Paper
for the NZAE Conference, 28-30 June 2006
Revisiting
Some Economic Fundamentals
Stuart
Birks, Massey
University
Abstract
There are some basic aspects of economic theory which have developed
over the past 200 or so years and now form the basis of much of our thinking
as economists. Economic thinking has also had an impact on how society as
a whole perceives itself. This paper explores some of the basic concepts,
asking whether they are as generally applicable as might be assumed. It speculates
on some possible alternatives, considering the implications that might arise
from other paradigms.
-
Introduction
Since I started
down this line of investigation, I have been surprised how potentially fruitful
it can be. It involves three steps. First, consider what are currently, commonly
accepted starting assumptions upon which much later analysis has been built.
Second, ask what alternative assumptions there might be that could have been
used in their place. Third, speculate on whether these alternative assumptions
might fundamentally alter our analyses and our conclusions.
-
Motivation
I was motivated to take this path by several references to academic
disciplines relying more on faith in their foundations than being generally
open to challenge
(Birks, 2006c)
. Joan Robinson provided an economic example in a paper
(Robinson, 1970)
in which she said the following:
Professor Ferguson, in The Neoclassical
Theory of Production and Distribution, asserts that belief in neo-classical
theory is a matter of faith. ‘I personally have the faith’, he
declares… (p.309)
It is acceptable to build on an existing
foundation if knowledge can be seen as a progression – so that where we are now is the cumulative effect
of past knowledge and the foundations have been verified. However, if knowledge
is a matter of perspectives, we
might be off track, so it is worth looking at views from elsewhere, or other
times, or, more generally, testing current perspectives.
As briefly
indicated in the March 2006 issue of Asymmetric Information, one area
I have been exploring in economics is that of utility
(Birks, 2006a, 2006d)
. Given the limited time available for this presentation,
I shall limit myself to this area. I had intended to focus on two lines of
enquiry. One, arising from passages written by David Hume, I have referred
to as that of “stimulus and reflection”. The other, linked in
to an increasing number of sources, is that of a “feeling of belonging”
and a “sense of purpose”. The latter is significant as the considerations
are central to major national and international policy initiatives, as observed
in the focus on “inclusive” policies, the concept of relative
deprivation, and broader definitions of health such as that adopted by the
World Health Organisation. However, time precludes coverage here and it will
have to be left for a subsequent paper.
-
Stimulus and Reflection
2.1
Explanation
Consider what might
be taken to be a general form for a utility function, U = f(X1,…Xn).
When we use a function such as this, we are saying that utility in a given
time period is a function solely of the quantities of (economic) goods and
services consumed in that time period. Any other variables, such as family
circumstances, health, or number of friends, are either associated characteristics
of the goods and services, or are independently determined and can be ignored.
With other standard economic assumptions, we are also claiming that the more
we consume the higher our utility. When we use such a function to consider
situations over time, we assume that the functional relationship at each time
period is the same.
That is what we
now take as a starting point in the theory of consumer behaviour, and it is
used in numerous other areas, including welfare economics. It is perhaps surprising
that we do this, given the far more circumspect origins of thought on utility.
In that context, George Stigler
(Stigler, 1950)
points out, “most economists of the
period [1776-1915] used utility theory primarily to explain economic behaviour
(particularly demand behaviour) and only secondarily to amend or justify economic
policy” (p.307). Thus it would be quite reasonable to focus on quantities
of goods and services, as the problem being posed is to place values on these
variables (as with determining quantities consumed by individuals). There
is a major jump from this to the use of utility theory as a basis for determining
desirable social policy.
Volume 1 of David
Hume’s work, A Treatise of Human Nature, was published in 1748
(Hume, 1911)
. While he was not writing
directly on utility, he was writing at a time when he could have influenced
the early deliberations about utility. In Part I
Section II he discusses what he calls impressions, and their role
as the generators of ideas. He divides impressions into those of sensation
and reflection (“reflexion”), describing the latter as passions,
desires, and emotions. I appear to have subconsciously modified the
original idea to refer to “stimulus and reflection”, which may
be more meaningful today.
