Yuri's examples are failures of State or Society. He may be interested in public or social decision making. We may discuss various aspects of those questions but the principles were not very different from economics. 

At the top of his explanation, Yuri wrote:

• Economic theory has an equilibrium theory where everybody rationally maximizes his objective (profit or utility) but an invisible hand moves everybody to Pareto optimal allocation. This is the core theorem behind the idea of free markets.

However, this premise is all wrong. Economic agents including consumers and firms can not maximize their pretended objective (utility or profit). I have argue long on this in my paper. Please read it:

Microfoundations of Evolutionary Economics

https://www.researchgate.net/publication/301766363_Microfoundations_of_Evolutionary_Economics

Entire economics based on general equilibrium framework should be abandoned and a new theory (I would say evolutionary theory of economic activities and processes) should be constructed. The new theory is not yet complete, but a rough shape is already appearing.

Public choice and social choice comprise much more complex problems than single agent cases like consumers or firms (in reality board of directors). However, if you base your starting point on rational economics (i.e. neoclassical economics), you would not arrive at a correct understanding even of public or social choices. 

The rational economics is based on irrational assumptions and is not a rational science.

Working Paper Microfoundations of Evolutionary Economics

Actually there is something changing in this theory you know. I found it in a Harvard lab where a new model is being developed, starting from the point that agents are irrational. Those guys over there are pointing out an end in utility maximisation theory and everything that goes with it. I am not sure if it is out in public because I found it as a reference somewhere that I cannot recall right now. 

Sophia, I agree that economic agents are not always rational in their decision making. Here I tried to explore this topic: https://www.researchgate.net/post/What_factor_is_more_important_for_human_behavior

However, complexity arises a lot and it is difficult to modify economic theory. There is a theory of bounded rationality, but how far bounded? How many iterations "I know that you know that..." do you do in real life? I guess zero or 1, and only some mathematicians can do infinity (to be fully rational).

But this question is different. It is also about policy. Suppose governments are rational. Well, they have good teams of economic advisers with Ph.D. degrees who know all about rationality. But why are we moving in wrong direction? Why we are caring too little about future? What is wrong in policy? May it be that bureaucrats are too corrupted? In some countries yes, but probably not everywhere... Maybe economic theory misses important player - nature? Is our time discount chosen rationally? Well, it is part of preferences, and they perhaps have both emotional and economic origin ("I want it all and I want it now"), at least are given as fixed in economic models... Just think along these lines.

Micro incentives are always need based and do not motivate for big leaps, these are only for sustainability

I do not get your point, Krishnan. Do you mean that macroeconomic incentives for sustainable development never exist? Let us talk about nature. If all know that its destruction will result in substantial deterioration of our life in  already 10-30 years, we rationally add our utility today and in future, discount it and vote for less destruction of nature. I want to know where is the problem: a) separation of public from decision makers, b) non-knowledge of what would happen by both, c) too high discount of future and no altruism towards future generations.

It is more focused towards for example

when the sops are introduced these are very narrowed down specifically for those verticals to pep up and flourish. That is the reason i had indicated like that.

 Now people well known about this and we do not believe this function as well. 

Rationality among economic agents is not limited to the application of Benthams pleasure pain principle or that of Mill's utilitarian rationality. This is plane and simple emotivism  which prescribes decision making as based on man's satisfaction or dissatisfaction of consequences of his/her actions. This is one of the weaknesses of economic determinism. Rationality is anchored on syntheresis . Syntheresis is a mind action. It is a weighing of judgment based on REASON.

You already mentioned natural monopolies, which are often inevitable and therefore must be regulated via external mechanisms. That's not so much a failing of microeconomic theory, but rather a pragmatic fix to it.

Some of the other problems you mentioned, though, can be corrected with microeconomics. One example would be environmental impacts. It becomes a matter of allocating costs where they must be allocated, so the proper equilibrium is reached. If driving a car creates costs that are not being borne by the owner, such as costs in cleaning up air pollution, then the proper solution is to include those costs as part of the cost of using cars. That will have a natural effect of both reducing the amount of driving done with internal combustion, and increasing the appeal of alternative propulsion technologies.

As to high accumulation of debt by governments, that is not an issue of microeconomics. That is a problem with government control. Regular mortals pay a steep price for debt they incur, and that's how microeconomics controls that problem naturally. Politicians and bureaucrats have to understand that their short-term self-interests are costing society a bundle of money.

