The Science of Demand (27) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Section 7.  The Utility Concept Unnecessary

Let’s revert to the utility concept. Though it has been widely accepted in the economics profession for over two centuries, after careful deliberation, I decide against using it. The reason being “utility” itself is a castle in the air that does not exist in the real world. Purely an abstract conceived by economists, being invisible therefore non-testable, it cannot be used as a basis for empirical testing. From the perspective of economic explanation, my stance is simply the more incense burners, the more ghosts there are. If we can do without non-observable variables, do not use them. It is not necessary to use “utility”.

My teacher, Alchian, in those years siding with Becker and Friedman, considered that “utility” should be preserved and used. His argument was that certain economic goods, e.g., friendship, reputation, etc., could not be transacted in the market nor measured by money, hence these non-pecuniary goods could only be measured by utility. I pondered long and deep over it, yet my conclusion is: indeed a good number of goods cannot be transacted in the market, resulting in their values not measurable by market price. Nonetheless, since the postulate of substitution tells us that the so-called non-pecuniary goods can be substituted by pecuniary goods, we can use the changes in the prices of pecuniary goods to predict or explain the choice behavior of non-pecuniary goods. For instance, I am currently spending substantial time amending this “Economic Explanation”, therefore my time forgone, measureable by money, is increased. For this reason, less time is spent with my children, which can be interpreted as my care (non-pecuniary good) for them diminishes. My aforementioned 1972 article about phenomena in traditional China like property rights in children, blind marriage, daughter-in-law raised from childhood, etc., completely evaded this utility concept.

The main reason why this utility theory is so popular, I believe, is due to its suitability to be handled by mathematical equation. Professional-looking writings have a higher chance of being published. In the contemporary era, Becker is the most adept in applying the utility function, and possesses the best analytical skill I have ever seen. However, his explanatory power is nothing extraordinary: his predictions on what would happen around us were repeatedly off target. Indeed, since utility is unreal, formalities have to be added before its theory can be tested, hence during reasoning it is prone to fall into the trap of tautology. Saying that all the behavior of jumping off a tall building, divorce, killing a child, etc., is for maximizing one’s utility number is undoubtedly right, since it cannot possibly be falsified. This is a tautological statement. Becker is of course not that mentally deficient, yet readers should realize that the utility analysis has a tendency to fall into this trap. In fact, innumerable gentlemen within the profession have repeatedly been ambushed.

What Alchian said in those days was right. There are two conditions in using the utility analysis to explain or predict human behavior. First, we need to know how to use utility numbers to rank different visible choices. Second, we need to know that we have to pay for these choices. I agree, yet my feedback is: if we know these, the utility concept is no longer needed.