
He, she or it (such distinctions are irrelevant) can always be trusted to maximise personal profit, from seeking out the best deals to selling her own child if the price is high enough.
It is maximise “utility”.
Sigh.
I spent most of my life under the impression that classical economics assumed that all actors were entirely rational in the pursuit of their own self-interest, which meant profit.
It wasn’t until I started reading up that I realised that what was actually assumed (by honest economists) was that all actors simply pursued what they perceived to be their own self-interest, i.e. utility, and that that perception was not necessarily rational.
Why else would people engage in behaviour that made them feel good but was also personally harmful and financially draining, such as drug addiction? Or acrimonious, financially ruinous divorce actions? Or gambling? Or any of an uncountable number of activities much more likely to produce loss than profit? And what about all those people who are obviously primarily irrational anyway, which under certain circumstances means all of us?
Is this conflation of rationality, profit and utility yet another deliberate lefty misrepresentation, like “National Insurance”, which I also assumed until I learned better really was an insurance scheme?
“yet another deliberate lefty misrepresentation”
Yes.
Except if everyone maximises ‘utility’ and utility is defined by that person and that person alone, then its not really much of an all encompassing predictive theory then is it?
Why did X do the exact opposite of Y in the same circumstances? Because they were both maximising utility of course. Yay, trebles all round for economists, aren’t they clever??!!
Missing the point. If everyone maximises their own utility and definitions of own utility vary then that means that the one plan for everyone does not work. Which is, you’d think, an interesting conclusion?
Norman & Our Host
“yet another deliberate lefty misrepresentation”
Juliet Samuel is about as far from a lefty as The Times will allow.
Is it too much to ask for some consistency?
“He, she or it (such distinctions are irrelevant)…” so shouldn’t “…selling her own child…” be “…selling his, her or its own child…”?
“Missing the point. If everyone maximises their own utility and definitions of own utility vary then that means that the one plan for everyone does not work.”
Makes a bit of a mess of all those economic ‘laws’ then doesn’t it?
Utility is the economics get out clause for when their predictions fail. Someone buys more of something when the price goes up? Oh they were maximising their utility in some other way unique to them, our law of supply and demand has not failed!
You cannot call something a ‘law’ if virtually everyone at some time or other breaches it. If all you can say is that in the aggregate people observe the law, then its not a law, its just observation of what most people do. Which in effect is what economics is, observing what people do. And as people are people what they do changes from day to day, week to week, year to year, decade to decade. Economics is not a science, its sociology with numbers.
Jim
Economy is like thermodynamics, it’s the laws of large numbers that apply. So, yes, we need to investigate what ‘utility’ really means. For individuals that’s hard to predict, but for millions of individuals there may be a useful answer.
PS I (independently) posted much the same comment as our host’s on The Times, but it’s still ‘awaiting moderation’. I expect my use of the word ‘irrational’ upset the censor-bot.
Something of a variation of the good ol’ linen shirt; if society broadly demands that you sit down of a Saturday night and watch Strictly, so you’ve all got something to chat about on the Monday morning Zoom call, then you’re going to need a telly.
The social pressure creates the utility to be met, which is then mediated by the cash available. Got 50 quid, you’re looking second-hand for a 24″, got five grand, brand new 52″ Sony with all the kit. Satisficing.
So, the utility would be at a large scale, population level, the way it’s met, not so much.
Jim, the general consistency in human needs and wants provides content to the concept of utility, even though there are an indefinite number of ways for individuals to live their version of the good life.
The point is that the concept of utility does nothing to help up predict anything. Its purely a fiddle figure to explain why some things happen contrary to what we think should happen. The is no predictive power to it – you can’t create a scenario and say ‘because utility this will happen’. All you can do is see what happens and then say ‘Most people did this, so thats our general prediction, but some did different things, a very few the complete opposite, we conclude this is because they are idiots, sorry, were maximising their utility in different ways’.
In an online economics lecture at work (the sort my organisation shouldn’t need, but hey-ho) much was made in the side bar of “rational economic man” not existing. I replied that IN AGGREGATE he does.
I have heard economics called the study of aggregate behaviour. And I’ve heard others complain that, no, sociology and anthropology study COLLECTIVE behaviour. At which point I give up.
Jim
Yes, economics doesn’t have much predictive capacity, but it does have some. So we know that people will maximise their utility by seeking more leisure time once their income reaches a given level. And that is just one example of utility having predictive capacity…
Did the science of economics predict that nearly all its adherents would be socialists?
Economics is still useful; it can often predict what won’t work. That’s because it contains – in a compressed, abstract form – lots of observations about the past. And if a policy has failed before it’s pretty likely to fail again. Example: rent controls; indeed, pretty much any price controls.
But I do have a question: if economists largely agree that price controls are rubbish why do so many of them advocate control of interest rates? After all, interest is just the rent you pay on borrowed money.
Price controls tend to be caps, interest rates tend to be floors.
“So we know that people will maximise their utility by seeking more leisure time once their income reaches a given level. ”
Or more accurately ‘So we know that people will seek more leisure time once their income reaches a given level.’ What exactly did the concept of utility add to the statement?
PJF said:
“Did the science of economics predict that nearly all its adherents would be socialists?”
Yes – O’Sullivan’s Law.
Jim said:
Or more accurately ‘So we know that people will seek more leisure time once their income reaches a given level.’ What exactly did the concept of utility add to the statement?
Not much, and certainly nothing predictive, but it does give a framework to think about how people might react as individuals, to then go out and look at what they tend to do en masse.
“in the pursuit of their own self-interest, which meant profit.”
Where “profit” could be anything the initiator conceives as Prifit at the time.
Which may not comply with the perception of anyone else.
Hence the Beautiful english expression: “Your Miles May Vary”.
The logical fallacy built into this one is that everybody sees the same thing as “profit” in the same way , which… they don’t.
You can apply a letter factor in a formula for it, but that does not, in any way, relieve anyone of defining “profit”.
As long as you can’t accurately quantify that particular term, it has no business being there….
– O’Sullivan’s Law.
It’s a fun law/prediction but O’Sullivan isn’t an economist.
It’s true that utility is rather circular. Why do people do x? Because they maximize utility. How do we know they maximize utility? Because they do x.
However, utility as a concept seems to me to be mostly a way to say “look closer”.
Get a surprising result, such as a higher price making a thing more desirable? Or people with higher compensation now working fewer hours? Or someone choosing the “wrong” deal?
Then either people have lost their minds, or there’s something more that you’re not considering. Look closer.
It’s not very predictive because it is so personal.
Though if you keep it in mind, then you might be able to make deals that people will find more desirable. Mostly by finding out more about the specific people you’re trying to appeal to and what they are likely to think adds more utility for them, at a lower price in giving up utility for you.
https://web.pdx.edu/~nwallace/EHP/BeckerAddiction.pdf
https://www.jstor.org/stable/1830469
The classic paper by Gary Becker and Kevin Murphy on “A Theory of Rational Addiction” (1988).
@Norman, I reckon you would be very interested in a lot of Becker’s stuff. The rationality of participating in crime for example. Have a look at a list of his most famous papers.