Introduction

Economic theory of utility maximization

The British philosopher Jeremy Bentham postulates in his book The principles of morals and legislation (1789/2000) that the pursuit of pleasure and the avoidance of pain explain all human behaviour. Later this principle was called ‘hedonic utility’. Utility was then considered to be a cardinal measure of pleasure. Cardinal means that utility should be measured in absolute numbers. Disutility referred to negative emotions that people avoid, such as pain. People select the maximum utility: the net balance of the pursuit of pleasure and the avoidance of pain. People act rationally if they maximize their utility. The notions of maximizing utility, and thus acting rationally, were extremely relevant for nineteenth-century economists. Economists (Jevons, 1871/1970) saw the principle of hedonic calculus, the computation of utility as the net balance of pleasure and pain, as a universal law of human behaviour from which economic relations and market exchange behaviours could be derived.

Economists did not get the support of psychologists of that time for their principle of hedonic calculus. William James (1890) criticized this approach, arguing that the determinants of behaviour cannot be reduced to a simple hedonic calculus.

This instigated the idea of freeing economic theory from psychological influences, either by accepting hedonic calculus as a simple starting point for economic theorizing or by excluding psychology completely by measuring utility from expenditure or preference. It also implied that economists gradually shifted from measuring cardinal (metric) to ordinal (non-metric) utility.