A Pathetic Development

Chapter 4: The Notion of Utility

Utility, a word frequently used by western economic scholars, is translated as "xiaoyong" (usefulness) in mainland China, while I think "gongyong" (worthiness) could be more appropriate. I've yielded to many other mainland translations, but this time I won't. The former translation "xiaoyong" is too real, and tends to make people feel there is really such a thing, which there is actually not. In China's cultural tradition,  there has never been such a concept of utility. As there is this cultural difference, one has the concept while the other doesn't, any translation of it can only be like blind men learn what an elephant is. Due to the same reason, some other concepts are almost untranslatable as well, like "cost", I don't think it's correct to be translated as "chengben" (expense), but I cannot come up with a better one either, so I just follow and yet express my attitude here that the translation is not so right.

Anyway, it's not so important for not having a perfect translation for "utility", because it had been more than a hundred years before western economic scholars made clear what the concept really means. With knowledge passed through generations, they thought they had understood, but actually not. It's not until the mid-twentieth century that the utility concept in economics receives an unambiguous definition. Yet as of today, many economic scholars still haven't got the correct definition. It can't be these scholars are too stupid to understand the concept, as many of them are indeed very smart. It's just they are unwilling: if they understand and agree the notion of utility detailed in this chapter, they'd lose their ambition to engineer any social improvement, and become nobodies like me.

Chapter 4, Section 1: A Pathetic Development

In 1789 and 1802, the English master of economic philosophy J. Bentham (1748-1832) originated the concept of utility, and influenced later generations vastly from then on. Bentham originally had three intentions. First, utility is an index of happiness or enjoyment. Second, everyone strives for a higher value of this index. The latter aspect led to the mathematization of selfishness, and after calculus was introduced into economics, utility functions flourished. Today they are still very popular in economics. Yet that's not because utility is indispensable in explanation, but because it makes mathematics applicable. Those skilled in math can thus have more showtimes.

Bentham's third intention was, when one's income increases, marginal utility of his income would decrease. He further made an assumption that everyone has a same version of income enjoyment, therefore the marginal income utility of a rich is low while that of a poor is high, the maximum welfare of the society would then be reached when all individuals have the same amount of income. This was the theoretical foundation of egalitarianism, and the predecessor of today's welfare economics.

Well, whether one's income increase would lead to a decrease of his marginal utility of income, is quite questionable. What economists all agree on today, is that utility indexes of different individuals are not comparable. The importance of one more dollar to a big rich doesn't have to be less than that to a street beggar. This only point would suffice to crush welfare economics. In 1950, P. Samuelson (1915-2009) pointed out in one profound paper, that no matter how much the total income of a society increase, as long as the income of some members (even only a single individual) has a decrease, economists would then be unable to affirm social welfare is improved.

Even Samuelson, the No. 1 figure of welfare economics, said like that, why are there still many practitioners of welfare economics today? I guess there two reasons. First, like previously mentioned, these economists think they are capable of engineering social improvements. Second, they need improve their own welfare: by advising the government in welfare engineering, they can have more income. In fact, the government loves to cut broad thongs of another's leather, sending taxpayers' money to economists: before the implementation of some policies that satisfy their own interests, government officials always need the words of corroboration from such scholars.

Scientifically speaking, the most important question on utility is Bentham's first intention: utility is an index of happiness. As the proverb goes: you are not a fish yourself, how can you know the happiness of it? How could you ever know whether I am happy or not, or whether I am more happier than yesterday? Leopards cannot change their spots, so are many economists, who always take themselves as capable as God. Today there are still people that view utility as an index.

In 1915, a self-taught Russian economist E. E. Slutsky (1880-1948) published — in Italian — an influential paper. After he passed, the paper was translated into English in 1952. One point of this great work was that, if we are going to explain human behaviors with a utility theory, then the concept of utility must be freed from subjective happiness or enjoyment. Mustn't it? To explain human behaviors, we need predict their choices, or under varied conditions how the choices would change. Whether one's choice is based on an increase of happiness, doesn't matter at all.

Since Bentham, participants in utility theory research almost included every important economists. Unfortunately, efforts of these countless geniuses earned only a history full of pathos. In 1950, G. J. Stigler (1911-1991) published a long paper titled The Development of Utility Theory to retrospect the history of utility thoughts over the past more than one hundred years. The paper was very knowledgeable, and also very graceful. In its conclusion Stigler could not help losing his temper: he thought economic scholars had had so little intention in theory validation, that all the efforts virtuosoes had payed in utility theory made nearly no contribution to our explanation of human behaviors!

I loved a paragraph of Stigler's conclusion in that work so much that in 1968 I had him write them down on a white paper, so that I can place it on my table as a motto of research. Today the ink has faded, but the scripture remains. I post it here so that the readers can appreciate the handwriting and keenness of this genius of the twentieth century. The words are as follow:

"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

Anyway, the theory of utility is still very popular today, so I have to spend some words to elaborate its key points.

In 1972 I published a paper about some phenomena like "blind marriage" and "child wife" in Chinese traditional marriage. In its last section I criticized the theory of utility heavily and deemed it totally useless. Economic Journal (Royal Economic Society) wanted to publish it but required me to reduce another five pages, so I simply removed the last section. After publication, two exerts wrote to me and blamed that I shouldn't have removed the section they thought the most important. Later the manuscript of this section cannot be found any more.

That I was against the theory of utility, was mainly because "utility" is only an imaginary concept by economists, a castle in the air, not fact, invisible and untouchable, so it's very difficult to derive refutable implications under this theory, and most would be only tautology.

At the time, R. H. Coase was on my side, while on the opposite side were three man I appreciated a lot: M. Friedman, G. Becker and my teacher A. A. Alchian. They opted to keep the theory of utility, as many economic goods — like friendship, reputation, family love, etc. — cannot be measured with money. As money cannot be used, they thought utility should come into play. In the following I will explain why I don't agree their point, but let me first show what the notion of utility that everyone agrees is.