RATIONAL
UTILITY MAXIMIZATION FOR DUMMIES
Or, Why Economics Doesn't Work (2004)
Think of someone you know, a male friend.
Let’s say his name is Bill. You may describe Bill as
“happy,” but he has his bad days like anyone else. You may
describe him as “intelligent,” but your friend has also
done some fairly inane things in his time. Billis clearly a
complex entity, beyond a quick summing-up.
When Bill goes for a fitting for a suit, his tailor can
measure him accurately, and create a suit that fits him
well. But ask the tailor who Bill is, and he will say “Bill
is a 44 long, with a 33" waist and a 32" inseam.” For his
purposes, Bill’s physical dimensions are all that matters.
But no one would think the tailor’s description of his
customer as complete. (If someone were to ask you to
describe Bill, and you gave his measurements, they would
think you were either joking or nuts.)
As a description of people, and their collective behaviour
in the market, classical economic theory is lot like
tailoring: it can be quite accurate, but only within a
limited area of application.
An economist’s description of Bill as a “rational utility
maximizer,” is just every bit as trivially true as a tailor
saying he’s “a 44 long, with a 33" waist and a 32" inseam.”
When we reduce human beings to economic agents, and insist
the market (itself largely a creation of a certain kind of
economic thinking) is the final arbiter of human purpose
and meaning, that’s when the trouble begins. Like the
tailor’s estimate of John, it’s sane in limited
application, and insane when it pretends to be the big
picture.
Unfortunately, today’s intellectually fashionable tailors —
that is, the economic advisors to government, corporations
and financial institutions — are out of control, and
they’re running around with scissors.
Consider how economists measure the gross domestic product.
Lets say John has a divorce, and tops it off with a heart
attack. By standard economic accounting, John has
contributed to the GDP by stimulating legal and health
services. He has done good, as far as “good” is measured by
economic thinking.
One incident that critics of classical economic theory
frequently cite is the Exxon Valdez incident. When the
tanker ran aground off the coast of Alaska in the late
eighties, the oil spill was counted as beneficial to the
GDP, due to all the jobs created by the massive clean-up
operations.
Former UBC professor of genetics David Suzuki tells a great
anecdote about economic thinking and its disconnect from
reality. Thinking he should supplement his academic
background in biology with an understanding of economics,
Suzuki took an introductory course at UBC. The instructor
stood at the blackboard, with lines in chalk indicating the
flow from the resource base into the market, with
subsidiary industries adding value and creating wealth for
investors.
Suzuki pointed to the one side of the blackboard that was
empty of equations, the resource base, and asked whether
the calculations took into account the effect of human
activity on the environment — the diminishing reserves and
growing waste that he quite reasonably regarded as a cost
mortgaged into the future.
“That’s an externality,” the professor responded dryly. He
meant the environment is something external to the grand
human workings of the market. An “externality,” e.g., an
unknown, not worth factoring in. Suzuki left the class on
the spot.
Post-Keynesian economic theory is stuck in a Newtonian-era
rut — a push-pull paradigm — and its about to hit a wall,
both intellectually and practically, in earth’s carrying
capacity. Many sociologists and ecologists have been aware
of the contradictions of standard economic theory for at
least a decade, and in the past few years some academic
economists have come around too. One of them is professor
Stefano Zamagni, from the University of Bologna, who spoke
in Vancouver recently on “economics as if people mattered.”
What an amazing thought. Economics as if
people
mattered, instead of the
smart designer duds cut for them by Adam Smith’s Men’s
Wear. (I suppose yet another intellectual revolution will
have to occur before we hear about Economics as if The
Planet Mattered.) What Zamagni is talking about is an
economic model that abandons the divisive politics of left
and right through a middle path of decentralization.
* * * * * * *
According to Zamagni, prior to the 1900s, economics was
referred to as “the science of happiness.” By the late
twentieth century, it had famously become “the dismal
science.” Given this arc, one wonders what fun description
will attend the big-bucks bean-counting of the next
century: “the Science of Misery,” perhaps?
The Oxford-educated Zamagni, Adjunct Professor of Public
Economics at the Bologna center of the John Hopkins
University, is a garrulous sort with a bass-profundo
lecturing style. He spoke recently at the Wosk Centre for
Dialogue on “Economics as if People Mattered.“
The prof prefaced his booming critique by tossing a bone to
his profession, noting economics is “a very well developed
discipline; very rich in terms of methodological tools,
statistical tools, etc. “
But on the things that really
matter, “the discipline is virtually silent.”
Zamagni went on to describe the crisis facing economic
science. As it is currently practiced, the field involves “
a limited conception of personal well-being, and a limited
conception of the common good…”
Economists identify the common good with the sum total of
individual goods, Zamagni says, which doesn’t work, as it
ignores “the good of every individual in all the dimensions
of a human being.“
The crisis of the economic discipline has anthropological
foundations, he says: our culture-bound faith in
reductionism. What Zamagni calls the “original sin of
economics” is the reductionist idea that economic relations
are reducible to the exchange of equivalence — I give or do
something for you, and you give or do something for me of
the same value.
Economic relations are molded and interpreted as if there
were only such exchanges, he says. There is another
dimension to exchange, based on the principle of
reciprocity, “and the principle of reciprocity is
completely different from the exchange of goods.”
Reciprocity is closely tied to trust, and both variables
are entirely missing from economic equations. In fact, they
are unquantifable, yet immensely important to sustaining
fair economic relations. (Enron, anyone?)
Consider the family, which we all agree is the single most
important social unit. Here reciprocity reigns, or at least
it should; When the family tries to mimic the workings of
economic relations, Zamagni says, you get disaster.
Zamagni give the example of cooperatives, where trust
energizes and empowers the economic relations among its
members — primarily because the scale is small enough for
people to know each other face-to-face. “Reciprocity is
based on ’I help you, and you help me,’ rather than ’I
exchange this for this, based on the exchange of
equivalence.’”
The pernicious idea that the primary relations between
human beings are solely that which is measured by classical
economics has pervaded all aspects of life, Zamagni says,
from family, to schooling, to the culture at large.
The professor connects several decades of materialistic
economic philosophy, with its reductionistic disconnect
from the real word, to the deterioration of North American
civic and family life. The “instrumental rationality“ of
economic thinking, he says, has ventured far beyond its
sphere of applicability.
“One of the major cultural disasters has been bringing
people to believe that to maximize utility (a measure of
satisfaction) is to maximize happiness, as if happiness and
maximization of utility is the same thing.
This is a “ mystification,” he says, and goes on to explain
how this bizarre idea came about. “Utility is the property
of the relation between human beings and things… clothes,
services, these things bring me satisfaction. If I am
thirsty, the glass of water gives me utility because it
acts as a drink…(utility) is always the relations between a
human being and a thing.”
According to this almost universally accepted notion, it
follows that if you want to maximize utility, you need to
maximize the consumption of things.
But happiness, Zamagni reasonably insists, “is a property
of the relation between a human being and at least another
human being.”
This is a radical concept — radical because it accords with
everyday experience, yet flies the face for the theological
hair-splitting that passes for current economic thinking.
But is there anywhere in the world that such lofty ideas
about reciprocity have found real-world application? There
is, but that’s for another column.
Geoff Olson