Briefly, Hume suggested
that people experience something, and this gives an impression on the senses.
This is then stored in the memory as an idea. Recollections of this memory
serve as further experiences, even though they are just in the mind. This
can go on through several iterations. We could imagine
where we might have been if this had been incorporated into thinking about
people’s utility. The act of consumption provides a stimulus, but this
can then be followed by acts of reflection. It could be considered that much
of the pleasure gained arises through internal processing of experiences,
in which case development of the ability to process effectively could be as
significant for utility as the act of consumption itself.
Kahneman et al
(Kahneman, Wakker, & Sarin, 1997)
make a related distinction, referring back only
to Bentham, when they talk of “Decision utility” and “Experienced
utility”. “Experienced utility can be reported in real time
(instant utility), or in retrospective evaluations of past episodes (remembered
utility)” (p.375) They focus on discrepancies between the two forms
of utility, resulting in suboptimal decisions arising
from “systematic errors in the evaluation of past events and decisions
that do not maximise future experienced utility” (p.376). There is a
difficulty in terms of whether remembered utility has utility value, or is
merely information that may be used in subsequent decisions. Kahneman et al
focus on the suboptimal decision making that can result from using incorrect
information, such that observed decision utility may reflect suboptimal decisions.
Implicit in this approach is the assumption that the only real utility experienced
is the instant utility, and remembered utility can result in decisions based
on false information because of distorted recall and imperfect memory. The
situation becomes more confused if people gain ongoing utility from recall
or reflection, as I am suggesting here.
2.2
Implications
Had this perspective
formed the basis of thinking on utility, economics would be very different
today. We could speculate on this. It would mean that the utility of consumption is not dependent just on the characteristics
of the goods and services consumed. It also depends on how individuals process
the effects of consumption (reflection). In other words, both preferences
and utility gained are endogenous, and we can become more efficient in generating
utility.
2.2.1
Consumption having ongoing effects
According to Hume’s view, utility would not
only be obtained directly from consumption. The act of consumption can produce
multiple impressions as the act is recalled. The benefits of consumption are
then as much a matter of how we retain and generate impressions as of the
act of consumption itself. This could affect how we view economic activities.
For example, we could think of holidays not as consumption, but as an investment
in memories. As another example, might a child get more pleasure from one
treasured toy, about which impressions can accumulate, than from many toys
which are quickly forgotten? On another dimension, consider
Mireille Guiliano’s book, French
Women Don’t Get Fat: The Secret of Eating for Pleasure
(Guiliano, 2005)
, which emphasises savouring small quantities rather than
consuming large quantities. Related to this, the sociology of food presents
several wider aspects to food consumption
(Beardsworth & Keil, 1997)
. They suggest that preparing and eating food can be a social
event, and “foodways can be seen as a kind of language encoding patterns
of social relations, particularly those connected with social boundaries and
with processes of inclusion and exclusion” (p.74). As such, they are
an investment in social capital with longer-term implications. Similarly,
despite the move to prepared foods and TV dinners, people may still experience
the pleasure of waking up to the smell of bacon being fried, the anticipation
caused by the cooking smells of a thick soup or beef casserole in winter,
or an evening entertaining round the dinner table. Some of these things are
to be savoured and recalled.
2.2.2
Endogenous preferences
A consideration of reflection has additional implications.
Preferences and utility are unlikely to be fixed if they are based on a collection
of sensations and reflections that is ever-increasing (or ever changing, at
least, as people may forget). It would hardly be surprising, were we to develop
and sustain distorted perceptions, but this may, to a degree, be unimportant.
Some might argue that all perceptions are distorted, or at least shaped by
their social context
(Berger, 1967)
. The act of reflection could be considered as
an ongoing part of the process of consumption, in addition to being linked
to experiences unrelated to consumption activities. Consequently change is
ongoing, and internal thought processes can play an important part in determining
utility. Some have even suggested that the focus should be on reflection,
rather than stimulus, to the extent that satisfaction results as far as possible
from the former alone. To quote Samuel Johnson:
Without asserting Stoicism, it may be said, that it is our business
to exempt ourselves as much as we can from the power of external things. There
is but one solid basis of happiness; and that is, the reasonable hope of a
happy futurity. This may be had every where.
