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July 27, 2003

Grumbling about Econ -- Frank Knight

Friedrich --

Part of the fun of following economics, it seems to me, is trying to figure out your beefs with it. I'm no more than a tyro fan with a decent Econ 101/102 grasp on the topic, so I'm no one to be argued with let alone paid attention to. But what the heck; it's like following baseball -- you develop your own theories, your own faves, what you hope are your own insights. Or at least beefs.

For some reason I've been chewing over two points recently.

1) The utility thing. Despite a few years of enthusiastic self-education, I still don't really know what "utility" is, and have a strong suspicion that economists don't either -- that they use the word as a place-holder. What are people really up to, what are they looking for, and how can it be represented? For one thing, and as tons of people before have argued better than I can, it's simply absurd to view people as rational income-maximizers. More's generally better than less, but there are so many other values that can take precedence; The Economist reported the other day that studies show that as many as a third of working Englishpeople would prefer working fewer hours to making more money.

So what to measure instead: units of happiness? Too idiotic -- in the first place, it's a psychological truism that happiness exists only in relationship to other feelings. Units of self-interest? Huh? Wha'? Who can define one?

Me, I often play with the idea of "units of life-is-worth-living-ness". When I'm enthusiastic about this idea, I tend to think it would help account for a bit more of life -- for example, all the things you live through that you probably wouldn't have chosen to live through had you had the option, yet you got a lot out of them anyway. It would allow for the fact that we stumble into a lot of experiences; not everything that makes life worth living is something we've actively sought out, god knows, and we often learn to value things only long after the fact.

There's a practical objection, of course, as there often is to my ideas: how would one actually measure life-is-worth-living-ness units? But, perverse space-cadet that I am, I'm sort of pleased by that objection. I'd love to see economists confront a little more openly the self-contraditory mess that is a living human being. I'd love to see them wrestle less with how people make conscious decisions and more with how they actually muddle through. (I don't know about you, but my unconscious decisions outnumber my conscious decisions by about a zillion to one.) Plus, there's always the little issue you rarely see economists address: our self-defeating behavior. Our mistakes. Our fuckups. I'd love to see an economist develop a model of that.

Which leads me to 2) Desire. There's a geeky tendency on the part of economists to assume that if we bought it, we wanted it -- that dollars paid out are a trustworthy representation of our real wants and desires.

I find that idea almost impossible to stomach. Do you? For one thing, it doesn't take into account stupid purchases, of which I've made my share. (Wouldn't it be lovely to see an economist try to model regret?) If an economist were to argue that I wanted the thing at the moment I bought it, I'd have to agree. But I'd also have to argue in return that that implies differing levels of desire -- fleeting desire and deep desire, and many levels in between. Why aren't economists discussing this?

Showbiz offers another way in here. It's clear if you watch the biz for more than five minutes that there's a real difference between the entertainment that people want (the orginal "Matrix," an out-of-left-field hit that struck an unforseen nerve) and what they can be sold ("Matrix Reloaded," which scarfed up a lot of sucker money for a couple of weeks). Hey, you made a similar argument once. I remember back in our college years you were talking to some classmate about the Bond movies. You made the point that, while the early Bonds discovered and developed real pleasures and desires, the later ones were different -- at best, shrewd (and perhaps enjoyable) cashings-in. (Our classmate, who if I remember right refused to see your point, has probably gone on to a stellar career in Hollywood.)

Here's an even more dramatic way to make a similar point: cancer. A couple of years ago, I was operated on for cancer. Now, this was nothing I'd wanted, let alone had gone looking for. And god knows it's nothing I'd wish on many people this side of Hitler and Stalin. Still, it's been quite a worthwhile thing to have gone through. Several friends who'd been through cancer scares themselves have told me something similar -- that, assuming survival (knock on wood, and wish me well -- blood test next week), you can come away from a cancer bout with your life much enriched. And I've gotta admit that my life is much the better for having had cancer. In many ways, I'm glad I had cancer. It increased my utility, if you will. Yet why do I suspect that even if I put a pro-cancer endorsement on every billboard, and subjected the country to its biggest advertising blitz ever, I'd still find very few buyers?

