Thursday, August 25, 2022

James Buchanan, Frank Knight and John Stuart Mill on choice and utility functions

In economics we say that people want to maximize their utility. They buy the combination of goods that will make them happiest.

These three economists had some interesting observations about this.

Frank Knight was an economics professor at The University of Chicago in the first half of the 20th century. John Stuart Mill was a British philosopher and economist in the 19th century.

Here is an interesting quote from Knight followed by a similar one from John Stuart Mill.

"Life is at bottom an exploration in the field of values, an attempt to discover values, rather than on the basis of knowledge of them to produce and enjoy them to the greatest possible extent. We strive to 'know ourselves,' to find our real wants, more than to get what we want"
Source: Knight, Frank H. 1935. "The Limitations of Scientific Method in Economics," in The Ethics of Competition and other Essays. Harper and Row: New York.

See also Frank Knight’s “Risk, Uncertainty and Profit” 100 Years Later: Without Frank Knight, there would not have been a Chicago School of Economics by John Phelan. 

John Stuart Mill said: 

“The purpose of liberty is not to give us what we want but to help us grow so that we can best understand our wants.”

See The Forgotten Philosopher by Alan Wolfe in The Chronicle of Higher Education.

I read something about Nobel Prize winning economist James Buchanan today that reminded me of what Knight and Mill said. See Some Economics of James Buchanan by Timothy Taylor (the post is very interesting, raising questions about what economics is). This excerpt is a quote from Buchanan:

"In one sense, the theory of choice presents a paradox. If the utility function of the choosing agent is fully defined in advance, choice becomes purely mechanical. No "decision," as such, is required; there is no weighing of alternatives. On the other hand, if the utility function is not wholly defined, choice becomes real, and decisions become unpredictable mental events. If I know what I want, a computer can make all of my choices for me. If I do not know what I want, no possible computer can derive my utility function since it does not really exist."  

All of this raises questions about utility functions. Do we have them? Do they change over time? If they do, how and why? 

We say that tastes and preferences are one of the shift factors for demand in economics. If the taste for something increases, then demand increases. But normally we don't say much about why tastes change. 

Mill and Knight both seem to be saying that life is finding out what your tastes are. If that is the case, maybe, like Buchanan says, a computer could not make decisions for us.

No comments: