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Maximizing utility is just a model

For my Microeconomics night class, our professor surprisingly assigned us a murder mystery short novel, The Fatal Equilibrium. This was, however, no ordinary mystery, but one that was a mix of murder… and economics (what, you thought I was going to say underwater basketweaving?). The author, Marshall Jevons, is actually the pseudonym for two economics professors, William Breit and Kenneth G. Elzinger.

It’s not classic literature by any means. You’d occasionally find economics lectures somewhat crudely squeezed into the dialogue. They made it appear somewhat more plausible than your average Mathnet episode, as the characters were mostly college professors, the kind of people who probably squeeze lectures into normal dialogue all the time in real life. But it was plainly obvious what parts of the story were intended as entertainment and what parts were education. Still, it was a neat way to review topics such as price elasticity and consumer surplus and to see how it related to real-world examples. And one passage in particular struck me.

It answered a question that had always bugged me about economics (and judging from comments I’ve seen elsewhere, I’m not the only one). Namely that it all rests upon an assumption of human behavior that just does not seem realistic: that everybody acts to maximize their utility (i.e. happiness). This question is echoed in the book by a professor of Psychology who scoffs at a field embracing the theory of Utilitarianism despite its being discarded by her own field many years ago.

Well, this book presented me with an interesting response that I’d thought I’d pass on. In the scene, Henry Spearman is a professor of Economics on a Promotion and Tenure board defending a candidate, Dennis Gossen, from the above attack upon the field of Economics itself. And this is what Spearman says:

“Economics can’t use laboratories in their research — people would argue and cajole and possibly lie if you experimented with, say, their income or their assets over time. So being barred from experimenting with real participants in a laboratory, we develop theories that are evaluated, not by their realism, but by their usefulness. ‘Usefulness’ of course means theories that are tolerably good predictors of outcomes or have implications that are borne out in practice. It’s true that economists have theories with assumptions that are unrealistic. When Dennis Gossen assumes that people are highly rational maximizers of utility, that doesn’t mean he is stating a view of human nature that he believes is realistic. He is doing what has to be done to make the subject matter of his discipline empirically manageable. Utility maximization is one of the most powerful generalizations we have. Its usefulness has been borne out over and over again. All you can ask of an economist is high logical standards and corroborating empirical evidence. But the theory will be a generalization, ignoring many of the real world’s details.”

He goes on to point out that other sciences ignore real world details all the time, such as Physicists assuming perfect vacuums or frictionless panes. After all, added detail and realism sometimes causes more trouble than its worth.

Yeah, it makes no sense to me that college professors on a Promotion and Tenure board would need to hear this speech (if you have to judge candidates in a variety of fields, shouldn’t you at least have a working understanding of those fields?). But then again, a lot about the tenure system makes absolutely no sense to me. A rant for another time, perhaps.