Utility maximization — explaining everything and nothing

3 April, 2016 at 19:22 | Posted in Economics | 2 Comments

Despite the rise of behavioral economics, many economists still believe that utility maximization is a good explanation of human behavior. Although evidence from experimental economics and elsewhere has rolled back the assumption that human agents are entirely self-interested, and shown that altruism and cooperation are important, a prominent response has been to modify individual preference functions so that they are “other-regarding”. But even with these modified preference functions, individuals are still maximizing their own utility.

5197ebbdd9c758d5c73657c270f97340Defenders of utility maximization rightly reject critical claims that specific behavioral outcomes undermine this assumption. They do not. But this is a sign of weakness rather than strength. The problem is that utility maximization is unfalsifiable as an explanation of behavior. As I show more fully in my 2013 book entitled From Pleasure Machines to Moral Communities, utility maximization can fit any real-world evidence, including behavior that appears to suggest preference inconsistency.

But note that utility maximization is not a tautology. Tautologies are true by assumption or definition. Utility maximization is not a tautology because it is potentially false. But empirically it is unfalsifiable.

Where does that leave us? Utility maximization can be useful as a heuristic modelling device. But strictly it does not explain any behavior. It does not identify specific causes. It cannot explain any particular behavior because it is consistent with any observable behavior. Its apparent universal power signals weakness, not strength.

Geoff Hodgson

Interesting post from one of yours truly’s favourite economists.

On the question of tautology, I think it is only fair to say that the way axioms and theorems are formulated in mainstream (neoclassical) economics, they are often made tautological and informationally totally empty.

Modern (expected) utility theory is a good example of this. Leaving the specification of preferences without almost any restrictions whatsoever, every imaginable evidence is safely made compatible with the all-embracing ‘theory’ — and a theory without informational content never risks being empirically tested and found falsified. Used in mainstream economics ‘thought experimental’ activities, it may of course be very ‘handy’, but totally void of any empirical value.

Utility theory has like so many other economic theories morphed into an empty theory of everything. And a theory of everything explains nothing — just as Gary Becker’s ‘economics of everything’ it only makes nonsense out of economic science.

The ever-growing literature on human capital has long recognized that the scope of the theory extends well beyond the traditional analysis of schooling and on-the-job training … Yet economists have ignored the analysis of an important class of activities which can and should be brought within the purview of the theory. A prime example of this class is brushing teeth.

BeckerGaryCartoon2009_07_10The conventional analysis of toothbrushing has centered around two basic models. The “bad taste in mouth” model is based on the notion that each person has a “taste for brushing,” and the fact that brushing frequencies differ is “explained” by differences in tastes. Since any pattern of human behavior can be rationalized by such implicit theorizing, this model is devoid of empirically testable predictions, and hence uninteresting.

The “mother told me so” theory is based on differences in cultural upbringing. Here it is argued, for example, that thrice-a-day brushers brush three times daily because their mothers forced them to do so as children. Of course, this is hardly a complete explanation. Like most psychological theories, it leaves open the question of why mothers should want their children to brush after every meal …

In a survey of professors in a leading Eastern university it was found that assistant professors brushed 2.14 times daily on average, while associate professors brushed only 1.89 times and full professors only 1.47 times daily. The author, a sociologist, mistakenly attributed this finding to the fact that the higher-ranking professors were older and that hygiene standards in America had advanced steadily over time. To a human capital theorist, of course, this pattern is exactly what would be expected from the higher wages received in the higher professorial ranks, and from the fact that younger professors, looking for promotions, cannot afford to have bad breath.

Alan Blinder

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  1. It is entirely clear to almost anyone who had a mother that economic theory that said that individuals always acted in their own self interest was very flawed. Utility theory always seemed like a really bad patch to try to save a really poor theory of how people behave. As a young econ major, I figured that utility theory was brought up in econ 101 so that normal people wouldn’t say that economists were absolute idiots for basing theory on something so evidently untrue. I guess I was wrong.

  2. “Utility theory has like so many other economic theories morphed into an empty theory of everything. And a theory of everything explains nothing — just as Gary Becker’s ‘economics of everything’ it only makes nonsense out of economic science.”

    How do such low level theories, like utility theory, fit into the grand scale of economic results? Is it possible to show, using such theories, why 40 million people in USA are below poverty line? Or does it justify the data that Federal Funds Rate tracks the unemployment data almost precisely for over 30 years period? Take a look at many graphs here https://theoryofsouls.wordpress.com/

    Economy is completely manipulated, as shown by data, and no theory works here. Many politicians and well known economists including Keynes, said so, many times during the last 200 years. After all money is false, because money is not an object of nature. How can you create anything true using something false like money? You cannot. Thus the article quote brought out above is very meaningful and realistic.


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