Week 9: Rationality and its Critics

The Problem with Utility

Recap

  • Menger's assumption of rationality - put economics in a scientific footing
  • Bentham's utility - utility is usefulness
  • Mill's utility - refines further, about the pursuit of pleasure and avoidance of pain without causing harm
  • Jevons' utility - value depends on utility

How to compare utility across people?

  • Utility Monster = if maximising individual utility, person with highest will get everything and lowest will get nothing

Jevons: not possible for interpersonal utility comparisons

"The motive in one mind is weighed only against other motives in the same mind, never against the motives of other minds.” (Jevons)

Context: Victorian England
Second half 19th century - pesimisistic developments in intellectual life

Herbert Spencer (1820-1903) Survival of the Fittest

  • Social evolution based on survival of the fittest across classes and people

Gloomy nature of literature - naturalist writers describe people as animals in the natural world who are beset by their environment

Henry Sidgwick (1838-1900): “the prolonged effort of the human intellect to frame a perfect ideal of rational conduct is seen to have been foredoomed to inevitable failure”

Edgeworth’s Attempt at Resolving the Utility Problem (he wasn't as pessimistic)

F.Y. Edgeworth (1845-1926)

Context:

  • Friend and neighbour of Jevons
  • Member of Sunday Tramps (walking group in London with many intellectual elites)

Mathematical Psychics (1881)

  • Applying mathematics to the moral sciences
  • Utility can be measured through psychoanalysis
  • Hedonism = hedometer can measure utility

Exact utility - put Bentham and Mill on scientific backing by providing assumptions that lead to utility maximising outcomes mathematically

The Edgeworth Box

  • Two commodities (x, y), two individuals (yellow and green)
  • Indifference curves set willing tradeoffs between goods
  • Points of tangency where exchange will take place
  • Pareto efficienct distribution

Pareto Efficiency

Vilfredo Pareto (1848-1923)

  • Interpersonal utility further on scientific foundations
  • Polymath - part of mathematic revolution in economics

Pareto allocation = allocation of resources where it is not possible to make one person better off without making another person worse off

Pareto improvement = gains by one person without a corresponding loss to another

Second Wave Marginalists

  • Differential calculus
  • Marginal product based understanding of the price of labor - start to become interested in the supply side
  • Unemployment caused by wages being higher than equilibrium wages - solution: drop wages

John Bates Clark (1847-1938)

Context:

  • First major American economist
  • 1872: In Germany
  • 1885: Co-founder of American Economic Association; writes The Philosophy of Wealth
  • 1895: joins Columbia University - large group of grad students to disseminate information
  • 1899: Distribution of Wealth

Marginal Product Theory of Distribution

Explains how you get interest and profits from supply side

  • If all factors of production are paid their marginal products
  • Then the sum of factor income would exhaust the total output
  • aka product 'exhaustion'

Need:
Constant returns to scale and perfect competition

If this is the case, then how do we get interest?

  • Time value of money - individuals prefer present goods to an equal amount of future goods
  • Thus, payment made today to a factor of production will be less than the value of the final goods produced tomorrow
  • So FoP will supersede the discounted values of their marginal products

Interest is:

  • A riskless payment for use of capital
  • Difference between payment to factors and value of marginal product when final goods are produced

Profits:

  • Residal income after inputs paid
  • Temporary - in SR you make profits in LR they are temporary

Distribution of Wealth (1899)

  • Progress towards a just society is natural (influence of Spencer)
  • Market produces ethical outcomes

Responding to agrarian socialism of the time - cares about this debate as it is currently taking place

  • Gilded age - inequality and ascent of barons, progressive reformers like Henry George

Fabianism 1884

George Bernard Shaw (1856-1950

  • Playright and big voice in class discourse in 20th century
  • Founded (in part) Fabian Society

Fabianism: goal was to promote democratic socialism

  • Not through violent revolution but social reform by permeation tactics
  • More sustainable means of affecting social change
  • Trying to understand conditions of the working class

Martha Beatrice Potter (1858-1943)

  • Prominent Fabian
  • 1858: Born into wealthy family, Gloucester
  • 1880s: Helps cousin Charles Booth research lives of labouring people --> becomes Life and Labour of People in London (1889-1903)
  • 1891: Co-operative Movement in Great Britain

Beatrice and Sidney Webb c. 1895

  • Marry in 1892
  • Collaborations: History of Trade Unionism (1894), Industrial Democracy (1897), history of local government (multiple vols.)

The Minority Report (1908)

“to secure a national minimum of civilised life… open to all alike, of both sexes and all classes” (Source: Minority Report to the Royal Commission on the Poor Laws and Relief of Distress (1908))

  • Idea is supposed to provide some minimum threshold by which people can live, belief the state has the responsibility to provide this

London School of Economics and Political Science (LSE), est. 1895

“[Sidney’s vision is to found, slowly and quietly, a ‘London School of Economics and Political Science’ – a centre not only of lectures on special subjects, but an association of students who would be directed and supported in doing original work.”

Tap into new economic and political science and start contirbuting to the knowledge production of this discipline and this is intrinsically linked to the practical work that is done outside its halls

“In old age it is one of the minor satisfactions of life to watch the success of your children, literal children or symbolic. The London School of Economics is undoubtedly our most famous one…” Doesn’t always pan out in the Fabian Vision…

Amartya Sen (1933-)

  • Welfare economist from India
  • Works at LSE 1971-77
  • Critique of rationality - against virtue and towards self-interest

Contributions

Social choice: Highly technical work on social choice theory and specifically the insight that with informational broadening we can construct partial orderings of preferences and make certain comparisons of interpersonal utility

Famines and exchange entitlements: Famines don't arise in democratic socieites because you have a public sphere where people can articulate their preferences and the government has to respond e.g. Bengal famine

Missing Women

Capabilities

Sen's Critique of rationality

Poses fundamental question: What are we maximising?

  • "The main point here is that the standard of living is really a matter of functionings and capabilities, and not a matter directly of opulence, commodities or utilities.” (The Standard of Living, 1985)

Idea about maximising our consumption or command of commodities may not be what we really want

  • Functionings: varioius living conditions that we can or cannot achieve
  • Capabilities: ability to achieve these functionings

Sympathy: Concern for others that doesn't concern one's welfare --> egoistic
Commitment: non-egoistic, doesn't increase your own utility

Commitment calls into question the rational actor utility maximising assumption - people make decisions that are irrational (against their own self-interest)