Wednesday, October 15, 2014

Peter Dorman — Utility and Happiness

The question, after all, is whether the economic choices people make maximize their well-being. To test this we go out and gather various independent measures of well-being. When we find out they diverge in significant ways from revealed preferences, it is weird to use this as a demonstration that the evidence can’t really show what it seems to show, since our hypothesis about utility maximization has to be right. And for “weird” you can also substitute “ideological”.
Rational choice based on utility maximization is essentially the same as Ludwig von Mises axion of human action. It's a priori and unfalsifiable.

Among logicians, the economic definition of utility is called a circular definition. It provides no useful information.

From Wikipedia/Utility:
Cambridge economist Joan Robinson famously criticized utility for being a circular concept: "Utility is the quality in commodities that makes individuals want to buy them, and the fact that individuals want to buy commodities shows that they have utility"[9]:48 Robinson also pointed out that because the theory assumes that preferences are fixed this means that utility is not a testable assumption. This is because if we take changes in peoples' behavior in relation to a change in prices or a change in the underlying budget constraint we can never be sure to what extent the change in behavior was due to the change in price or budget constraint and how much was due to a change in preferences.[10] This criticism is similar to that of the philosopher Hans Albert who argued that the ceteris paribus conditions on which the marginalist theory of demand rested on rendered the theory itself an empty tautology and completely closed to experimental testing.[11] In essence, demand and supply curve (theoretical line of quantity of a product which would have been offered or requested for given price) is purely ontological and could never been demonstrated empirically. 
Another criticism comes from the assertion that neither cardinal nor ordinary utility is empirically observable in the real world. In the case of cardinal utility it is impossible to measure the level of satisfaction "quantitatively" when someone consumes or purchases an apple. In case of ordinal utility, it is impossible to determine what choices were made when someone purchases, for example, an orange. Any act would involve preference over a vast set of choices (such as apple, orange juice, other vegetable, vitamin C tablets, exercise, not purchasing, etc.).[12][13][14] 
An evolutionary psychology perspective is that utility may be better viewed as due to preferences that maximized evolutionary fitness in the ancestral environment but not necessarily in the current one.[15]
Rational choice based on maximizing utility simply states that people choose based on what motivates them to choose but gives no empirical or operational way of determining this, which is required in technical definition in the sciences. It's like the Latin terms  medieval philosophy and medicine that were meant to impress rather than inform, which were roundly satirized after the Renaissance. Conventional economics is stuck in that rut, and conventional economists are too stuck other themselves to realize that look like Scholastic theologians and philosophers. The new Latin used to impress while concealing vacuity is math.

Of course, it is possible to construct formal models of cardinal and ordinal utility as neoclassical economists and game theorists have done, but the question is whether such models are representational, and that requires hypothesis formulation and testing, which in turn requires interpreting the model wrt to what is modeled. That's what technical definition does. Without anchoring a model to what it purportedly represents, it is unfalsifiable.
The Empirical Evidence Against Utility Maximization
ABSTRACT
Current Economics Textbooks and Economists justify a theory of consumer behavior based on utility maximization on a priori grounds. This methodology follows Lionel Robbins’ idea that economic theory is based on logical deduction from postulates which are “simple and indisputable facts of experience.” Strong evidence has emerged from many different lines of research that these “simple and indisputable facts of experience” are contradicted by human behavior. In this article, we summarize some of main contradictions between predictions of utility theory and actual human behavior. Efforts to resolve these contradictions continue to be made within orthodox frameworks, but it appears likely that a paradigm shift is required.
In addition, a model that purports to be causal must demonstrate a basis of causality in terms of some transmission mechanism.  Utility theory says no more than that rational choice is motivated but not how it motivated, which is the issue. Saying that rational choice is motivated just distinguishes the meaning of "rational choice" from say, a whim. It's about the model and not what is modeled.

Econospeak
Utility and Happiness
Peter Dorman | Professor of Economics, Evergreen Stat College

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