2.2.3
Media, entertainment, information, knowledge and democracy
The media, for whatever purposes, provides information. It may be good
or poor quality information. Numerous writers have distinguished between information
and knowledge. From an individual perspective, it could be argued that
information requires reflection to be processed into knowledge. From this
perspective, if today’s mass media are competing on circulation and
audience ratings it would be legitimate to ask whether their actions result
in too much stimulus and too little reflection. I recently presented one example
of the possible distorting effects of this, whereby in news and other material
there is a distorted presentation of issues in a way that is transient and
superficial
(Birks, 2006b)
.
We could extend this aspect further, in that the stimulus of an experience
via the media is detached from the lived reality. In other words, we could
ask how realistic are these vicarious impressions? Even if the representations
are factually accurate, audiences are detached observers, and they tend to
see events from far more angles or perspectives, and get far more information
in a more condensed form, than an individual in a lived experience. This has
been recognised as a problem elsewhere in terms of the use of people’s
preferences to determine social desirability of policy options, as discussed
in
(Birks, 2006e)
. There is a complex relationship between experience and
perception, and we rely on perceptions as a basis for expressed preferences
in markets and democratic societies. This indicates a broadly based concern,
namely –
2.2.4
Is there undue emphasis on stimulus activity at the expense
of reflection?
Economists have accepted a focus on consumption of goods and services
as a basis for wellbeing, along with the perspective that consumption has
transient benefits. I have suggested above that this arises from a simplified
focus on only part of the consumption process. In turn, this focus may have
influenced the behaviour of and our attitudes to some of the institutions
in society, the media being one example discussed here. It may be possible
to increase wellbeing by i) reducing stimulus from economic goods and services
and increasing stimulus from other activities, and ii) replacing some of the
time spent on stimulus with time spent on reflection. This may also have implications
for consideration of policy issues and the workings of democracy.
-
Does it matter?
It could be asked, can’t we assume that people strike an optimal
balance between stimulus and reflection, and stimulus from economic and non-economic
goods and services? If so, then even though we as economists are taking a
simplified approach, the distortions may not be as severe as otherwise (although
there would still be implications of changing perceptions over time). There
are reasons why we might consider the assumption of optimal balance to be
unrealistic. To speculate, these could include; i) peer pressure; ii) government
and other incentives emphasizing one over the other; and iii) society’s
values arising from a utility framework (if we have successfully trained people
to think like economists) that may understate reflection and associated aspects
of lifestyle.
From an economic perspective, this raises a serious question. Does
consideration of reflection highlight limitations in our analyses? I would
suggest that it does. At the same time, section IX of This Simian World
(Day, 1920)
suggests that a lack of reflection might be an inherent
characteristic of humans due to our simian origins:
By nature their itch is
rather for knowing, than for understanding or thinking.
Some of them will learn to think, doubtless, and even to concentrate,
but their eagerness to acquire those accomplishments will not be strong or
insistent. Creatures whose mainspring
is curiosity will enjoy the accumulating of facts, far more than the pausing
at times to reflect on those facts. If
they do not reflect on them, of course they'll be slow to find out about the
ideas and relationships lying behind them; and they will be curious about
those ideas; so you would suppose they'd reflect.
But deep thinking is painful.
It means they must channel the spready rivers of their attention.
That cannot be done without discipline and drills for the mind; and
they will abhor doing that; their minds will work better when they are left
free to run off at tangents.
As one afterword,
the additional considerations of “belonging” and “purpose”,
mentioned above but not considered at length, are increasingly being emphasised
in the wider policy environment even though they do not appear in utility
functions. Consequently, economics risks becoming seriously out of step with
major national and international policy initiatives. Discussion of these points
will have to wait for another paper.
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