The second axiom of neoclassical economics: methodological instrumentalism

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from Christian Arnsperger and Yanis Varoufakis

We label the second feature of neoclassical economics methodological instrumentalism: all behaviour is preference-driven or, more precisely, it is to be understood as a means for maximising preference-satisfaction.[1] Preference is given, current, fully determining, and strictly separate from both belief (which simply helps the agent predict uncertain future outcomes) and from the means employed. Everything we do and say is instrumental to preference-satisfaction so much so that there is no longer any philosophical room for questioning whether the agent will act on her preferences. In effect, neoclassical theory is a narrow version of consequentialism in which the only consequence that matters is the extent to which an homogeneous index of preference-satisfaction is maximised.[2]

Methodological instrumentalism’s roots are traceable in David Hume’s Treatise of Human Nature (1739/40) in which the Scottish philosopher famously divided the human decision making process in three distinct modules: Passions, Belief and Reason. Passions provide the destination, Reason slavishly steers a course that attempts to get us there, drawing upon a given set of Beliefs regarding the external constraints and the likely consequences of alternative actions. It is not difficult to see the lineage with standard microeconomics: the person is defined as a bundle of preferences, her beliefs reduce to a set of subjective probability density functions, which help convert her preferences into expected utilities, and, lastly, her Reason is the cold-hearted optimiser whose authority does not extend beyond maximising these uilities. However, it is a mistake to think that Hume would have approved. For his Passions are too unruly to fit neatly in some ordinal or expected utility function. It took the combined efforts of Jeremy Bentham and the late 19^th Century neoclassicists to tame the Passions sufficiently before they could initially be reduced to a unidimensional index of pleasure before turning into smooth, double differentiable utility functions. 

During the tumultuous 20^th Century, neoclassicists invested greatly in bleaching all psychology out of the rational agent’s decision making process. All hints of a philosophical discussion regarding the rationality of homo economicus were thus removed. People could, and ‘should’, be modelled as if they possessed consistent preferences which guide their behaviour automatically. The question of whether all rational women and men are condemned to maximise some utility function all the time became…nonsensical. Thus, instrumentalism lost its connection to the philosophies of Hume, Bentham or Mill and became a technical move that economists made instinctively with the same nonchalance as that of an accomplished artist preparing his oils and canvass before getting down to business.

However, it is false to claim that this state of affairs, even though ubiquitous in economics departments the world over, is essential for neoclassical economics. The first signs that it need not be came with the literature on endogenous preferences. Neoclassical economists increasingly sought to distance themselves from the assumption that preferences are fixed and exogenous. During the past twenty five years or so, homo economicus has developed a capacity to adapt his preferences in response to past outcomes (see Bowles, 1998). However, while the assumption that current preferences are exogenous was dropped, they remained fully determining. Thus, instrumentalism was preserved albeit in a dynamic context.

A more recent development has taken neoclassicism, and homo economicus, onto higher levels of sophistication. The advent of psychological game theory (see Rabin, 1993, and Hargreaves-Heap and Varoufakis, 2004, Ch. 7) has brought on a reconsideration of the standard assumption that agents’ current preferences are separate from the structure of the interaction in which they are involved. Suddenly, what one wants hinged on what she thought others expected she would do. And when these second order beliefs (her beliefs about the expectations of others) came to depend on the social structure in which the decision is embedded, the agent’s very preferences could not be linked just with outcomes: they depended on the structure and history of the interaction as well.

In view of the above, there is no future in criticisms of neoclassicism based on the charge that the latter must take for granted preferences which are either exogenous or independent of the agents’ socio-economic relationships. Critics toeing that line will be met with the scornful rejoinder that they criticise out of ignorance. However, our point that neoclassicism is still rooted in methodological instrumentalism cannot be so dismissed. For even in the latest reincarnation provided by endogenous preferences and psychological game theory, homo economicus is still exclusively motivated by a fierce means-ends instrumentalism. He may have difficulty defining his ends, without firm beliefs of what means others expect him to deploy, but he remains irreversibly ends-driven.

[1] Not to be confused with actual, psychological satisfaction. In this sense, homo economicus may maximise his preference satisfaction while feeling suicidal.

[2] Once upon a time, we could have instead talked of methodological rationalism as the dominant narrative centred on agents acting rationally. But since ordinal utilitarianism took over, there is no sense in narrating behaviour in terms of agents acting rationally. Instead, rationality is reduced to the consistency of one’s preference ordering which, by definition, determines that which agents will do.

Christian Arnsperger and Yanis Varoufakis

Tomorrow read “The second axiom of neoclassical economics: methodological equilibration”