Question

Explain in detail why the concept of utility is an imperfect proxy for happiness.

Answer 1

Its difficult to measure a qualitative concept such as utility, but economists try to quantify it in two different ways: cardinal utility and ordinal utility. Both of these values are imperfect, but they provide an important foundation for studying consumer choice.

In economics, utility simply means the satisfaction that a consumer experiences from a product or service. Utility is an important factor in decision-making and product choice, but it presents a problem for economists trying to incorporate it into microeconomics models. Utility varies among consumers for the same product, and it can be influenced by other factors, such as price and the availability of alternatives.Utility is a hypothetical measure of well-being used by economists (and others) to construct models of individual choice. It is whatever motivates people to make the choices they make. It cannot be seen or measured directly, only inferred from those choices under the assumption that there is a single “something” behind them.

In recent years the concept of utility, along with the claim that individuals act to maximize it, has come under attack. Other aspects of well-being, like self-reported happiness or satisfaction, certain types of brain activity, and indicators of physical and emotional health are directly measurable, and it’s been found that people often, and systematically, make choices that fail to optimize these substantive benefits. In fact, there has been a lively and complex debate, kicked off by the Easterlin Paradox, over whether and under what conditions increases in real income correspond to increases in directly measurable well-being.

we found new evidence that people’s choices don’t maximize their happiness: they could move to a different location and become happier but they don’t. Hence there’s a conflict between utility, the invisible whatever that causes people to choose what they choose, and measurable happiness. And this shows that policies geared toward increasing happiness are misguided, because utility is what should be maximized.f I’m missing something here, but what I see is this: (1) We have a theory that people’s choices maximize something called utility. (2) But we have evidence that measurable well-being is not maximized by these choices. (3) Therefore we conclude that measurable well-being is a bad proxy for “true” well-being.

Of course, any single measurable dimension of well-being is likely to be incomplete. We really do need, as Stiglitz et al. said, a dashboard of indicators. But surely the shortcomings of any one measure can only be assessed against other measures. And my having chosen A over B is not in itself a substantive measure of how well off I am basking in my subsequent A-ness. The question, after all, is whether the economic choices people make maximize their well-being. To test this we go out and gather various independent measures of well-being. When we find out they diverge in significant ways from revealed preferences, it is weird to use this as a demonstration that the evidence can’t really show what it seems to show, since our hypothesis about utility maximization has to be right. And for “weird” you can also substitute “ideological”.