In short, I think that for the most part, microeconomic theory works just fine. The main problem with it being that costs are not applied as they should be, in some cases. Any control system in which the feedback loops are cut will have a tendency to go, your know, out of control. My bet is that many of the so-called "irrational decisions" people make are not irrational at all. They are perhaps short-sighted, but very rational. Polluting the environment is a completely rational decision, if doing so costs you nothing (let's say, within your lifetime), and keeping it clean costs you a lot.

 Yuri's examples are failures of State or Society. He may be interested in public or social decision making. We may discuss various aspects of those questions but the principles were not very different from economics. 

At the top of his explanation, Yuri wrote:

• Economic theory has an equilibrium theory where everybody rationally maximizes his objective (profit or utility) but an invisible hand moves everybody to Pareto optimal allocation. This is the core theorem behind the idea of free markets.

However, this premise is all wrong. Economic agents including consumers and firms can not maximize their pretended objective (utility or profit). I have argue long on this in my paper. Please read it:

Microfoundations of Evolutionary Economics

https://www.researchgate.net/publication/301766363_Microfoundations_of_Evolutionary_Economics

Entire economics based on general equilibrium framework should be abandoned and a new theory (I would say evolutionary theory of economic activities and processes) should be constructed. The new theory is not yet complete, but a rough shape is already appearing.

Public choice and social choice comprise much more complex problems than single agent cases like consumers or firms (in reality board of directors). However, if you base your starting point on rational economics (i.e. neoclassical economics), you would not arrive at a correct understanding even of public or social choices. 

The rational economics is based on irrational assumptions and is not a rational science.

Working Paper Microfoundations of Evolutionary Economics

I think it is also a question of values. Natural goods and capabilities of future generations are valued less than economic goods today. Additionally, there is a knowledge - action gap. Even though many peolpe would say that future generations should have the same rights and opportunities as we do have today, and even though people appreciate nature, they just don't behave according to that. This is a big research field in environmental psychology, for example ;)

What is wrong in policy and why we are moving in wrong direction? Despite all scientific progress, availability of information of all kind, IT tools, countless international gatherings of politicians (we are paying for that) and expressed "good will" - something does not allow us to go in good (better) direction. In case of my country, the reasons are: corruption, egoism of policy makers, distance from nature, alienation from God and basic rules (regardless religion), vanity, materialism, sightless system of values. I think in the essence is a change of human being itself. We, humans, are becoming less and less people in our very essence. People lost the feeling that we are not the first nor the last on the planet.Too much information and little contact with oneself and with nature leads to the fact that all people are changing in (according to me) very disturbing direction. When it comes to decision makers, and their ability to do things, we all feel consequences. Policy makers are also people who are confused and generally they do not know what to do, but they are not aware that they need help. I feel a huge gap between politicians of the rest of the world. Therefore, we are running in circles, without advancements. Unfortunately, decisions are made by politicians. I think politicians should be subtracted from the power to decide. Too much power in hands of people who do not know what to do with it can not bring anything good. Courage, determination and willingness to bear the consequences - we need such people, but they generally are not among politicians.

I want to thank everybody for an interesting discussion that goes in several dimensions.

Mirjana mentions correctly the problems with politicians who are often either do not have proper knowledge about the problems they need to tackle or do it contrary to public interest, just following their own goals. In the worst case they also may be corrupted. Democratic system intends to make it socially easy to replace them, but do we often see it in reality (at least in some countries)?

I agree with Albert that economic theory is not so bad. But it definitely does not include nature as an actor, although it provides for free many resources that are becoming increasingly scarce. If the Nature would be of of billionaries taxing users for non-sustainable harvesting or pollution at the objective value of what nature loses, microeconomics would create much better incentives. As for the debt by government, we clearly see the difference between private interest of (short living) bureaucrats and (long living, thus lower discounted) public interest that results in socially sub-optimal decision of growing public debt.

Those issues undermine the first welfare theorem and the idea to keep markets free to get social efficiency. The application of this idea to Big Bang transition in the former USSR in 1990s brought  enormous negative consequences and suffering of population. Now we see that the markets should be regulated (so the invisible hand does not work on macro level). Also, agents are heterogeneous, but mainstream theory considers just a  representative agent. I would add at least 2x2 types: rich and poor, on one hand, and typical population member and politician, on the other. Indeed, there might be a conflict of interests and corresponding games. In the extreme case, this can even lead to re-birth of some kind of Marxism, but mathematical. However, there is plenty of possibilities to do it using standard game theory, widely used by economists.

