Economic Individualism and Preference Formation

This note examines some issues involved in an attempt to go beyond the assumption, long-made by most economists, that people’s preferences are simply to be treated as “given” and that the principle of consumer sovereignty entails a refusal to consider some (or some people’s) revealed preferences as more authoritative than others. The most important break with that assumption has been the development of behavioral economics, which shows that people may not always know what they really want, and that economists have to develop a more critical approach, distinguishing people’s true preferences from those that are merely apparent. While this approach, a version of which is proposed by Michael Woodford, might very well be needed to explain various otherwise mysterious ways in which actual societies defy economists’ predictions based on the assumption of purely rational behavior, it also involves a danger of replacing an empirical investigation of human choice with a normative account of what people should chose – or might chose under some sort of “ideal conditions” that reduce the diversity of human preferences to merely erroneous deviations from what reason and human nature demand. To solve this conundrum, economics might need to incorporate a more robust theory of human choice, perhaps along the lines proposed by Robert Shiller and Edmund Phelps. Such a theory would bring economics closer to other social sciences, such as history, psychology, and maybe even ethics and aesthetics