The Vitruvian Vendetta
Gautham Antarvedi
TY B.Sc. (2022-2025)
Estimated Reading time: 10 minutes
I think we’ve all struggled with the concept of utility; a psychological phantom that is supposed to represent satisfaction. I still liked ordinal more than cardinal but don’t ask me by how much. Then we wrestle with indifference curves and tangency. Jump through mental hoops to go from a two good case to an n-good case. These contraptions seem a little unbelievable to us. On the flip side, you have isoquants and isocosts. The production function is a lot more believable as to how one would run a firm, unless you’ve actually seen one run. Our economic models rest firmly on a foundation of quicksand. In fact, the model is only as good as the assumptions it abandons. We construct the homo economicus and predict his next act, knowing him to be further than the most distant relative of the homo sapien. Then, we even begin to question our assumptions, trying to go from the rational back to the real.
What is the point? What is the motivation behind this conviction to establish axioms? Holding all else constant, we wish to predict how changing one little thing changes an outcome. But that is not enough. We want to understand efficiency: given particular conditions, how one agent can maximize. The tangency conditions are just that, an effort to establish efficiency at the individual and at the level of the firm. This could simply be an exercise to demonstrate the superiority of the neoclassical system of economics. Personally, I would find the effort admirable. However, what actually motivates the departure can be uncovered by looking at what these models are trying to achieve. For one, they’re making an effort to understand what makes a free exchange system of economics work (or work better than the alternatives). They’re also trying to formalize the subject, to elevate it to a science.
What does science entail? Science entails falsification and prediction. Basically, one has to prove a theorem and the theorem should be able to predict an outcome. To a mind trained in the scientific method, the two should seem one and the same. If X causes Y, you should be able to recreate X to reproduce Y. Easy enough? Now make a person do the same thing, the same way twice. Fine, do something a little closer to what economics tries to do, make two people in similar social situations react the exact same way to an intervention. Trust me, I’m not just anal in my use of “exact”. The reasons why people might react similarly and differently to a particular situation is important to decision making. By framing the question as a maximization problem, we already assume that people react the same to a situation- that they will make an effort to “maximize” their utility. By framing the question as one of econometrics, we allow for economics to expand the question. We now ask what factors are most prevalent in making a decision, still assuming that studying such phenomena will allow us to make predictions. I argue that both methods actually narrow the problem severely.
An attempt to observe choice in isolation inevitably leads to a maximization problem. And an attempt to expand this kind of atomization to a study of a sample and a population leads to statistical methods. Before attempting to arrive at what the correct way to view choice might be, let us discuss why people react differently to different social situations. The simple answers are along the lines of diversity and context. The psychological manifestation of all these answers is knowledge. Your “knowledge” of how to react to a situation may be learnt through your personal experiences, your education and there’s even a biological basis for viewing your genetics as encoding “chemical memory”. I admit that I might be stretching the jurisdiction of that last one. Nevertheless, knowledge is necessary to react to a situation because you have no idea of what a particular situation leads to. You need a game plan, sure, but you also need to know what the game is? You need knowledge to deal with uncertainty.
Knowledge develops through interaction, that much is obvious. You can’t have knowledge about stuff you haven’t interacted with, directly or indirectly. The indirect transmission of knowledge in society is how you “know” most things. I doubt everyone reading this article has seen a lion roar, the eiffel tower or the footprints of astronauts on the moon (if you check all three boxes, call me). But everyone has knowledge of these things. While it is healthy to exercise some level of doubt, you do borrow from the repository of knowledge that is the world. That knowledge allows you to exercise agency in the face of uncertainty. Every choice you make is uncertain. No outcome is guaranteed. Tomorrow is not promised. Still, you go on without existential paralysis. This is because you trust in the knowledge society provides you about itself.
Money, prices are just expressions of such knowledge. Prices let you know how much something is worth with respect to another. It quantifies the demand and supply of the goods in the economy. Money consolidates disaggregated information in society to provide you with a benchmark, a convention for economic exchange. Prices are just aids to negotiation, signals within the context of more knowledge that a person possesses. An agent in a negotiation uses more information than just prices. For example, whether to take or to set the price is determined by further knowledge as well. The expression of prices as knowledge, knowledge as a factor in decision making against uncertainty reveals the nature of choice.
