Normally I don’t like to double up like this, but I was having a fun conversation with a fellow economist the other day about whether standard neoclassical economic theory is or is not based on the notion people are selfish, which you may recall was the topic of my last post. Setting aside the actual conversation for just a moment, I must say I find it suggestive of bad intent on the part of academic economists that people trained as economists are still having discussions like this, given that neoclassical welfare economics has been around in its current form for about one hundred years or so now. Makes one wonder what they and their fellows in academic philosophy have been doing all this time. But never mind, let’s try to talk it out a bit more right now, shall we?
My interlocutor argued that because economic theory analyzes human behavior in terms of individual utility it implies people behave to satisfy their own desires and not for the good of others. He called this characteristic of economic theory “methodological individualism” and described it as “reducing” utility to the individual, which was terminology I must confess I don’t normally use myself. He suggested if we broke this reductive conception of utility by assuming the utility functions of different people are not independent but interrelated in some way, then the mathematics wouldn’t work, and the theory would crumble in his own evocative language. In contrast, I’ve argued economic theory is not really based on the notion people are selfish but it’s a common misperception that it does. We each talked past one another for a bit and left it at that. However, after thinking about it a little more I think I may now understand what he was getting at. Let’s discuss.
First, let me say I have no doubt at all my colleague was correct about the methodological individualism, the reductive conception of utility, and that the mathematical model of the economy associated with neoclassical welfare economics will not work as intended unless the actors in that model have independent utility functions. However, I’m rather less sure those features of economic theory rule out actors in economic theory thinking about and acting for the good of others as a part of the individual desires they’re trying to satisfy.
Clearly, given the unobservable nature of utility as defined in economic theory, one actor could never have another actor’s utility literally show up in the first actor’s own utility function. How would it get there? However, what’s less clear to me is whether observable phenomena potentially relevant to the assessment of another actor’s utility under some definition of utility relevant to some interpretation of utilitarian ethics, or indeed any other observable characteristic relevant to any other of the variety of ethical beliefs we find in the real world, could not be incorporated into the utility function of a given actor in economic theory. That is to say, it’s not clear to me the utility function of a given actor in the economic model associated with economic theory could not include utility that actor derived from fulfilling his or her own individual preferences about behaving ethically toward other actors based on whatever observable phenomenon that first actor was assumed able to perceive in that model, and that includes notably fulfilling those individual preferences by working to create a society expressing those preferences.
Clearly, given the unobservable nature of utility as defined in economic theory, one actor could never have another actor’s utility literally show up in the first actor’s own utility function. How would it get there? However, what’s less clear to me is whether observable phenomena potentially relevant to the assessment of another actor’s utility under some definition of utility relevant to some interpretation of utilitarian ethics, or indeed any other observable characteristic relevant to any other of the variety of ethical beliefs we find in the real world, could not be incorporated into the utility function of a given actor in economic theory. That is to say, it’s not clear to me the utility function of a given actor in the economic model associated with economic theory could not include utility that actor derived from fulfilling his or her own individual preferences about behaving ethically toward other actors based on whatever observable phenomenon that first actor was assumed able to perceive in that model, and that includes notably fulfilling those individual preferences by working to create a society expressing those preferences.
Nor do I think it really precludes the appearance in one actor’s utility function of utility for that actor generated by other people acting in ways that fulfill that first actor’s preferences related to what those other people should be doing, what I’ve previously called second party preferences. (Not to be confused with the situation addressed by the de gustibus non est disputandum principle, which refers to one person second guessing someone else’s choices on the basis of that other person’s own utility.) In terms of the conceptual analysis of the ethical component of economic theory I’ve presented elsewhere, what happens when one person derives utility from preferences relating to what another person does is that every situation involves or might involve a conflict of desires that renders economic theory irrelevant because of our inability to make interpersonal utility comparisons using the definition of utility used in economic theory. Well, unless one could set up a market for that sort of thing, then I suppose it would just be one more externality one could potentially address on the market under any particular distribution of economic power, so it would fall into the same category as all other such interpersonal conflicts resolved using economic power on the market. But is there or could there ever be such a market? Seems complications may ensue because of such factors as the difficulty of setting up contracts of that sort, enforcement, numbers of people potentially involved, etc. And how do we handle the situation analytically if a market cannot be generated? Interesting. However, I seem to be straying rather far from the point of this post, so let’s just leave these issues for some other day, shall we?
So what’s the point? Just that I’m not convinced methodological individualism and the reductive conception of utility really implies economic theory treats people as acting like self-centered amoral jerks. That issue, of course, is conceptually distinct from the issue of whether neoclassical welfare economics expresses the ethical proposition people should act like self-centered amoral jerks, that is, that greed is good. However, my contention that economic theory does not necessarily treat people as acting like self-centered amoral jerks certainly seems to undercut one such way such an ethical proposition could enter neoclassical welfare economics, via a logical or factual mechanism that serves as a necessary element to the ethical argument.
Addendum
I have more recent thoughts on this issue of methodological individualism, for example, see the post Methodological Individualism from May 19, 2021, or the related addendum to my post Does Neoclassical Economics Really Propose Greed is Good from February 12, 2020. I also have more recent thoughts on the issue of “greed is good,” for example, see the post on Actors and Roles in Neoclassical Welfare Economics from February 24, 2021.
