Motivation for this presentation

At the last seminar I gave to my research group I banged on a bit about making our implicit assumptions, such as utilitarianism and equilibrium based thinking, explicit. The eventual goal of doing so is to be able to think critically about these assumptions.

Some points of attention:

Economics - definitions

Ask people to provide definitions of economics. Compare with what I found from browsing the internet below:


Jeremy Bentham and utilitarianism

Aside: I always thought that Ayn Rand was a ruthless utilitarian, but it seems that she wasn't. She was simply a ****.

Measuring utility with prices i.e. marginal values

I don't think it's controversial to say that neoclassical economics can be seen as an attempt to give mathematical rigour to utilitarianism. As anecdotal proof of this, the Wikipedia entry at the end of this post states this explicitly. In addition, quick Google search produces this paper from Nathalie Sigot among other articles. A more academic reference (from 1971) which states this:

It has often been said that the Theory of Political Economy [by Jevons] marks a watershed in the development of economic thought mainly because of two outstanding characteristics in it - its introduction into economics of psychological hedonism on the one hand, and of mathematical and quantitative techniques on the other. The first of these, it seems to me, can be directly traced to the utilitarian philosophy of Jeremy Bentham and the second to the mathematical logic of Augustus De Morgan.

William Stanley Jevon's explicitly tries to operationalise Bentham's "felicific calculus" in his Theory of Economy (see Natalie Sigot).

Key point: prices are the result of individuals or firms expressing their utility - the "usefulness" (happiness) that they get from buying something. This price formation happens through markets, which were described using equilibrium theories (see quotes from Jevons below about oscillations of a pendulum and prices).

Fun fact: since utilitarianism was controversial at the time (hence the further refinement by John Stuart Mill), Jevons didn't actually say that it utility maximisation should be a policy goal. Instead, he really though he was describing reality, i.e. utility maximisation was descriptive rather than prescriptive.

Equilibrium or 'physics envy'

Equilibrium was used to discover "laws" of economics. Compare that to e.g. describing the dynamics of complex systems (agent based approach). This is the central thesis of Chapter 4 of Kate Raworth's "Doughnut Economics".

Jevons (in "The Theory of Political Economy"):

the Theory of Economy ... presents a close analogy to the Science of Statical Mechanics, and the Laws of Exchange are found to resemble the Laws of Quilibrium of a lever.

Walras in "Elements of Pure Economics" (who talked of the 'mechanism of competition'):

the pure theory of economics ... is a science which resembles the physio-mathematical sciences in every respect

As a criticism of this, according to Kate Raworth (referencing Keen, S. (2011) Debunking Economics):

Jevons himself had a hunch that economic analysis should be dynamic but, lacking the mathematics to do it, he settled for comparative statics, which compares snapshots of two points in time.

Continuing, and referencing Alfred Marshall's "Principles of Economics" (possibly taken out of context?):

Alfred Marshall argued against mechanical metaphors and, instead, for seeing economics as 'a branch of biology, broadly interpreted.'

This whole presentation is succinctly summarised by Jevons in the "Theory of Political Economy":

Just as we measure gravity by its effects in the motion of a pendulum, so we may estimate the equality or inequality of feelings by the decisions of the human mind. The will is our pendulum, and its oscillations are minutely registered in the price lists of the markets.

Supposedly Friedrich Hayek decried the economist's

propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to downright error.

An aside: the idea of macro-economic equilibrium seems to have been very fanciful since the 70s due to the Sonnenschein–Mantel–Debreu theorem. Doesn't stop IAMs, but I guess they're prescriptive rather than descriptive anyway?

From equilibrium to optimisation

See this web page (from Aalto funnily enough) for history of optimisation.

Famous equilibrium or optimisation based models

PRIMES model used by the European Commission

DICE model by Nordhaus

Stern Report model???

