Utility theory — explaining everything and nothing
from Lars Syll
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.
Defenders 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.
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.
The 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.
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Real-World Economics Review Blog 
I like this critism of some part of economic theories.
I just would add, that any science not trying to get a real world unit first is senseless.
I mean, whatever kind of theory tries to argue why humans choose this or that … and really noone is worried about the fact that the unit to MEASURE whatever kind of inner-economic effect is not based on a STABLE UNIT but only on a relative and real world undefined unit as money …
How shall I name this?
In physics, a student constantly ignoring this fact would expelled from any further lessons …
Only economists think they are on the right and only path …
But: They are wrong.
Economists do at least have dollars, even though it’s only a relative measure, it is objective. The other social sciences have no unit of measure whatsoever.
What do you suggest should be done about it?
I suggest, this question should be more intensly discussed:
“What is the real world physical characteristic, to be used as the reference for the true world dimension in comparision to the relative unit of the sum of GDP, summarized in relative terms?”
That is the question to be answered first.
And exactly this is the moment, (since ten years of intense research on this) when normal, average economist step out of the discussion. Most normal economists just think “silly question, impossible, have no idea on real economic thinking” …
Which means, that I want to replace the basket of daily used goods to “measure” the inflation rate by a real world charactieristic, that is a given characteristic of ANY part of the GDP. Or in other words:
I want to define a “basket of goods” for measuring the real world characteristic of any GDP that contains any product, any service.
What I am saying: The basket of good for the inflation rate is no longer necessary as soon this question is answered.
That’s all.
And the answer is not easy to understand for educated economists.
It is much much easier to understand by physicists, they take it in a minute – and they are right. They have a real science base behind, they work with real world phenomenoms, they do work with real measuring, real units.
It is a complete revolve of former economic basement.
I compare it with the change of the Ptolemaic understanding of the universe (earth in the center, sun goes around) to the kopernicanic universe, more based on fact than on believes.
“[scientists] do work with real measuring, real units.”
I don’t quite follow this word “real”. Measurement units are invented and agreed by human beings. You can measure distance in feet or in metres—in what way are these real? The distance is real—it’s set by mother nature—but the feet or metres unit is pure invention.
Except for dollars (and zlotys, pesos, etc) no one has invented any measurement units for any social science objects. You seek a physical characteristic that can be used as a unit. But surely no one would call a metre a “physical characteristic.” People just agree on a definition of “metre” (the current on has to do with the distance light travels in a some fraction of second).
Social scientists would love to have a unit of measure but no one has been able to define any. How convenient it would be to measure kilos of aggression and litres of compassion and Newtons of stupidity. But the only measures we have are relative ones (like dollars), such as relative opinions or statistics on mental health.
Hm, good question, thanks!
I mean: In physics, there is some given characteristic of something to be measured – lets say, a dimension or weight, or mass.
To measure it, you describe that characteristic, You describe the unit, its scale – and then you compare the meter with the dimension of the object.
There is a falsificable measuring failure as well, but at least you have a defined scale unit with a defined reference dimension.
That is, what in economics do not exist.
“Measuring” in monetary dimensions is using a rubber band as a meter.
Money (any kind of money, from stone money to bitcoin) is always of a relative dimension – as long there is no relation given to a real world (physical world) dimension as a given reference.
An easy question: How would You try to define a “limit of growth” while using a unlimited elastic undefined scale of measuring toolbox: money?
Money IS relative.
The simple question: relative to what?
Or more in detail: relative to what kind of physical given characteristic, which must be a given characteristic in any part of economic systems, any product, any capital good, any service done, just anything?
That is the question to be answered.
And again: The answer is there – and any physicist is agreeing the answer by a minute.
“Social scientists would love to have a unit of measure but no one has been able to define any. How convenient it would be to measure kilos of aggression and litres of compassion and Newtons of stupidity. But the only measures we have are relative ones (like dollars), such as relative opinions or statistics on mental health.”
Well, to measure the trade value of single parts of economic systems, you end up at ideas like “labor theory of value” – which is ridiculous. Its nonsens, because it would mean, that you always get someone to buy something for a however “measured” amount of value/trade exchange goods/money.
Any trade is of course always relative. But any traded good, any traded service delivered has a relative value above 0 – and below or even 1. (1 is the total GDP).
And you must leave the common understanding of how to measure economic systems by summing up the total pile of all relative values.
There is a phsical dimension of any economic systems which can be used as reference for the total GDP instead of the weak inflation rate basket of some weirdly selected real world goods.
When I was a young guy and it was still thought acceptable for young men to look at young women and think how attractive they were, we used to measure desirability in oersteds – units of magnetic attraction. It was a joke, of course. While human desire has a physical substrate it is not readily measured in physical units.
“While human desire has a physical substrate it is not readily measured in physical units.”
Totally right.
But economic systems do not exist in real world physical dimension of human desire.
Economic systems are real. Any (!) part of any thinkable economic system has at least one, most times much more physical characteristics.
And, even more important, any (!) part of any thinkable economic system has one dedicated physical characteristic that any other part of that very economic system has as well.
That means:
There is exactly one given physical true world real characteristic of any product, any service delivered, just any part of any economic system that is characterising the real world dimension of each part – and, by the sum of it, the total real world dimension of that economic system.
There is a real world dimension of any GDP of any contry, at any times in history and … for any economic system that may exist in our total universe.
Its not the Big Mac index. It is a real dimension characteristic.
But economies do exist in the dimension of human desire. Economies exist to service the hierarchy of human needs: food, shelter, entertainment, novelty. Activities derive value from how well they serve those needs/desires in a market place, commercial or political. There is no identified stable correlation between those values and any physical unit. Of course any activity can be described in terms of weight of product, amount of energy consumed etc but the relative amounts of those things are not correlated with the relative value of each activity expressed in money. So whether the physical substrate affords a useful metric depends entirely on the question you are asking. To know how much carbon each activity emits is essential for some key policy purposes. To know what it’s output weighs is generally of no interest. To know whether people will be feeling better off, the money value of income and output is informative and index numbers exist to ameliorate the essentially relative nature of monetary values. Why do physical scientists have such difficulty adapting to the requirements of social studies?
I fail to manage to understand economics, when it is presented as human desires, without a proper means for its measurement. This is because anyone can write about it in unexacting terms and achieve a measure of truth, without necessarily showing how much any other truths may oppose or compete with this, in parallel terms.
Surely to properly understand a claim for its nature, we need to compare how a specific aspect of it compares to other kinds too. That is why a measure of its strength must be a part of what is being discussed. And that is how it can become a truly scientific matter instead of being so informal that an intuitive and biased account of it might still be claimed to serve or oppose.
Economics systems do exist and should energyasnumeraire see my short working-paper SSRN 2865571 “Einstein’s Criterion Applied to Logical Macroeconomics Modelling” he will begin to see that such measures can be applied to the flows of money and goods, etc, within a general economics society that comprises and covers this overall situation.
@ energyasnu
“To measure it, you describe that characteristic” Well no. To measure it, you measure it; you don’t describe anything.
I don’t quite know what ‘physical characteristic’ or ‘reference’ mean in your posts. You keep repeating the words but you need to give an illustrative example.
Labour theory of value is not ridiculous. Labour does in part determine price. The alternative is the scarcity theory of value. Scarcity, too, in part determines price. Labour theory is left wing; scarcity theory is right wing.
Money is relative. Sure. Relative to last year’s price or wage etc. It used to be relative to gold by diktat but that didn’t seem to solve any problem.