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Human Well-Being and Economic Goals

Economics and the Good, I: Individuals
Overview Essay Page 1

David Kiron

Economics as a science of human behavior has been grounded in a remarkably parsimonious postulate: that of the self-interested, isolated individual who chooses freely and rationally among alternative courses of action after computing their prospective costs and benefits.
- Albert O. Hirschman[1]

This neoclassical model of homoeconomicus is defended more for its predictive power than for its psychological realism. However, there is mounting concern that the model's simple assumptions, while perhaps adequate for many aspects of economic behavior, fail to explain or promote those features of the human condition necessary for a good life. This section develops both empirical and theoretical objections to the prevailing revealed preference analysis of welfare, challenging especially its assumption that preferences are the correct terms in which to understand human welfare.

As discussed in Part 3, the ordinalist revolution in the 1930s seemed to obviate the need for an accurate measure of cardinal utility and a more sophisticated theory of human motivation. Subsequently, economic behavior could be explained with a few assumptions: as long as individuals are rational and their choices reflect their preferences, individuals maximize their utility. Utility was retained as a useful rubric for understanding human welfare, not because problems with earlier formulations had been solved, but because they could be avoided.

Revealed preference theory assumes that the satisfaction of a person's actual preferences must improve her welfare. However, preference satisfaction may in fact fail to improve well-being if preferences are irrational, poorly cultivated, malconditioned, or based on incomplete or false information. In response to such objections, efforts have been made to improve this theory to account for the many instances in which preference satisfaction detracts from or contributes nothing to human welfare. The main thrust of these modifications is to idealize preferences and model individual preferences as those that a person would have if fully informed about her choices. However, this move brings other significant problems that offer strong reasons to reject any preference-based theory of well-being.

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