An Allegory of Economics

Disclaimer: This is not an attempt at anything factual or historical. It is more of a thought exercise to flesh out an idea I'm chasing. It's taking the form of a just-so, fictitious allegory that, one more time so we're completely clear, may bear little to no relationship with any actual events.

Once upon a time there were some Scottish gentlemen who were trying to understand what it was that made some nations wealthy and others poor. It was a big question. Where to begin?

They started with some simple ideas. People value some things, and want to get more of those things than they already have. There are many varied sorts of things people want of course; it could be money, it could be more leisure time, it could be the happiness of their friends. The point is not what these are but that people want them, and have to take action in order to try and get them.

Getting them requires giving something up. Whether it's the other things you could have done with the time it took, or the other things you could have bought with the same amount of money you paid; you can't get something for nothing.

The Scotsmen believed that people's desires exceeded their capabilities to fulfill those desires. That there is no limit to wants but a scarcity of what we want. That every action we take forces us to make trade-offs between what we give up in order to obtain what we acquire.

Talking about trade-offs only has any meaning if you have some knowledge of what people want. It's nice to understand that people have to give up something they value in order to get something else that they value, but it gets a bit cumbersome to talk in these terms if you can't put some concrete real-world examples into it.

Looking at the role of money helps simplify things a bit. We know that people buy things with and sell things for money, whether it's things like food and tools, or services that people provide with their skills, time, and effort. The use of money is a pretty clear case of trade-offs; the money you use to buy something is money you will not be able to use to buy anything else.

The Scotsmen understood that the things people bought and sold with money only accounted for one part of what makes up the whole of personal wealth. However, it is the part that is much easier to observe and quantify than the rest. So they drew largely on the goods and services bought and sold with money when building their theories, and were able to make great progress in the direction of answering the initial question.

The Scotsmen died as all people do, their project far from complete but satisfied that they had accomplished much in their short lives, and could only hope that others would pick up where they left off.

Others did indeed pass on their work and attempt to build upon it. First some Englishmen, then some Frenchmen, and soon after Germans and Austrians joined the fray, until the work of the Scottish gentlemen became the foundation for work being done by scholars the world over.

Yet successive generations were rarely as wise as the original Scottish gentlemen. They believed that they could achieve a total, complete, true understanding of the trade-offs that all human beings faced. Attempts to accomplish this often involved assuming that the things bought and sold with money were the only things of value to people. If this were so, of course, it would make it much easier to predict human behavior more completely. And if you could predict human behavior more completely, you might even figure out how to influence if not outright control it.

Many men came to the school founded by the Scotsmen with the hope that it would give them tools to accomplish just this. They left disappointed or deluded, and often both.

For they failed to understand that focusing on a model of trade-offs between goods and services purchased with money was itself a trade-off, one that sacrificed all of those things that people value and methods they have for obtaining them that are more difficult to quantify than those which are purchased with and sold for money. The time and effort it would take to understand the dynamics of those nonmonetary trade-offs would not further the scholars' understanding of them by nearly the same extent that they could further their knowledge of monetary trade-offs with the same amount of time and effort.

As criticism from outside the field began to mount, the scholars responded by creating fictional units that people maximize across all decisions; the thing that is maximized whether it is through buying what they want or by making a new friend or any number of activity. This unit was called Utility, and for a time, the scholars believed they could measure this thing.

They admitted that the old model of people as monetary wealth maximizers only captured one piece of the picture. The new model of people as Utility maximizers, however, surely included the full package. Thus contented with their response to the critics, the scholars turned around and in practice changed nothing about the nature of their analysis. Utility in place of money was just a cosmetic alteration; in the end they still believed that they could or had reduced trade-offs to something entirely quantifiable and predictable.

In fact, maximizing Utility became such a dominant feature of the theory of wealth, that trade-offs began to take second saddle. Sure, there were limits to how much you could increase your Utility at a given moment. But people would work to reduce those limits. Scholars built up theories of how they could reduce those limits not only in particular circumstances but even over time. They spoke of people having Rational expectations about the circumstances of the future, and making Rational choices to maximize their Utility.

In the present day the discussion has devolved into a debate about whether or not people are really Rational or not. Some people came in and argued that people were not Rational all the times, or at all; that they often consistently failed to maximize their Utility. Defenders of rationality crafted "best of all possible world" arguments that would have better suited Dr. Pangloss than true scholars.

From their graves, the Scottish gentlemen were so dismayed by the state of the debate that they began to complain to one another--this in spite of the fact that some among their number firmly disbelieved in any sort of existence after death. Such was the magnitude of their chagrin, that they would put aside long held assumptions of that sort.

These scholars today, they don't seem to have a clue. It's all Rational this, Utility that. The only crucial point is that there are trade-offs. These trade-offs are based on values that are difficult for a scholar to understand from the outside. At best you can hope for some approximation. But to speak of some imaginary thing called Utility, and whether or not people are Rational enough to maximize it--what a lot of nonsense!

Our theories were simpler than reality, of course; this the dead Scots freely admitted. But we dealt in things that exist in reality. Money and that which is bought and sold with it exists. Trade-offs exist, scarcity exists. There are a lot of things that exist that we weren't able to take account of, but most if not all of the things that we did take account of do exist.

Utility, as these scholars speak of it, does not exist. It is a fiction. Rationality is a similar construct. These constructs serve no purpose but to cloud and confuse. The goal should be to gain as solid an understanding of real trade-offs as possible, not to invent fake concepts to fill to place of what is difficult to quantify.

The scholars of the modern day did not hear these words of wisdom, however, because the Scottish gentlemen were, unfortunately, dead.

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