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