Consider the Crusoe thought experiment, a man is stranded on an island, he will maximize his outcomes. Now, consider a real man stranded on an island. I would probably curl up and sob for the first three days. The Crusoe and Friday version is equally ridiculous, still focusing on economic rationality and disregarding character and personality as if they don’t factor into choice. Let’s say I was stranded on an island with the girl I have a crush on, I’d probably do all the work while she batted her eyes at me. What exactly am I maximizing but my chances with her? The Crusoe experiment doesn’t just isolate him, it also orphans him. It renders him at the mercy of uncertainty. Choices in the real world are not made thus. They’re a result of exchange. Knowledge in particular contexts coalesce to form action, to form exchange.
The implication is that choice is emergent. The implication is free will. That people are not reducible to the factors of choice. An even cooler implication is the emergence of prices. Prices emerge from exchange. They are not reducible to exchange because one cannot determine the necessary information about the agents engaged in exchange. How then, do choices, exchange and prices make the free market? What makes this aggregation of random exchanges efficient? We shall once again make our way back from the neoclassical conception of efficiency, of equilibrium.
The traditional marshallian demand and supply curves can only come to equilibrium based on two things: one is rationality, that we have tackled, and the second is static or predictable conditions leading to an equilibrium. The fantastical nature of equilibrium should be obvious since it is never achieved in reality. Let’s say demand and supply are static, unchanging. Equilibrium can obviously be achieved and we can easily establish a top-down perfect structure of the economy. It is unreasonable to argue that demand and supply are static, but the perfect structure could be achieved even if the change was predictable. Commensurate changes could be achieved through a coordinated effort in the economy. The entire economy could be an equation. As mathematically beautiful this may seem, this ignores the simple truth that invention and innovation alter any equation substantially and often, and that the world is sufficiently dynamic to make prediction untenable.
How then, does the economic system achieve efficiency? A mental exercise imagining the supply side as a valuation of the material world and the demand side as a valuation of human wants does not elaborate the economic system. The economic system is the organization of a disorganised system; it is coordination without a plan. Efficiency is only acquired through knowledge. Knowledge about opportunity costs are discovered, about how to organize better. Such knowledge is transmitted and challenged throughout the economy. Prices aid in quantifying and transmitting this knowledge throughout the economy. They are not a dictate of the valuation between the demand side and the supply side of the economy. Instead, prices are a discovery of valuation generated through each free negotiation. Prices allow for coordination because they communicate knowledge. Not static knowledge but knowledge developed through a dynamic bottom-up process of valuation. The price of gold is not just the use value of gold but the usefulness of gold relative to the different uses that every person in the economy has with that gold. That is a vast amount of information contained within a simple number. The malleable, quantifiable nature of prices coupled with ease of communication allows it to coordinate an efficient outcome for the economy. It is the development of dynamic knowledge within society, the process of free individuals contributing to the repository of knowledge.
It is important not to reduce prices to signals, as it can reduce the problem again to a principal agent problem. Without the greater framework of knowledge and uncertainty, it turns into an argument about incentives. Incentives inevitably lead to a similar neoclassical conception of efficiency and allows for perspectives rooted in this unreality. Like the idea that growth is about the growing volume of money, goods and services. These volumes neatly reduce the problem to an analogy of the pie. Growing the size of the pie, ensuring everyone gets a fair slice etc. A positive sum game is a fair description of division of labor, neatly divvying up the economy into fractions adding up to a growing number. Assigning the unequal numerators to justice and a growing denominator to the economy has to be a gross misrepresentation of the social sciences. It ignores the knowledge that is unquantifiable and reduces its importance in determining human action.
Recognizing prices only as an incentive, a factor in decision making and a deterministic view of choice is effectively ignoring most of the problem. The positive definition of economics, allocating scarce means among alternative uses, seldom explains choice. Choice and exchange, organization and institutions can be effectively explained by an opportunity cost that includes not only economic costs but other social costs as well. However, such costs are impossible to quantify, they can only be weighted by the person facing them. These social costs also expose an important truth that economics cannot be separated from the other social sciences and studied independent of value judgements. Economics has been a pioneer by heavily borrowing its method of study from the natural sciences. The quantifiable nature of money, coupled with the atomizing of individuals allows a study similar to physics or chemistry, to think in terms of cause and effect. The usefulness of such study is only limited to informing decisions of actors within the economy, not in describing the truth about the system.