A few months ago, I wrote:
Economists seem to rely heavily on a sort of folk psychology, a relic of the 1920s-1950s in which people calculate utilities (or act as if they are doing so) in order to make decisions. A central tenet of economics is that inference or policy recommendation be derived from first principles from this folk-psychology model.
This just seems silly to me, as if astronomers justified all their calculations with an underlying appeal to Aristotle’s mechanics. Or maybe the better analogy is the Stalinist era in which everything had to be connected to Marxist principles (followed, perhaps, by an equationful explanation of how the world can be interpreted as if Marxism were valid).
Mark Thoma and Paul Krugman seem to agree with me on this one (as does my Barnard colleague Rajiv Sethi). They don’t go so far as to identify utility etc as folk psychology, but maybe that will come next.
P.S. Perhaps this will clarify: In a typical economics research paper, first there’s the utility model with lots of derivatives and integrals, leading to a proof that a certain parameter of interest can be estimated using some sort of regression model. The second step is to fit the regression. When I’m talking about the emptiness of classical microfoundations, I’m saying you can just go straight to the regression, maybe do the utility analysis afterward to help understand things, but it’s not foundational.
P.P.S. I’m a big fan of utility analysis as a normative theory; I’ve published several research articles using utility theory and devoted a chapter of Bayesian Data Analysis to the topic. But I don’t think utility theory is a good foundation for a model of human behavior. Again, I’d rather model prices etc directly without attempting to found such models on this obsolete model of human psychology. And, yes, this reliance on utility theory leads to widespread confusion. Consider the silly belief that many people seem to hold, that a dislike of uncertainty corresponds to a nonlinear utility function for money.