Yoshinori wants to replace economic theory. Indeed, some indications that economic theory needs serious reforms started already after crisis 2008, which is still not cured completely. So work here should be welcome, although it is a bit difficult to publish. For example, my conference paper about origins of crisis was not accepted by a journal in 2010. I did not try later, just put it on RG, and there are many reads: https://www.researchgate.net/publication/272380285_About_Origins_of_Financial_Crisis_2008

I also want to attract your attention to more important work in this field by A.Kirman and D.Helbing: https://www.researchgate.net/publication/272241774_Rethinking_Economics_Using_Complexity_Theory

Article Rethinking Economics Using Complexity Theory

Conference Paper About Origins of Financial Crisis 2008

The main problems of nowadays' economic theory are included in the first paragraph of your question. The concepts of free markets, utility etc. are useless, not to say nonsense. Markets need more or less strong regulation to function. Most transactions are taxed and have to be registered in some form. The concept of the economy as a set of utility maximizing agents means that economics has resigned from being a social science. Firms want, of course, make profits, but I think non of them knows what the maximum profit could be. It is also not or half true that future generations pay for the government debt. This debt is wealth in the hands of the creditors and this wealth is sooner or later transferred to the next generation.

Dear Yuri Yegorov

I wish I can help you but it is not my field.

Regards

Saeed 

Yuri, two brief points.

One is that costs can be better applied, to allow microeconomics to function properly. There is no reason why they cannot. The costs of pollution are being better understood over the years, but are still not borne specifically by the bad actors. You might say, the taxpayer, and society in general, is subsidizing the bad actors, so they are being rewarded for being bad actors. The economy is a systems like any other system. Feedback loops are essential for stability. Costs need to feed back to the input side of the system.

The other point is that governments create much the same problem as the environmental issues. Politicians do not bear the economic cost of their decisions. The only "cost" to them is votes at the next election. So for example, if a politician promises free money to everyone, he will get many votes. The fact that such a policy is economically unsustainable (system out of control) makes no difference to that politician. He will get the votes, society will pay the price, and by the time the effects of the uncontrolled system become evident, that politician's term in office may be over. (Venezuela comes to mind.)

Instead of being rewarded by more votes, if these politicians were made to pay the economic costs of their mistakes, would we not expect a different set of policies? In effect, the "mistakes" politicians make, for the reward of more votes, are subsidized by the taxpayer. That is why the microeconomic model appears to  not work right.

To put one's faith on "more regulation," by these very same politicians and bureaucrats, is risky business. Think of the human body system. Is it sensible to allow the body's immune system to be run manually, by people? Or would we expect that manual control would make a mess of everything? The human immune system is way too complex to be run manually, even if certain  specific therapies do so, in very limited ways. The economy is exactly the same. Much too complex for politicians to control completely. At most, these politicians should be allowed to tweak the system on occasion, such as writing regulations in cases where natural monopolies exist.

In general, the problem is the lack of knowledge of the environment, and the context of the formation and evolution of the problem that has to be dealt with, as the basis for its objective formulation and preparing for the theory usage in the reality. On the other hand, it is logical that a theory of knowledge and ability to 'calculations '' without adequate interpretation cannot produce the expected outcome. And the third problem is the willingness to tackle these problems and formulate objectively

The legal environment is more essential to oil the machinery of microeconomics in any country by facilitating opportunity to both the employees and employers by providing means to address their aggressiveness for better labour law enforcement and relations

Poster Econometric Framework Poster

That is really interesting question. I entirely agree with Dr.Manfredi.

 Dear Yuri,

I met Alan Kirman in Tokyo, this year in March. His presentation was superb. He was one of invited lecturer for the annual meeting of Japan Association for Evolutionary Economics.

Yoshinori

I want to thank everybody for the discussion. Yoshinori, I found a recent paper published in journal by Alan Kirman: https://www.researchgate.net/publication/303827504_Complexity_and_Economic_Policy_A_Paradigm_Shift_or_a_Change_in_Perspective_A_Review_Essay_on_David_Colander_and_Roland_Kupers%27s_Complexity_and_the_Art_of_Public_Policy

He, you and perhaps few more people are attempting to rethink economic theory so that it can explain more of reality. Evolutionary approach takes into account changing environment, population and previous actions of economic players. Non-linearity and positive feedback (also studied by Brian Arthur) are responsible for multiplicity of possible paths and complexity of emerging patterns.

