By George P. Brockway, originally published March 7, 1988
WITH THE EXCEPTION of philosophy, all disciplines start with assumptions. I’ll be glad to discuss the exception with anyone who wants to stay after class. For now, let’s concentrate on two assumptions of economics as it is generally taught and understood. The first is that economic producers are profit maximizers. The second is that economic consumers are utility maximizers. Sometimes these assumptions are explicitly stated, as by mathematical economist Gerard Debreu, and sometimes they are accepted as too obvious to warrant discussion, as by Frank Hahn, another mathematical economist. On the other side a considerable literature exists questioning their realism. Given the enormous range and variety of what people do, not to mention the comparative effectiveness of those doings, it is argued that the multitudinous actions cannot all be examples of profit maximization. It is similarly said that the different ways we spend our money – certainly idiosyncratic, frequently wasteful and occasionally counterproductive – suggest that utility maximization is an idea without much real content.
Personally, I see much merit in those objections; yet I also see force in the rejoinder that it would be irrational not to try to maximize profit or utility, as the case may be. If you can get more of either, why shouldn’t you? Indeed, since maximum profit comes from the most efficient use of scarce resources, can it not be said that you have a duty to seek it? After all, this is the way Adam Smith’s invisible hand seduces selfish behavior into producing public good. Nevertheless, I’m going to demonstrate that the whole scheme is inescapably fallacious.
For look at me, a profit-maximizing man. Not only am I clever, bold and ruthless; not only do I stretch the law as far as it will go in my favor (but no farther); not only do I push my employees to the limit and deal as sharply as I can with my suppliers and my customers; not only am I admired and feared as a keen and tough competitor-beyond these delightful qualities I am necessarily a workaholic. As long as there’s another dollar-another penny-to be made, I am after it, not like a hawk (I have no time for soaring), perhaps like a weasel.
If there’s no way to squeeze more out of my regular employment, I go moonlighting; and when I finally fall into bed, I lie awake a long time scheming ways to increase my profit tomorrow.
Unfortunately, I never get to enjoy my winnings. I’m too busy. If I were to relax a moment, a main chance might pass me by. Literature is full of monsters like me. Dickens would have had to shut up shop if he hadn’t had such people to write about.
Literature is full of utility maximizers as well-charming wastrels who live a life of endless pleasure. Women are supposed to be enchanted by them. Until very recently, women were themselves supposed to live such lives. As Thorstein Veblen saw it, only when women were successful at this utility maximizing did their profit-maximizing husbands enjoy any utility-albeit a derived utility -from the profits they piled up.
So we have a conflict. A profit maximizer has to forgo utilities for lack of time. And unless a utility maximizer can manage to be supported by someone else, he (or she) will not have resources necessary to pay for possible pleasures.
No producer is only a producer, and very few besides children, the senile and the infirm are only consumers. Since producers are consumers too, they must be both profit maximizers and utility maximizers, and that is impossible. Can we narrow the situation down and say that an economic agent is a profit maximizer when he is producing and a utility maximizer when he is consuming? Then we must ask why he is producing at this moment instead of consuming. Why is he moonlighting instead of gazing at the moon? If he has a job, he has no doubt accepted the responsibility of maximizing profits at certain hours of the day, but why did he take the job? Why not emulate Henry Thoreau? After all, Thoreau was an exemplary producer: Goods he created still yield profits and utilities, all over the world, a century and a quarter after his death.
An obvious modification of the scheme calls for utility maximizers to do their best subject to the restraint of their wealth, while profit maximizers are clearly subject to the limitation of their abilities and their luck. Even an incompetent man may be a workaholic, however, and consequently unable to enjoy the utilities available to one of his status, while a remittance man may steal enough time from his pleasures to make a little profit for himself, just for fun. Thus the proposed constraints are, if precise, limited to a single case; or if they are vague enough to be general in application, they are also so general in implication that no useful inference may be drawn.
This conclusion is not merely a rhetorical flourish. Translate your thoughts into mathematics (as you must to get ahead as an economist these days) and you will reach the same conclusion very quickly. For each assumption requires that a variable be maximized, and the variables are assumed to be independent. But you can’t simultaneously maximize two independent variables-except by happenstance. If they are always maximized together, they are not independent: One is a function of the other, or both are a function of some third. In the present case, if the variables are not independent, neither are the assumptions.
One of them (perhaps both) must go. A sure way to screw up your mathematics is to make a lot of assumptions that are not necessary. The situation here, though, is not like that of Euclid’s parallel-line postulate, which was not provable from the other postulates. The parallel- line postulate led to our familiar, four-square, no nonsense geometry which is perfectly valid in its domain. The economists’ assumptions, in contrast, are mutually contradictory and lead only to confusion.
It is not surprising, therefore, that in practice economists tend to forget one assumption or the other. Jeremy Bentham, the founder of utilitarianism, based his system on the “principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question.” In our time, the producer is more likely to be emphasized.
But forgetfulness of one assumption or shifting of emphasis will not do. Conventional economics is sustained by the tension between supply and demand, and they are, in turn, determined by maximization.
IT SHOULD BE noted that the appropriate tension is not provided by the “minimax” of game theory, where any economic activity has a single objective and the problem is to find the best combination of possible gain with the related possible loss. Various solutions to the problem may be proposed and investigated, but they will all be ranked on a single scale. In the case of profit maximization and utility maximization, there are two scales; and even if it could be maintained that, say, for every action, the value on one scale is the reciprocal of the value on the other, the theory would still provide no basis for picking the best combination.
The problem is indeterminate, and without mathematical solution, as we have seen it to be illogical and without reasonable solution. These are no mere quibbles; they go directly to the heart of conventional economic theory. Nor is appeal here being made to the realism or unrealism of the assumptions. Although such empirical appeal is not without validity, it is not being made here. Our appeal is to logic. Any theory that is illogical at the start will be illogical forever after. GIGO, as the computer people say.
And it has to be acknowledged that a great deal of garbage is in fact spewed out in the form of economic talk. Consider the arguments for privatization, for revenue-neutral taxation, for ubiquitous deregulation, for indifference to industrial pollution. These all turn on the axiomatic nature of profit maximization. Consider, next, the arguments for free trade, for unrestrained competition, even for the right (as proposed by some flaky Harvard pseudo-philosophers) to decide the specific functions of government one will support with one’s taxes-and how much. These all turn on the axiomatic nature of utility maximization. So the assumptions are not innocent.
But if we have to give up those two assumptions, what becomes of economics? Let’s look again at the reason for the failure of the assumptions. They seemed fair enough until we recognized that a profit maximizer must be a person, that a utility maximizer must be a person, and that in the vast majority of cases profit maximization and utility maximization must both be done by the same person at the same time.
In short, persons are, as my old boss W.W. Norton used to say, the absolute sine qua non. Economics is concerned with the maintenance of persons, not simply as biological entities, but as responsible agents-that is, as doers, as actors. Since the actions of one person involve others, they have an ethical aspect. The actual first assumption of economics, then, is that it is a division of ethics. It is the division of ethics that concerns money. On this rock a system can be erected whose orientation is quite different from that of the pseudo-science resting fallaciously on profit and utility maximization.
The New Leader