Utility Functions

Economists like to discuss goal-seeking with mathematical terminology. When they talk about maximizing utility functions, they are using an abstract, mathematical way of saying that people are trying to attain goals. A utility function, written as follows:

U = f(x1, x2,...xn)

means that items x1, x2, etc. to some nth x all contribute to a person's utility. Utility, as the word is used here, is an abstract variable indicating goal-attainment or want-satisfaction. If a person has simple goals or objectives, such as accumulating material possessions, then x1 may represent cars, x2 fine furniture, x3 antiques, x4 land, etc. In the jargon of economists, anything that helps achieve goals gives utility.

Although it is of no practical importance here, it should be noted that some economists disagree with the interpretation above. They see utility as a real psychic entity, just as happiness, joy, and satisfaction can be considered real psychic states. In this interpretation, the possibility of measuring utility exists, though the techniques have not been developed. If, however, utility is a fiction invented to allow us to talk about goal attainment in an abstract way, no general technique of measurement is possible.

Economists have been reluctant to examine goals that involve competition for status. Perhaps their reluctance is due to their emphasis on the mutual advantages of exchange. In an honest transaction both the buyer and sellers must benefit or else the transaction will not take place. However, quest for status is zero-sum. If one person rises in status, he does so at the expense of others who he passes up. Their reluctance to examine goals involving status has meant that economists have surrendered some interesting questions to other disciplines. For example, to what extent does economic development depend on the goals that people have? Do some goals stop economic development? Limited evidence seems to suggest that groups in which it is socially unacceptable for a person to rise relative to his neighbors have a harder time developing than those groups in which social mobility is acceptable. Other social sciences have emphasized pursuit of status, and it gives them a very different way of seeing the world than the way economists do.

In developing the logic of choice, economists assume that people are rational, which means that people have well-defined goals and that they purposefully and logically act to attain those goals as best they can, given their circumstances. You might note that economics does not judge the goals themselves as rational or irrational. Economists almost always take goals as given. People are irrational if, given their goals, they act in ways that do not lead to the accomplishment of their goals.

Benefits an essential part of incentives, but so too are constraints and costs.

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Copyright Robert Schenk