I agree with Albert about governments. Indeed, their own incentives are often different from social objectives. How can we improve this system? "Manual control" was in the former USSR, but the complexity turned out to be so high that the system was abandoned towards wild markets. I would say ex-post that it was overshooting. European countries have regulated markets and their population is happier. Although many say that in 1970s it was better than today; perhaps this is growing environmental cost. Income inequality grew too much in the last 20 years everywhere, and this should be also controlled.

Some people criticize the concept of utility. I am not among them. We should keep something fixed in modelling even it does not describe reality in a fully correct way. If we have no core, we just stay with "everything can happen"- and this is not a science. But I would give up some rationality (in the form accepted by economic theory) if this allows to make better predictions. I also think that we should not move fast into even more complex stochastic models before we understand the full complexity of deterministic dynamics.

Physicists have many deterministic models describing core behaviour of nature, and stochasticity often does not change this pattern critically. One can study first linear harmonic waves, then non-linear, and then it is possible to understand the random spectrum of all waves together.

Article Complexity and Economic Policy: A Paradigm Shift or a Change...

Yoshinori, you start your paper (is it already published?) with the phrase "there is no theory of value". I did not read all but I have the questions: 1) have you seen some good examples of value theory, 2) have you elaborated this?

I do not know if it makes sense to look at it in historical perspective. Before there was a human and an animal. The animal was domesticated, and human said: "this is my property and it has some value". In a similar manner, countries were conquered and people became slaves. In this period of slavery (and partly in feudalism) an owner could tell: "My property is 100 horses, 200 cows and 50 slaves (or peasants). They have the value of 10 kg of gold." This was well before capitalism. But capitalism has not eradicated those problems: still a man can take a piece of nature (either from nature or previously belonging to a community) and tell "this is my property". This is how privatization was done in Russia in 1990s (I mean mostly natural resources, that belonged before to state - to all people). I know that some oil fields were bought (on auctions, but how were they organized?) for just 1% of their market value in 2 years.

Another problem (as I see it) is that value is not preserved and is very volatile. It is less volatile in physical terms (although wars and natural disasters destroy part of it all the time), but more in financial. Any change of exchange rate or stock market index can make an owner poorer or richer up to few % every day. This is not very convenient and even can pose problems, like a necessity to repay debt in the moment of low value of stocks. The fact that value is not preserved and is highly volatile allows for some people to become rich not by producing anything but just by speculation. It is also possible that people have asymmetric information about value of something, especially for pieces of art - and lose in trade.

... a fine piece of argument by Prof. Yuri. It made me think value in terms of creators versus users, including co-users as well as forms of value and valuation, such as use-value, aesthetic value etc. 

 Yuri asked me if 

1) I have seen some good examples of value theory, and

2) I have you elaborated this.

I answer both with Yes, I did. Please see my paper

The Revival of Classical Theory of Values

https://www.researchgate.net/publication/269393496_The_Revival_of_Classical_Theory_of_Values

As I have added in one of comments on this conference paper, this was already published in a book but you can catch the essence of the paper by this draft paper,. 

Please note that I am concerned with normal state of capitalism. Your story of Russia in 1990's is important human experience as well as central planning. I do not dare say that that primitive exploitation is well described by my theory of value.    

Conference Paper The Revival of Classical Theory of Values

Let me explain the status of the paper that I have cited in the first of my answers (post #9 ). This paper is to be the chapter one of a book with the same title as the chapter. (See my project.)

It argues mainly how the neoclassical economics is flawed and how we should reconstruct a new economics. In a word, it is concerned with the systems theory principles. The second chapter that I an now preparing treats more directly the economics principles. It includes the theory of prices and the theory of how firms adjust their production volumes. The aim of the book is to show that we may have a decentralized  market economy in which firms with myopic view and bounded rationality can follow as a total system of production network the slowly changing final demand.

This gives an example of working market economy without assuming infinitely rational and infinitely far sighted agents like the neoclassical economics.  

Dear Yoshinori, I had a look at your article about value theory. It is interesting contribution where you compare vision of different classical authors on that. You say that there is continuity between classical and neoclassical theory of value, inability of Keynes to come to correct answer, disagreement with Marx's theory of value as used labor and some problems of neoclassical theory.

