1 - Introduction: Marginal Utility Matters

Summary

Individuals can rationally pursue their interests without the preferences and marginal utilities that have long taken center stage in economics. Economics without preferences lays out the microeconomics of individual behavior, markets, and welfare when agents cannot always come to judgment. Although economic theory has claimed that self-interest requires agents to form preferences, individuals can protect themselves from harm by refusing to trade options they cannot rank. Many of the anomalies uncovered by behavioral economics – from status quo bias to loss aversion – thus have a rationality design. The absence of preferences also resolves the puzzle that classical economic agents are almost never indifferent between options whereas real-world agents often are. When individuals cannot judge trade-offs, gaps appear between the marginal valuations of gains and losses. These gaps explain why market prices can be volatile and render orthodox efficiency criteria indecisive. Policymakers will no longer be able to pin down an optimal provision of public goods. Traditional schemes that try to harness preference information to compensate agents harmed by economic change will allow virtually any decision to qualify as efficient. Governments should instead spur productivity growth, the main benefit capitalism can deliver, while shielding agents from the price upheavals that result.