Utility is useful (and planets probably don't love each other)

It's interesting that blog-writing was meant to be a way to relax a bit, get ideas down. It's somehow got all tensed up, and I keep on finding myself accidentally writing in comments elsewhere. This one's a quick defence of the idea of utility. At some point I'll explain in more detail the several, tiered stages I went through before I ended up seeing how the standard micro-economics framework is in fact really useful. That's quite a shift, since before I'd completely bought the common sociological (and ABM) criticism of utility as clearly false, because unrealistic. But here's a start. Oh - and having tried many books, here's the best one I found for learning micro-economics basics if, like me, you've been attempting that outside of an economics course. It assumes only calculus basics and the writing is incredibly clear-minded. Anyway, from a comment on an ongoing P3 thread:

I started my PhD listening to a lot of agent modellers promising the moon on a stick. Realistic, reactive, built on plausible psychology blah. I’ve ended it completely seeing what the idea of utility is good for. It’s not meant to be a ‘realistic’ take on human psychology, it’s a neutral framework for thinking through how cost changes shift people’s responses. E.g. the fairly unremarkable fact that people will tend to cut back on other spending first as fuel costs increase can be described in terms of elasticities. It’s tautological, but then all theories are, by themselves. It doesn’t stop it being very useful: if you know that increasing fuel costs will actually reduce spending in the rest of the economy more than it affects fuel spending, that’s important – not least for working out tax revenues.

It doesn’t explain *why* those choices are being made, and for a lot of purposes it doesn’t need to. It depends on what level of explanation you’re after. Others might want to ask: well, is the inelasticity of fuel prices amenable to change in other ways, if we break it down? What role, for example, does the physical structure of cities have?

Compare to another of my favourite utility-based findings: “savings in walking and waiting times are valued at between two and three times savings in on-vehicle time – parameters that have proved to be remarkably robust over the years.” (Button, Transport Economics, p.104)

So: more people will be – for instance – willing to drive for an hour each way to work, when they would never consider walking for that amount of time. Of course, one can come up with many theories to explain the underlying facts: anything from the structure of towns/cities/transport design to people’s (relative) aversion to physical exercise (I commute about an hour each way, with some walking. I’m fairly fit, I run, but I’m not sure I’d want to walk to work for 2 hours a day…!) But *at a given level of explanation* it is very useful to know that people value transport time differently for different modes.

So taking that simple example: if it appears that people will only walk or cycle for much shorter time stretches than under power, what can you do with that info? Several possible things. Find out the impact of physical/urban structure. Try and pull out the underlying factors affecting people’s choices, separate from those structures. If you want to reduce carbon output, you could either berate people for being so weak and tell them they should drive less – or perhaps think about other ways behaviour might be amenable to change, given what we know about how people react to those changes.

I’m not saying utility is the only way to think about people’s choices, and certainly not that it’s a description of the way people “really are”. But it seems to be clearly a useful tool for thinking about cost change, either monetary, time or some other cost imposed by our environment.

And just going back to the ‘level of explanation’ thing: “I have not been able to discover the causes of those properties… and I frame no hypothesis”. That’s Newton on gravity. He came up with what’s probably the first exemplar of a scientifically robust, generalised theory, but understood that deeper levels of explanation awaited. We’re still working on that.

I think physicists actually have less of a problem with this difference between levels of explanation than economists, who tend to assume that whole collections of people act like a single person (the ‘representative agent’ idea). But we have to get comfortable with what level of explanation we’re talking about. People are not utility-maximisers. Utility is useful for thinking about, describing and even predicting what impact people’s reaction to cost changes will have. What’s the problem? Pinning utility onto rationality is not necessary – any more than the theory of gravity requires planets to love each other.