But I would like to offer some puzzles. I will try to speak neoclassical language because its math is most developed. I will be also intuitive and not too rigid to be understandable to non-economists. First of all, we all have different values in the sense of usefulness of some object for us. It is easier to consider value of art or housing. There is so called hedonistic valuation of housing. Given square meters, location, closeness to public transport, parks, etc - each person can value a certain flat at a certain maximal price that he is willing to pay. If there is an auction among all potential buyers - the selling price would be equal to maximal valuation. But if not all potential buyers come, it may be much lower. So one who wants to get maximal price should either search for a buyer for a long period or use auction.

Certain external event like earthquake or terrorist attack tend to decrease those values. So, we have many different subjective values and the observed (objective) value is the registered price. Housing can also appreciate if this city becomes more popular international location due to life quality or wages offered by business.

With art it is even more complex. I know plenty of cases when piece of art can be sold at a secondary market by seller who has no idea about its value or no access to rich buyers, for a small fraction of the price, that can be obtained on an auction.

Does value have a link with used labor? Depends how we measure labor. Suppose that it is work-hour with standard salary (in a particular country) for this qualification. Then let say an impressionist Claude Monet could sell his artwork for a standard honorary of his time according to labor theory. But somehow the value of his work increased a lot over 100 years. The value of artists with similar skills did not increase, and their art is still cheap today... Well, for standard production this should be simpler, but still some value can become obsolete after technological innovation.

Dear 

I agree with Yoshinori Shiozawa 

regards

Very interesting topic. I guess  Albert Manfredi and Krishnan Umachandran  show important points regarding the topic. 

Again, thanks Yuri for this question.

Yuri's argument is the standard one among the textbooks. However, economics has a bad custom with regard to laws (not legislated, but "natural" laws). In natural sciences, almost all laws have their range of application. Even in the case when some are interpreted as universal at first, later development of science often comes to reveal that there is in fact a range of plausible application.

A typical case is the Newtonian dynamics. Until the 19th century, it was believed that Newtonian dynamics is valid for all rages, for example, at any scale of energy level. At the beginning of the 20th century, two big changes were added: quantum mechanics (formalized in 1920's, but Plank's discovery of quantum theory goes back to the last year of the 19th century, i.e. 1900) and special relativity theory by A. Einstein in the miracle year of 1905. The valid range of Newtonian dynamics became clear. The electrons around the atomic nucleus do not obey the Newtonian dynamics. Neither high speed movements near to light speed do. That a theory knows its limits of application or the range of validity is an important characteristic of the modern science. Neoclassical economics is disqualified as modern science in this sense.

Yuri's original question was concerned the validity of microeconomic theory. He asked why the microeconomic explanation does not apply to some questions of the public policy: (1) high accumulation of government debt and (2) the destruction of the nature. This case reveals the weakness of neoclassical reasoning. The neoclassical economics emphasizes the universality of its theory but pays few attentions to the limits of its theory. The two cases that Yuri illustrated is a question of public choice, or the case of decision making among many subjects. Simply stated, the neoclassical economics explains the psychology of market deals. It is a very special kind of decision making among many subjects. Yuri's two cases cannot be solved by market transactions. Among others, there are conflicts of interests. When market mechanism is not applicable, incentives that neoclassical thinks universal fails to function. This is the deep reason why the neoclassical incentive theory does not apply to the typical public choice cases.

Now, let us return to Yuri's objection. He argued that (1) the neoclassical framework applies to the Art Market, whereas (2) the classical theory of value does not apply to it. I willingly admit that the classical theory of value, or the cost of production theory of value, does not apply to Art Market. An impressionist picture, for example a picture of Claude Monet, lies out of the range of cost of production theory of value, because they are no more produced now.

The neoclassical economics claim that its theory applies to more wide markets. But the weakness of the neoclassical economics is that it does not know the limits. Does Yuri think that it applies to financial market, for example to a stock market? If yes, does the stock market is running as Leon Walras described? Walras thought that he is making a theory of market whose typical case is the Bourse of Paris. We can easily oppose to Walras.

No stock market in the world waits until the equilibrium is attained for all stocks. Is an individual stock price described by the supply and demand curves like Marshall's scissors? Many economists and students believe so. But, demand and supply is not determined by the shouted price in the market booth. Demand and supply of a stock depends much upon the speculative thought. The arguments which determine the demand and supply are not the current price of the market. The latter is one only one of many arguments. The trouble or weakness of the neoclassical theory does not make clear the range of application and people are lead to believe a pseudo-explanation.

