3.2 De Gustibus non est Disputandum.
It is a methodological decision on part of economists not to analyze tastes. For example, Samuelson and Nordhaus (1989, p 26) state that economists “must reckon with consumer wants and needs whether they are genuine or contrived.” Note the imperative form, which nonetheless appears meaningful, and subject to rational argument. Similarly, Stigler and Becker (1977) make the normative claim that “Tastes are the unchallengeable axioms of a man's behavior:” An economist is not allowed to question how tastes and wants are determined. Stigler and Becker (1977) also write that “On the traditional view an explanation of economic phenomena that reaches a difference in tastes between people or times is the terminus of the argument: the problem is abandoned at this point to whoever studies and explains tastes (psychologists? anthropologists? phrenologists? sociobiologists?).” This delineates a sharp discipline boundary, and a subliminal suggestion that it is not altogether respectable to study tastes.
Modern textbooks reflect this methodological commitment by taking utility functions as given. The origins, causes, flexibility, variations and intensities of these preferences are not the subject of economic analysis. Cooter and Rapaport (1984) provide a history of the transition from cardinal to ordinal utility, and argue that contrary to what is widely believed, this did not represent scientific progress. Similarly, Wong (2009) argues that Samuelson’s attempt to replace ordinal utility by ‘revealed preference’ fails to achieve its methodological goals. It is this last transition, discussed in greater detail below, which led to the idea that we cannot question tastes. Attempts to study how tastes are formed, how they change, and how they relate to satisfaction, welfare, happiness, etc. require going beyond observable choices, and hence are not ‘scientific’ according to positivist views.
3.2.1 Positivism leads to Revealed Preference
The positivist program of focusing on observables alone was extremely influential in the development of all sciences in the twentieth century. For instance, behavioral psychologists sought to study observable behaviors instead of unobservable emotional states. Similarly, economists sought to replace cardinal utility based on unobservable states of satisfaction and pleasure with more scientific and observable counterparts. This is why the Hicks-Allen reformulation of utility theory, which showed how all relevant economic concepts could be formulated using ordinal utility was hailed as a “revolution.”
Because ordinal utility is still based on the unobservable preferences of the consumer, the attempt was made to replace it with observable choices. Samuelson (cited in Wong, 2009) writes of “The discrediting of utility as a psychological concept” as the reason for his development of “revealed preference” theory. Wong (2009) provides an illuminating discussion of the methodological developments which led to ordinal utility and onwards to revealed preference. He has also shown how this research program fails in its methodological objectives. Because of the close correspondence between choices and preferences, assumptions about choices amount to assumptions about preferences. The mathematical equivalence of ordinal utility theory with revealed preference theory was demonstrated by Houthakker (1950).
3.2.2 Errors of Positivism are Reflected in Revealed Preference
Since choices reflect preferences, we cannot avoid reasoning about unobservables by focusing on choices alone. Any observable patterns in choices can only be due to patterns in the underlying preferences; if preferences do not exist (or are complex, conflicting and incomplete) then choices would not be subject to any logic at all. This issue is still not clearly understood by many. For example, Binmore (2009) writes “ We accept that people are infinitely various, but we succeed in accommodating their infinite variety within a single theory by denying ourselves the luxury of speculating about what is going on inside their heads. Instead, we pay attention only to what we see them doing.” Binmore, like Samuelson before him, fails to recognize that assumptions about (or descriptions of) choices are necessarily assumptions about preferences, or motivations for these choices. If observable choices follow simple rules, then motivations of people are not infinitely varied in the context under discussion. We focus on choices because of our strong intuition that the underlying preferences are stable enough to build a theory upon. Modern utility theory places strong, testable, and falsifiable restrictions on choice behavior, and by implication, equally strong restrictions on possible motivations for these choices. Therefore, Binmore’s assertion that “modern theory of utility makes a virtue of assuming nothing whatever about what causes our behavior” is not correct. In fact, extrapolations, predictions and explanations of patterns in choice behavior are only possible if we postulate underlying preferences which give rise to these patterns. Wong (2009) provides a more detailed and complete discussion.
REFERENCES FOR Consumer Sovereignty:
KYLE BAGWELL, Chapter 28, THE ECONOMIC ANALYSIS OF ADVERTISING
Handbook of Industrial Organization, Volume 3
Edited by M. Armstrong and R. Porter
© 2007 Elsevier B.V.