Global Energy and Climate Model of the IEA - "The model uses a partial equilibrium approach, integrating price sensitivities." Also for Erik (who once told me that IEA does not use TIMES): "The GEC Model is implemented in the simulation software Vensim (, but makes use of a wider range of software tools, including TIMES ("

Overview of IAMs and other energy and climate models (not exhaustive):

Cost optimisation and the prescriptive (normative) vs descriptive modelling

Aside: normative as in aiming for the "norm"

I will just blindly quote Trutnevyte on this, as she puts it very well:

Many of these bottom-up, perfect-foresight cost-optimizing models have evolved into large-scale, complex models that rely on thousands of parametric and structural assumptions. Although widely used, they have been criticized too. These models have been argued or shown to have systemic biases, to be based on value-laden, fragile or narrow assumptions, to lead to irreproducible scenarios [24], and to have insufficiently broad system boundaries. Retrospectively, the models did not capture structural changes in real-world transitions [23,26,27]. Detailed scenarios developed with such bottom-up models have been argued to be inadequate for anticipating long-term phenomena in face of deep uncertainties in technology, economy, and society. When described in detailed narratives, such scenarios also tend to induce over-confidence because detailed scenarios seem more probable that the ones that have not been shown in detail [31]. As a result, there has been an increasing interest in model evaluation to assess the performance of models. One of the unresolved critiques is the use of cost optimization This papers aims to assess the adequacy of cost optimization for modeling energy transitions.

Ever since the first bottom-up energy system models were developed, there has been a tension between exploratory and predictive use of energy scenarios. Nowadays modelers frame energy scenarios resulting from the models as possibilities what might happen and not predictionsdthat is, as scenarios “for insights, not numbers”. But whether used for predictions or insights, scenarios generated with models are implicitly assumed to be able to give some indication of what is possible in the future and, in this way, are implicitly used as proxies of the future. From the multidimensional space of possible futures that is defined by technical, economic, environmental and other con- straints, bottom-up models use cost-optimization to narrow down this space to one scenario to analyze further. But even intuitively one senses that real-world energy system transition may not be cost optimal. To date the bottom-up modeling community has been struggling to make the bridge between the need for scenarios that are reasonable proxies of the real-world transition and the models that cannot provide such proxies.

Trutnevyte proposes to explore the near optimal feasible space, e.g. use modeling to generate alternatives, if cost optimisation models are to be used at all.

So why do we minimise costs?

These are some very general thoughts:


As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosophers such as Jeremy Bentham and John Stuart Mill. The term has been adapted and reapplied within neoclassical economics, which dominates modern economic theory, as a utility function that represents a consumer's ordinal preferences over a choice set, but is not necessarily comparable across consumers or possessing a cardinal interpretation. This concept of utility is personal and based on choice rather than on pleasure received, and so requires fewer behavioral assumptions than the original concept.

It was expressed by E. Roy Weintraub that neoclassical economics rests on three assumptions, although certain branches of neoclassical theory may have different approaches:[11]

From these three assumptions, neoclassical economists have built a structure to understand the allocation of scarce resources among alternative ends—in fact, understanding such allocation is often considered the definition of economics to neoclassical theorists. Here's how William Stanley Jevons presented "the problem of Economics".

Given, a certain population, with various needs and powers of production, in possession of certain lands and other sources of material: required, the mode of employing their labor which will maximize the utility of their produce.[12]

From the basic assumptions of neoclassical economics comes a wide range of theories about various areas of economic activity. For example, profit maximization lies behind the neoclassical theory of the firm, while the derivation of demand curves leads to an understanding of consumer goods, and the supply curve allows an analysis of the factors of production. Utility maximization is the source for the neoclassical theory of consumption, the derivation of demand curves for consumer goods, and the derivation of labor supply curves and reservation demand.[13]

That same entry on international trade:

Neoclassical economics favors free trade according to David Ricardo's theory of comparative advantage.[25] This idea holds that free trade between two countries is always mutually beneficial because it allows the greatest total consumption in both countries.

And on the origins:

Classical economics, developed in the 18th and 19th centuries, included a value theory and distribution theory. The value of a product was thought to depend on the costs involved in producing that product. The explanation of costs in classical economics was simultaneously an explanation of distribution. A landlord received rent, workers received wages, and a capitalist tenant farmer received profits on their investment. This classic approach included the work of Adam Smith and David Ricardo.

However, some economists gradually began emphasizing the perceived value of a good to the consumer. They proposed a theory that the value of a product was to be explained with differences in utility (usefulness) to the consumer. (In England, economists tended to conceptualize utility in keeping with the utilitarianism of Jeremy Bentham and later of John Stuart Mill.)

