tag:blogger.com,1999:blog-17232051.post1677088022454104443..comments2022-08-06T12:23:21.892-04:00Comments on Noahpinion: Rational Expectations vs. HeliocentrismNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-17232051.post-32664596747682664842011-10-17T18:29:18.932-04:002011-10-17T18:29:18.932-04:00No. You are each thinking about "utility"...No. You are each thinking about "utility" all wrong. Utility is imaginary. There is no real metric for utility. It need not be correlated with happiness, it doesn't necessarily represent well being, and economists don't assume that everyone has a utility function that they are constantly maximizing in the back of their heads. A utility function is a mathematical construct invented so that we can represent people's choices. We don't start with a utility function and then get choices, we start by observing people's choices, and if those choices are sufficiently well behaved (complete, transitive, and continuous) we can represent them by a utility function in which the person always chooses the option that corresponds to the highest utility.<br /><br />If we have unlimited data on individual's choices, and their choice pattern is convex, we can actually precisely trace out a corresponding utility function. In practice, we usually pick an extremely general mathematical function for the utility function, and then estimate the parameters from what data we have available. This method allows us to make predictions on what choices people will make under different contexts, such as a new tax etc. Utility is as imaginary as the imaginary number i, but like i, it is also very useful as a mathematical tool.Publiushttps://www.blogger.com/profile/10246995943082719313noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-41865700275189932442011-10-16T17:12:44.570-04:002011-10-16T17:12:44.570-04:00A copernican revolution is an analogy that befits ...A copernican revolution is an analogy that befits the work of people like Cullen Roche and Steve Keen. Macro that is based on real accounting of the monetary system, and that understands dynamics.<br /><br />BT London.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72546207546128924372011-10-16T10:51:25.006-04:002011-10-16T10:51:25.006-04:00I beg to differ on the subject of the referential ...I beg to differ on the subject of the referential import of "utility."<br /><br />I know of two efforts to measure utility: one by the happiness research people and the other by the brain scan mavens. I don't claim to necessarily know them all.<br /><br />I agree that utility is, at the current state of the art, hard to measure. I think, though, that it is in principle measurable. To be sure, not necessarily by economists...<br /><br />JonathanAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-56605421432849989452011-10-16T07:06:15.475-04:002011-10-16T07:06:15.475-04:00Indeed: read the wikipedia entry about 'quanti...Indeed: read the wikipedia entry about 'quantifying utility'. There is nothing, nothing in it about how to measure it... (and I read Varian and Lucas and Becker too...).The obvious failure of neo classical economics to estimate and quantify it's basic concept, utility, clearly discredits the whole neo-classical endeavour as a scientific program.<br /><br />http://en.wikipedia.org/wiki/UtilityAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-66602162446728674762011-10-16T06:58:35.668-04:002011-10-16T06:58:35.668-04:00It's worse. The so called 'sound' or &...It's worse. The so called 'sound' or 'non-trivial' micro-economic foundation of ´rational expectations` is not only not micro at all, but it´s also not sound, and in highly trivial. It´s fairy tale economics± "and they maximized happily forever after". Or, in the argot of economics: "Also assume that "There is a fixed number of infinitely lived households that obtain utility from consumption and from holding real money balances, and disutility from working. For simplicity, we ignore population growth and normalize the number of households to 1. The representative household's objective (!?!, as it´s not estimated but assumed, M.K.) function is", and then comes the formula which implies that the prince and the princess took a mortgage to buy a castle and never wanted work or to pay any taxes or to have children anymore.<br /><br />But what the heck is this 'representative household' maximizing? Unlike the orbit or size of the planets of Copernicus and Keppler and Newton it's not defined - at least not by economists. And how are ´households´defined? Statisticians include jails, and soccer clubs, and dormitories and whatever. Did any of your prfoessors even try to tell you this? Did they even bother about this? And what's the metric used to estimate 'utility'? which dimensions does it have? What kind of scale do we use? What's its name (The "Bohm Bawerk"? The "Bentham"?)? How do we measure it? What's our equivalent of the telescope? Even the concept of utility is never discussed, "People do what they do", to quote the noble price lecture of Samuelson, and we assume that this maximises utility (Samuelson was smart and recognized the problem of this kind of 'science, but his proposal of 'revealed preference' to pin down utility empirically has come to nothing). And Arrow proved, with his paradox, that the whole concept of 'social utility' is inconsistent. By the way - our very brain seems to be modular and is therefore prone to the same paradox...<br /><br />"Utility" is the phlogiston of economics. Let's move on. Let's teach out students how the sector households is defined and estimated, how we estimate consumer confidence and consumer expenditure, how these variables influence each other, how households are prone to fuelling housing bubbles when given the chance to obtain unrestricted cheap credit - but let's leave "utility" behind us. Start with reading a book on Consumer Behavior, written by those guys who actually observe people to investigate what people really do, instead of assuming to know what they do. Real science.<br /><br />P.S. - when you read these consumer behavior books you will find that they don't mention utility at all, "as it does not sell nylons". People who investigate consumer behavior to advise companies have no use for the concept. These people should get the Noble!<br /><br />Merijn KnibbeAnonymousnoreply@blogger.com