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Week 9: Rationality and its Critics - Coggle Diagram
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)