The word
“utility” is commonly used in Western economics. Its usual translation in
China, more like “effectiveness” which seems so realistic as if it does exist
in the real world, is somewhat misleading. Never has Chinese culture this
utility concept, it is therefore understandable why a proper translation may
not exist. Nevertheless, without a proper translation is not that important,
since for more than a century Western economists are not too sure what utility
is, either. Passed on from older generations, they assume that they understand,
yet they do not in fact. It was only until the mid-twentieth century that
Western economics could provide a clear definition of utility. Even so, many
economists until today are still unsure of its correct definition. There is no
lack of bright people among these scholars, so it is unlikely due to stupidity.
They are reluctant to know: if they understand and concur with the utility
concept in this chapter, they will lose the ability to improve the society and,
like myself, become small potatoes.
In 1789
and 1802, British economic philosopher, Jeremy Bentham (1748 – 1832), put
forward the concept of utility which has broadly influenced later generations.
Bentham’s original conception was threefold. First, utility is an index
representing happiness or enjoyment. Second, every individual strives to attain
the highest index. This index helps to express the selfish postulate in a
mathematical manner, and when calculus was subsequently introduced to
economics, the utility function became vastly popular. The utility function is
still prevalent in economics today. This is not because of any indispensable
explanatory usage of the utility function, but that it can be conveniently
applied to mathematics. People who are adept at mathematics can easily write a
good number of articles.
Bentham’s
third conception was that when a person’s income increases, the marginal
utility of his income will decrease. He then assumed the degree of enjoyment of
every individual is the same regardless of the level of income, hence the
marginal utility of income of the rich is low, while the marginal utility of
income of the poor is high. The society as a whole enjoys the highest welfare
when everyone’s income is identical. This is the theoretical basis of
egalitarianism, as well as the predecessor of welfare economics that still
exists today.
It is
highly questionable whether a person’s increased income will lead to a decline
in his marginal utility of income. What contemporary economists unanimously
agree to, however, is that utility indices cannot be compared among different
individuals. The importance of one dollar to a wealthy person might be much
higher than that to a beggar on the street. On this point alone, welfare
economics is highly problematic. In 1950, Paul Samuelson (1915 – 2009) pointed
out in an abstruse article that irrespective of any increase in national income
of an economy, as long as the incomes of some people (or even one person) are
reduced, economics cannot confirm that social welfare has improved.
As he
himself also professed, Samuelson is the primary persona of welfare economics.
Why even today are there so many practitioners of welfare economics? I believe
there are two reasons. First, as mentioned earlier, economists believe they
have the ability to improve the society. Second, economists have to improve
their own welfare: being economic advisers of the government can increase their
own incomes. In fact, governments are generally liberal in passing taxpayers’
money to economists: in implementing policies for the self-interest of
government officials, it is always preferable having the assent of economists.
From a
scientific viewpoint, the most fatal problem of utility is Bentham’s first
conception that utility is a happiness index. If one is not a fish, how can one
know what makes a fish happy? How can one know whether I am happy, or whether I
am happier today than yesterday? Overthrowing an empire is easier than changing
a person’s character. Some economists always believe they have God’s
extraordinary abilities. Even today, some people still to a certain extent
consider utility as a happiness index.
In 1915, a
self-taught Russian economist, Eugen Slutsky (1880 – 1948), published in
Italian a weighty article. After his death, this article was translated in 1952
into English. A key contribution of this vital article was indicating that if
we were to use utility to explain human behavior, the utility concept had to be
detached from subjective happiness or enjoyment. Had it not? To explain
behavior, we need to predict human choices, or how human choices will change
under different circumstances. It is irrelevant and entirely insignificant
whether human choices hinge upon augmenting happiness.
After
Bentham, almost all notable and gifted economists got involved in the research
of the utility theory. Sadly though, the work of all these talents only
resulted in a history of blood and tears. In 1950, Stigler published a long
article entitled “The Development of
Utility Theory”, tracing the history of thought of the utility theory over
more than a century with incredible insight and striking literary grace. In his
conclusion, Stigler could not help abusing: he felt that economists were not
keen on testing theories, hence despite the mammoth efforts of so many masters
on the utility theory, the resultant contribution toward explaining human
behavior was only negligible!
I like
very much a passage in the concluding section of Stigler’s article. In 1968, I
asked Stigler to write it down on paper for me to put beside my desk as an
epigram for my research. The ink has since faded, but the manuscript is still
with me. For readers to appreciate the penmanship and literary grace of this
twentieth century’s talent, that passage is reprinted below:
“The criterion of congruence with reality should have been sharpened –
sharpened into the insistence that theories be examined for their implications
for observable behavior. Not only were such implications not sought and tested,
but there was a tendency, when there appeared to be a threat of an empirical
test, to reformulate the theory to make the test ineffective. Economists did
not anxiously seek the challenge of the facts.”
George J.
Stigler
<INSERT HANDWRITTEN PASSAGE>
In any
event, given that the utility theory is still popular today, I have to
elaborate more on its main point.
In 1972, I
published an article about the phenomena of “blind marriage” and
“daughter-in-law raised from childhood” in traditional Chinese marriage. In the
last section I vigorously criticized the utility theory, saying that it could
be banned due to its limited application. The British Economic Journal was
eager to publish that article, but asked for a reduction of five pages. I
therefore simply deleted the last section. After the article had gone public,
two masters in the profession wrote to me to condemn that I should not have
deleted what they considered were the most important section. The draft of that
section has never been located since.
The
principal reason of my opposition to the utility theory is that “utility”,
merely a concept envisaged by economists, is non-factual but a castle in the
air. It is neither visible nor touchable, and does not exist in the real world.
Consequently, it is not only difficult to derive implications that are
refutable by facts, but pitfalls are aplenty. Since tautological statements
tend to be unwittingly formulated, people are likely to be swindled.
At that
time Coase sided with me, while on the other side were three people I admire:
Friedman, Becker, and my teacher Alchian. They would rather hold on to the
utility theory since certain economic goods – such as friendship, reputation,
family fun, etc. – could not be pecuniarily measured. Their consideration was
that since those goods were not measurable by money, they had to be measured by
“utility”. I will explain why I cannot concur with the viewpoints of these
three mentors, but let me first elucidate the “utility” concept as it is
commonly agreed.
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