So, economist-dudes! Economist-dudettes! Some proposals, please. How do you propose to model, or at least account for:

  • The things we stumble into -- that we didn't decide to pursue -- that work out well?
  • The many stupid and self-defeating things we all do?
  • The difference between what we really want and what we can be sold?
  • The fact that much of what we get out of life are things and events we probably never would have chosen to endure had we been given the choice, but we weren't?
  • And the fact that there are indisputably times when our vulnerabilities and reflexes are simply taken advantage of?

I dunno, maybe there are economists who have written eloquently and enlighteningly on these topics. Can you recommend any? And maybe my ruminations here reveal nothing but my own economics illiteracy and naivete. But I've tried. I've read some bionomics and some behavioral econ; both seemed semi-useful if a little soft. The Austrians at least allow for the subjective element, but I find their dogmatism off-putting. (Esthetic objection, I know, but I'm an esthete.)

The economist whose work I know a bit who seems to me to take these kinds of things best into account is the early-Chicago guy Frank Knight. Have you ever read him? Cussed, difficult, grumpy. A good writer, too -- an affable and eloquent sourpuss of genius.

Here's a helpful entry on him at the Library of Economics and Liberty's Economics Encyclopedia (a good site, by the way). And here's a pretty good Knowledge Products audiobook called "Frank Knight and the Chicago School."

At the hyper-Austrian Mises Review, David Gordon, reviewing a collection of Knight's essays, writes (here):

Frank Knight complicates things in interesting ways. He first argues for a free economy in a way that Austrians can only applaud. After making an incisive case for classical liberalism, he next raises objections ... that threaten to undermine his own case.

But he is not yet finished. After setting forward his objections to the market, he in turn raises problems about attempts to respond through state action to these same objections. Knight ends up, to an extent difficult to specify exactly, as a chastened supporter of the market. It is not the "best" social system: rather it is the "least bad" arrangement.

In my amateurish way, I find Knight's reluctant and peevish free-market point of view molto simpatico. You?



posted by Michael at July 27, 2003


"Utility Maximization" is one of the big piles of steaming bullshit at the heart of modern economics. At it's heart it's a circular statement: humans are defined as utility maximizers, therefore everything they do is defined as utility maximization! (for a particularly ludicrous example of this, see Slate's resident neoclassical jump through hoops trying to explain - I kid you not - why people stand still on excalators but not on stairs.

There are many problems with the concept, but the most gaping hole is the "curse of dimensionality" - the fact that the choices a consumer is faced with on a daily basis present far too great a computational task for any conceivable utility-maximization algorithim to work. (for a good Powerpoint presentation by the indispensible Steve Keen on this topic, go here.

A preview: can you guess how much time it would take to find a utility maximizing bundle of 30 items (with 1-10 units of each item), assuming that you can eliminate 99.9% as obviously out-of-budget and can evaluate each basket in 1 billionth of a second? Try 32 billion years...

Posted by: jimbo on July 27, 2003 1:52 PM

Michael -- I think you're setting up something of a straw man here. What makes you think that the phenomena you gloss are in any way incompatible with classical economics? Let's say I spend $50 on a pair of jeans. The probability of that pair of jeans being "worth" exactly $50 to me is almost zero: I might find them very uncomfortable and never wear them, making them worth almost nothing to me, or I might wear them almost every day for the next three years, making them one of my most beloved items of clothing and worth, in hindsight, a hell of a lot more than $50. But $50 is what I paid for them, and it's as good an approximation as any to what those jeans are "worth" when you aggregate over all the hundreds of thousands of pairs sold.

What you're doing, I think, is confusing what you might call ideoeconomics with microeconomics. Microeconomics might be micro-, but it's still a model of the aggregate economic behaviour of millions of people. Within those millions of people, there are lots of swings and roundabouts, but when it's all added up, if it's a good model, it'll come out more or less where the model says it should. The economics of one individual person -- what I'm calling ideoeconomics -- by definition can't be modelled. You seem to wonder that individuals' behaviour differs from that of the average individual -- well, of course it does! The average individual doesn't exist as a real, flesh-and-blood person, but that person is still an extremely interesting and useful construct in economics.

Posted by: Felix on July 27, 2003 1:53 PM

Felix is right. Back in the days when I was earning a bachelor's degree in Econ, my professors, especially Gerry Eyrich, were quite open about the fact that "utility" is a completely artificial concept. You can't measure utility; there aren't any units of measure, or any measuring devices. The concept survives, IMHO, because the closest proxy to "utility" that you can measure is money--but as you point out they don't cover anywhere near all of human behavior.

There's a joke about three men stranded on a desert island with nothing but some matches and a can of tuna fish. They manage to build a fire, and then discuss how to fix dinner.

The first man is an engineer. He says, "Hey, I saw some jagged rocks over there; give me the can, and I'll see if I can bash it open."

The second man is a physicist. He says, "No, no, no, you're working too hard. Just put the can in the fire. The increase in temperature will cause an increase in pressure inside the can, and when the pressure gets strong enough, the can will open."

The third man chuckles to himself. "You guys are both working too hard," he says. "First," he says, "you have to assume a can opener."

Posted by: Will Duquette on July 27, 2003 6:25 PM

Jimbo -- Once I'm done taking your photography course, can I sign up for your Econ class? I'd love to see that Keen Powerpoint presentation, by the way, but your link to it doesn't work. Could I bug you to try again?

Felix, Will -- Points taken, but these aren't meant to be anything but the musings of an amateur and a fan. I do find it strange that the econ world is as geeky as it is, don't you? It's sometimes like being stranded at a convention of Asperger's Syndrome people -- brilliant, but oblivious to anything but their own formulae. Steven Landsburg, who Jimbo links to, is a good example -- brainy guy, but a Martian where simple humanity is concerned. (Hey, here's a Salon review of a Landsburg book that says almost exactly that.) What pleases me about someone like Frank Knight is that he's ultrabrainy about econ but equally aware of what the equations leave out, and quite eloquent about it. Some of the Austrians have that virtue too. I'd be interested to hear how you react to them.

Posted by: Michael Blowhard on July 28, 2003 11:25 AM

Like most academics, economists are difficult to understand in their natural environment of clasrooms and conferences. That's probably because in these settings they're speaking to each other, not to you. But their research yields a genuine understanding of how and why free markets work, and what governments can do (or not do) to help them work even better.

For example, we may find the minutest workings of Milton Friedman's monetarism impossible to understand without years of study and training. But we know that tax cuts are good for the economy, which is Friedman's basic point. So when Bush pushed through several massive tax cuts to stimulate an economic recovery (a strategy which appears to be working), he got the idea from economic "geeks" like Friedman.

Posted by: Tim Hulsey on July 28, 2003 12:45 PM

Now hold on just a second here. There's no economics textbook in existence, I'd bet, that declares utility is some tangible down-to-earth concept. It's absolutely a place-holder, meant to be an amorphous abstract representation for other things. You understand it don't you? It makes sense doesn't it? It follows logically from all the premises, right?

I think this beef is roasted -- just take it as it is, well done, and shrug it off. ;)

Posted by: Admiral Waugh on July 29, 2003 2:15 AM

Micheal - Try here. The dimensionality one is the last one on the page.

Felix, et al -

The problem is, treating UM as "averageing" only works if the deviations from it are essentially random - some "get it wrong" one way, some the other, so it washes out in the aggregate. But if the deviations are systemic (and everything learned by behavioral economics so far suggests that they are) then there is no reason to think that even aggregate behavior will conform to the model.

Example: say you have a model that predicts how long it will take a rat to run a maze. You assume that, confronted with a barrier, a rat will turn left half of the time and right the other half. So you run your model, and get a result. But what if it turns out that rats are wired so that they turn right 95% of the time, no matter what (no idea if that's true, just making it up...). How predictive would your model end up being?

Posted by: jimbo on July 31, 2003 4:55 PM

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