As I have argued in my paper below The New Theory of International Values (footnote 32 in section 6, p.36), the classical theory of value is not complete or universal. However, it is based on a much more sound theory than the neoclassical price theory, because the range of validity is clear. Of course, this is not the unique reason that I oppose to the neoclassical theory. It has many fundamental flaws inside, but they are not noticed by many of economists and are not pointed out in the standard presentation. I have argued these points in the first part of my paper A Guided Tour of the Backside of Agent Based Simulation. Unfortunately the section 3 is omitted from the uploaded draft paper (in my RG page). If Yuri and others ask me, I can send them the section three separately by mail.

https://www.researchgate.net/publication/304717720_The_New_Theory_of_International_Values_An_Overview

Working Paper The New Theory of International Values: An Overview

Dear Yoshinori, I see that you made quite a lot of work in this direction. I also like you analogy with physics: neoclassical economics does not set its limits of applicability. I tried to talk about limitation of self-regarding preferences (zero altruism, which is not confirmed by sociologists and psychologists). This is one assumption of applicability - when altruism can be neglected. More is in my Econophysics paper, published in Japanese journal 'Evolutionary and Institutional Economic Review": https://www.researchgate.net/publication/271500062_Econo-physics_A_Perspective_of_Matching_Two_Sciences

But here I  want to continue with my value examples, because another paper (Dacha pricing) is using similar valuation procedure: https://www.researchgate.net/publication/271503476_Dacha_Pricing_in_Russia_General_Equilibrium_Model_of_Location

It is one of my dissertation papers, and I tried to derive a nice mathematical model that also has interesting application. Where the story of value is there? It is not stressed in the paper. Agents are heterogeneous with respect to wealth and the wealth distribution is mapped into locations. In fact, each agent is competing only with neighbors in wealth distribution for land slot at some distance from the city, and in equilibrium his bidding rent curve is tangent to the aggregate. Non-linear (too steep) price gradient at small distances from the city emerges, because richer agents want not only compensation for commuting expenses but also for the loss of their more valueable leisure. It is also confirmed empirically.

Article Econo-physics: A Perspective of Matching Two Sciences

Article Dacha Pricing in Russia: General Equilibrium Model of Location

If income distribution theory would be available, it would be possible to see that income and wealth can affect the values. The listed Dacha paper shows that not only mapping but the whole equilibrium price pattern for land rent is influenced by wealth distribution. The total value of the wealth in land rent is thus a function of it.

It is also shown that transition between different wealth distributions (before and after transition) can make part of infrastructure obsolete. It was possible to give almost every citizen of 5 million city (like St. Petersburg) a small dacha at affordable distance only when inequality was low and transport was subsidized.

When two rich people (of, let say, 10 in total) make bids for a unique piece of art, the transaction price will be higher comparing to the cases when only mid-income people (income equality) bid. Also, 1 rich can overbid 9 poor because there are no real competitors. (We can control for the aggregate income being fixed). Thus, growing income and wealth inequality lead to increase in the total value of art as the part of GDP.

If you are interested in continuing discussion about income and wealth distributions, I have opened a new question for that: https://www.researchgate.net/post/Why_economic_theory_is_almost_silent_about_income_distribution_and_its_evolution

Very Brilliant and high level discussion Sir,Thanking you very much. 

Sorry guys, it's a misinterpretation to believe that "self regarding preferences" contains no altruism. If fact standard utility theory contain no preferences to any goods, ideas, morals, etc. at all. Preferences have to be revealed. Utility theory says nothing about whether you like opera or not, peanut butter or not, or altruism or not. Altruism becomes just another good. Some people like it and others don't. No more no less.

The current paradigm doesn't dismiss altruism in any way at all; it just doesn't promote it above any other goods or services. All utilities are deeply personal; however the independence approach to utility does not eliminate interdependent behavior.

So, to my mind, no reason to throw Friedman or Popper out, and a lot of good reasons to keep listening.

    Pete Bias

The (scintific) utility of utility theory (in the form of including "well-behaved" utility functions in economic models is, at best, zero, I would even say negative. I know nobody who calculates her consumption for a period (day, month, quarter or year?) on the base of an unchanged utility function for all periods. For most goods and services utility will sharply fall after reaching a certain quantity. For example: having a washing machine is fine (high utility), a second one could have some utility (as a reserve, if the first does not function and there is plenty of room to store it), but in most cases its utility would be negative and this would certainly be the case for the third one. The same is true, e.g. for food and beverages. Even if one includes altruism as a good (Where can I buy altruism?), the fact remains, that agents as utility maximizing machines are isolated from each other. This means that this sort of economics is no longer a social science.

