Rethinking the Philosophy of Economics

The most frustrating part of talking to many (but not all) economists is that they seem to think they aren’t presupposing an ethical philosophy. After all, they are just trying to let as many people as possible have what they want without passing any kind of judgment. That, of course, is a philosophy, and it’s based upon two unwarranted assumptions. First, economists are utilitarians, they believe that the goal is the greatest good for the greatest number. Second, they believe that utility is maximized by satisfying individual preferences. (Think about indifference curves and why individuals want to be on the indifference curve tangent to the budget constraint. Demand curves come from indifference curves and show a group utility function).

Now one could defend those assumption on ethical grounds, but economists don’t frequently do this, and since I’m not a utilitarian and I think they’re mistaken on the very nature of utility I’m certainly not going to do it for them. Instead, I’m going to suggest a new way to do economics.

First, economists would benefit tremendously from thinking of utility as a constrained optimization function. I’m not opposed to utility (properly defined) being a goal of economics, but it can’t be the only goal. If human rights are viewed as a constraint on utility maximization then economics can concern itself with increasing human happiness subject to a set of politically determined rights. Some economists recognize a trade-off between equity and efficiency, but that isn’t a particularly strong ethical framework. First, equity and efficiency don’t always trade-off, and second, human rights are not always about equity, sometimes they are about a minimum decent standard of treatment.

The second problem is the definition of utility as preference satisfaction, and it is a much more intractable one. Preferences don’t come from nowhere, they’re socially determined. This means that advertising and culture can induce preferences that we didn’t previously have. Advertising can drive a vicious circle in which a preference that didn’t exist is created and then satisfied. Even though there’s clear preference satisfaction (I was not coerced into buying the good) it’s difficult to coherently argue that I’ve actually been made better off. Human beings are naturally social beings, and an economics that doesn’t account for that is building from a flawed philosophical model.

Perhaps because humans are social beings, studies of happiness suggest that preference satisfaction is a relatively minor part of happiness. The primary determinants of human happiness are family, friends, and community. Money matters, at least up to a certain point, but it’s not the primary driver of happiness. One of the easiest ways to see this is to think about how much the economy has grown and how many cool new gadgets exist that didn’t exist 30 years ago. Even though significantly more preferences can be satisfied, human beings aren’t significantly happier. That’s because preference satisfaction isn’t what drives long-term happiness, it’s instead driven by a sense of belonging and being needed. An economics that is based on preference satisfaction can harm actual happiness by undervaluing things like walk-able neighborhoods and community gathering spaces.

To be clear, there’s nothing wrong with satisfying preferences. Other things equal, it’s better to have people’s preferences satisfied than not satisfied. The problem is that the other things that determine human happiness actually matter a lot more than preference satisfaction, so focusing so exclusively an maximizing the ability of individuals to satisfy their preference can be detrimental to the overall well-being of society. (I’ll briefly add that from a religious perspective there is again, other things equal, nothing wrong with preference satisfaction, but there are clearly things that are of significantly greater importance).


4 thoughts on “Rethinking the Philosophy of Economics

  1. Pingback: The Economics of Externalities « Faith and Public Policy

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  3. Pingback: The Philosophy of Classical Economics | Faith and Public Policy

  4. Pingback: Markets Shape Human Behavior (And Not Always For The Better) | Faith and Public Policy

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