Stephen Williamson has a good post on micro foundations. I only want pick one nit, and that’s because it suits a longer term agenda.
He writes
Optimization is pretty weak. It’s just some notion that the people living in the fictional world we have constructed are doing the best they can under the circumstances. The circumstances could be pretty bad, in that these people may not know a lot about what is going on. They may not know things about the people they are supposed to be trading with, and/or they may not be able to observe some aggregate variables, for example. There are many equilibrium concepts – standard competitive equilibrium, Nash equilibrium, pricing using bargaining solutions, competitive search, etc. All that we require from the equilibrium concept is that it coherently yields consistency among the decisions made by individuals.
I don’t think optimization is weak, though I don’t know exactly what Williamson means by this term.
However, what I would say is that optimization is the mathematical frame for attacking problems of choice.
Optimization sounds like it means doing the best or something like that. However, that’s projecting too much human emotion on to the mathematical process.
Optimization is dividing into parts. Things like this, not like that.
It short, optimization and choice are two different words for the same thing. If there is a choice then there is some optimization problem which represents it.
This is part of why I argue that utility is not happiness or satisfaction or anything like that. It is simply that thing which turns human choice into an optimization problem. Utility maximization could make you miserable. There is nothing inconsistent or even odd about that.
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Tuesday ~ March 13th, 2012 at 3:21 pm
PhilS
I presume he means weak in the mathematics sense, where weak = general. I.e., its a good thing if an assumption is “weak”.
He is saying that assuming optimization is not a big deal, that essentially there is always optimisation. The strong parts of the assumption come from assuming that the people doing the optimising are all knowing.
It would be a strong assumption to assume that people always make the best possible decisions. It is a weaker assumption to assume that people make the best decisions based on the information they have. In general stronger assumptions lead to simpler models, and relaxing assumptions is hard.
Tuesday ~ March 13th, 2012 at 6:35 pm
Lord
The best they know how to do, not that this is the best of all possible worlds.
Tuesday ~ March 13th, 2012 at 6:58 pm
Steve Williamson
“Utility maximization could make you miserable.”
Yes, eating a good meal, reading a good book, having a good night’s rest. Those all make me miserable.
Steve Williamson
Wednesday ~ March 14th, 2012 at 9:14 am
David Manheim
No, but some types of maximization can – accumulating the most wealth is one such “maximization” – you can sacrifice health, family, and happiness to acheive it, and many people do. Those people pick money as a utility function, and attempt to maximize it without real constraints.
Wednesday ~ March 14th, 2012 at 12:29 am
gregransom
These discussions are just more shovels on the giant mountain which establishes that economists self-evidently have no idea what they are doing which their math constructs — and they most of their efforts to give significance to their uses of terms like “choice” and all the rest are dependent on illegitimate appeal to multiple independent meaning to entites in math constructs which can’t bare those interpreted meanings.
I.e. these terms are unrecognized puns.
Wednesday ~ March 14th, 2012 at 4:17 pm
Becky Hargrove
Greg,
I only wish I could have learned math when I was young enough to truly absorb it. There are times in economic evolution when math means everything and that is equally true for optimization. We just have to figure out what the new perimeters are, before the optimization of math can really make the difference in renewed productivity.
Wednesday ~ March 14th, 2012 at 3:27 am
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