Dear Peter and Anton, thank you for the interest to this topic. I will comment on your ideas because I see it in a different way.

Peter, when I was talking about altruism, I had a meaning similar to the approach of Samuel Bowles, see https://en.wikipedia.org/wiki/Samuel_Bowles_(economist) . Neoclassical economic theory in standard textbooks elaborates the theory of preferences as purely individualistic. Roughly speaking, I would like to get any extra utility without caring whether my actions bring any social disutility. I care only about my consumption bundle and will maximize U, even if some of my actions bring disutility to others in the form of externality. But I agree that exernalities are dealt with separately, and that in some cases classical individualistic approach gives a good approximation to reality, especially when interaction is small. This is the first point.

The second is that self-regarding preferences mean that a person simply does not care about utility of others. Those ideas of SVO (social value orientation) were elaborated long ago by Charles Graham McClintock in the book "Experimental social psychology"(1972). I could not find his original graph like a complex plane with individual care on X axis and social of Y axis, with possibility of all intermediate cases. I found on internet similar picture (see Fig.1 in the file below):  http://vlab.ethz.ch/svo/SVO_rev_paper.pdf . In some of my papers I also used this approach. See for example the reference to my econo-physics paper in my post # 32. We can justify Marxism if we add to utility a component caring about the wealth of the poorest member of society. This means that a person may be better off if he sacrifices part of his wealth towards another person.

This is not done in classical microeconomics because only own consumption quantities (and not of others) enter utility function. I agree that things bring enormous mathematical complexity, so that it is better to start with utility from income (wealth). Since it has decreasing returns, society is better off when it is spread more equally. But if somebody has altruistic component (positively caring about friend/neighbor's income), there is already a mechanism for voluntarily redistribution (and elimination of non-efficient equilibrium in some games).

Anton, I disagree that utility theory is useless. It provides some internal values that are not observable in market transactions. In auctions some values are revealed by bidders, but some remain hidden. If a person did not buy some good because it looks expensive, we cannot measure his reservation price. If a shop does sales, some range of those reservation prices is revealed. The theory based only on prices and no (unobserved) utility will be much poorer. I agree that not all people are rational automates, but many feel what is their utility. In the case of washing machine and other set of goods I agree that the value of 2nd for many is zero (although some families have several cars or TV sets), but additional income can be spend on new varieties. In microeconomics we study mostly continuous choice of infinitely divisible goods (like bread and butter), but there are also models with mixed (discrete and continuous) choice (like car plus the rest, some cannot afford a car). I agree that utility can change over time (also due to marketing, while it is not a standard microeconomic assumption) and that there might be satiation point (a rational person does not drink infinite amount of vodka at a party where it is free, but he has a bliss point, after which additional amount with bring more disutility to health than fun).

As for unit of time, if differs, because there are both non-durable and durable goods. In the first case (when going to supermarket) I try to imagine 1000-dimensional hyperplane (equal to the number of varieties there) and to find its tangent point to my iso-utility manifold (partly a joke). For durable goods I also find the moment when it is optimal to replace them. For example, to replace old coat, when one can still use it 20 times, but is scare that some people would suspect little difference between this person and a beggar.

Hi Yuri,

Thanks for your response.

I still believe that your view of utility has implicit "direction." I simply don't think utility does. To me utility is whatever gives us satisfaction in whatever form. Consequently, it must perforce consider all of our feelings as we view a "good" or "service" or "action" so that when we entertain our views regarding the consumption of those things we are already constrained and pushed by our views of outsiders, insiders, family, friends, etc. even though they aren't making the decision. All of that is already 'weighed' in the utility that it brings. This allows us to enjoy crappy art by our children, giving money to charity, laughing at somebody's clothing, eating pizza, or anything. None of it is intrinsic. All of it is already (subconsciously?) influenced by our perceptions of the world, which are in turn impacted by the world's feedback.

About your ideas that utility can be negative: I agree and that is indeed worth exploring, much like the value function in behavioral economics.

I guess in summary I would say: I think altruism is "already in there" when we behave.

Fun discussion Yuri! Thanks!

    Pete