Mark Thoma asks for thoughts on the following point

Psychologists mock what economists call the micro­foundations of consumer behavior…. That this framework is suitable for aggregate systems in a globalized economy simply because the tribe called economics has agreed to adhere to these ad hoc assumptions makes no sense. Increased interactions with disciplines that economists have often mocked as unscientific would greatly improve economists’ understanding of the real world and would be more truly scientific. …

For the core questions that economists are interested in, optimization is always a valid framework. Now before I go on, I want to say that I am not sure I get the compulsion to use optimization in all cases. If you just posit some relationships and they work then more power to you.

However, I don’t think there is something missing in optimization.

Optimization is just picking. You have a bunch of different things. You want to say: show me things like this, not things like that. This is an optimization problem. It need not have any normative flavor even in describing the process. You need not be getting the “best” items by any non-trivial definition of the best.

Now in practice economists often imagine that you are dealing with a situation where you take some range on the number line and then match every single real number in that range to a different item in your bunch of things.

We call this an objective function. Its going to allow us to pick items using calculus.

I am of course going to tell you that spacetime is discrete and so at a basic level this simply cannot describe reality. But, that’s fine because economics doesn’t address problems in which the discreteness of reality becomes apparent.

So, we can act as if we can do this matching problem and then boom you have an objective function.

At the same time though you have to recognize that you just have some pile of crap and a number line. That’s it. You don’t want to go around imbuing objective functions with meaning they don’t have.

For example, take utility maximization. Here we have an objective function that matches possible human behaviors to the number line. We set up the matching so that the if we allow the human in question to engage in a larger set of behaviors he or she will in fact engage in a behavior that corresponds to a larger number.

So ultimately what we have done here is set up this relationship between possible things this human can do and numbers on the number line, mediated by observations about what the human actually does.

Fair enough, but what’s the meta-meaning of higher numbers. Nothing. There is no meta-meaning.

Are higher numbers in any sense fundamentally “better?” Not unless you  believe that whatever this person does when the constraints are eased is fundamentally better.

Do higher numbers make the person happier? Maybe. Since happiness is presumably a real thing you need some way to test this. However, there is no underlying reason why higher utility ought to correspond to greater happiness. Not unless you think freedom from constraint is the ne plus ultra of happiness.

I can give you a prime example why this probably isn’t true right here:

The most celebrated technique in this book is a return to swaddling where you wrap a baby like so

Now by all appearances babies seem happier when swaddled.

Maybe someone wants to come along and try to convince me that they have some method of establishing that the baby has higher utility when swaddled. Seeing such an argument is going to be a real treat.

This is a literal constraint on behavior. It only works if the friction of the blanket is enough to simply overwhelm the amount of force the baby can generate. Its hard to generate a scenario that is more oppressive than being completely bound head-to-toe.

Yet, it really, really looks like the baby is happier.

Are the only relevant constraints material? Not if this person acts anything like most people. The line that separates the set of behaviors that do and do not result in being the subject of laughter and ridicule is a pretty strong constraint for most folks.

The line that separates the behaviors that lead to esteem and being the object of sexual desire from the those that do not is also a pretty big deal.

What do I mean by “strong” and “big deal”

I mean this. Take your all material constraints. Look at how much they vary among the population. Now vary them that much on your subject and observe his behavior. How much does it change? How far up and down the number line can we go.

Now, take the material constraint to the least binding of the values you used and move only the ridicule constraint. See if we can sweep out a range of numbers just as large as we got before. I am betting we can.

This means we can do just as much by subjecting this person to various amounts of ridicule as you can by subjecting them to all the various material constraints present among our population.

Put in more human terms it would go like this, even if you are as rich as the wealthiest person in the world or have as many resources at your command as the most powerful person in the world we can make you behave as desperately as any pauper simply by subjecting you to enough ridicule.

That is what it would mean to say, ridicule is a big deal.

But, what does all this have to do with anything?

Three takeaways at least.

One, sticking with optimization doesn’t really limit the phenomena we can model.

Two, despite its name optimization doesn’t tell you anything subjective about what is happening. The proof is always in the pudding. If you like it when folks get to do what they would do if they had fewer constraints then that makes higher utility “better.” If not, then not.

Maybe when people are allowed to do whatever they want they will go out and get a subprime mortgage, move their family into a brand new house, not be able to keep up with the payment and then get foreclosed upon.

If you look at that and say: man that sucks. Then utility maximization is bad in this case.

Three, there is just no reason to suspect that real people will be influenced only by material constraints or that the range of behaviors people display will be tied mostly to changes in material constraints.

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