The third step from political economy to economics was the introduction of marginalism and the proposition that economic actors made decisions based on margins. For example, a person decides to buy a second sandwich based on how full he or she is after the first one, a firm hires a new employee based on the expected increase in profits the employee will bring. This differs from the aggregate decision-making of classical political economy in that it explains how vital goods such as water can be cheap, while luxuries can be expensive.

Further on:

In particular, Jevons saw his economics as an application and development of Jeremy Bentham's utilitarianism and never had a fully developed general equilibrium theory. Menger did not embrace this hedonic conception, explained diminishing marginal utility in terms of subjective prioritization of possible uses, and emphasized disequilibrium and the discrete; further, Menger had an objection to the use of mathematics in economics, while the other two modeled their theories after 19th-century mechanics.[28] Jevons built on the hedonic conception of Bentham or of Mill, while Walras was more interested in the interaction of markets than in explaining the individual psyche. [27]

Reference 28 is: "Philip Mirowski (1989) More Heat than Light: Economics as Social Physics, Physics as Nature's Economics, Cambridge University Press."

These are basically planning models on steroids and most are equilibrium models which maximise welfare / minimise costs:

Cost-benefit integrated assessment models are the main tools for calculating the social cost of carbon, or the marginal social cost of emitting one more tonne of carbon (as carbon dioxide) into the atmosphere at any point in time.[30] For instance, the DICE,[31] PAGE,[32] and FUND[33] models have been used by the US Interagency Working Group to calculate the social cost of carbon and its results have been used for regulatory impact analysis.[34]

There are however some agent based models and some using evolutionary economics, no idea what these are.

The only 'criterion' one should take into account is 'the will or inclination of the person immediately concerned' (1957, p. 39): `Whatever can produce pleasure or prevent pain may possess utility. [...]; but we must beware of restricting the meaning of the word [utility] by any moral considerations' (1957, p. 38)

Prior to Jevons, numerous writers had expressed their desire to estimate the effects of such and such a measure in terms of collective welfare, to such an extent that Edgeworth defined utilitarianism only in the light of the principle of the greatest happiness. He distinguished the 'Economic Calculus', based on the assumption that 'every agent is actuated only by self-interest', from the 'Utilitarian Calculus' `in which each and all tend to maximum universal utility' (1881, pp. 15-16).

Jevons recognized that 'no human mind is constituted in this perfect way: a future feeling is always less influential than a present one'

Key point: discounting the future!!!

[Bentham:] any particular person must be regarded as governed by various considerations of which wealth is only one. But then there are principles governing the accumulation of wealth. These principles are totally different from the principles of morals.

[Jaffé] contrasted Jevons's 'bestowed concentrated effort on an attempt to reduce utilitarian speculations to an exact science which would be useful as a foundation for the theory of value in exchange' with Walras's approach which 'peremptorily and nonchalantly [...] postulated a measurable marginal utility theory' (1976, p. 318)

Hence, in Menger, the equilibrium price is the result of bargaining between two agents: 'The level of relative or monetary prices should be included in an interval whose limits correspond to the respective values declined by the subjectivity of both agents and the final actual price level will result from a bargaining process between agents' (Gloria-Palermo, 1999)

[Jevons:] 'The price of a commodity is the only test we have of the utility of the commodity to the purchaser'. This suited him [Jevons] in so far as it enabled feelings to be treated as mathematical data and it became possible to compare feelings for the same individual.

Key point here is feelings = mathematical data.

Here, methodological issues play a great part: mathematization gave rise to a simplification of a concept originating in moral philosophy 'the utilitarian calculus' in order to establish a new approach to political economy.

Jevons, from "The Theory of Political Economy":

the Theory of Economy ... presents a close analogy to the Science of Statical Mechanics, and the Laws of Exchange are found to resemble the Laws of Quilibrium of a lever.

Just as we measure gravity by its effects in the motion of a pendulum, so we may estimate the equality or inequality of feelings by the decisions of the human mind. The will is our pendulum, and its oscillations are minutely registered in the price lists of the markets.

Feedback to myself