Individuals Maximizing Utilities of Their Own Net-worths
May Harm Welfare of Humanity in Long-run:
A Rational Model of Social Stability and Individual Prosperity

September 1, 2006

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

The economic paradigm currently embraced by humans ignores how individual actions undercut common welfare and then undermine individual welfare.  Individual actions for enhancing own net worth should not degrade social welfare. The right (rational) paradigm is to maximize the true individual net worth including the negative effect stemming from, for example, riots due to a deterioration of net worth of the vast majority wrought by individual net worth maximizing efforts.

The current paradigm of maximization of (utility of) net worth by individuals to choose their optimal courses of action is self-contradictory.  It is because individual actions can degrade collective social welfare and thereby reduce individual net worth.  The current paradigm presumes that when individuals maximize their own net worth, they enhance each others' net worth. This presumption is not correct. Own net worth maximization can lead to actions that each individual may construe to be optimal but maybe harmful to all living in a society. 

For example, each individual may use this paradigm to "optimally" extract ground water from an independent bore well when the community where he lives cannot guarantee good water supply.  But if every individual digs a separate bore well, the ground water level in the geographical location of the community can shrink.  This can harm every individual living in the community.  Ancient civilizations have perished due to deterioration of collective welfare stemming from individually optimal courses of action. The paradigm of individual utility maximization with no regard to collective social welfare is contradictory and very often harmful. 

Now consider maximization of (utility of) net worth of each individual nation.  To enhance safety of a nation against possible bombing by others, the individual net worth maximization paradigm will prescribe the nation to “optimally” make its own nuclear bombs.  But if every nation piles up nuclear bombs to point at others, then all the bombs may explode accidentally.  This will then hamper the utility of each individual nation.  The paradigm that prescribes an individual nation to maximize its own utility is thus self-contradictory.

Take the case of oil consumption and automobile production. It is optimal for companies to produce as many automobiles as they can as long as they earn profits. It is optimal for individuals to live as independently from each other as possible. These individually optimal courses of action can lead to spreading of human living and production of an unsustainably large number of automobiles. Such individually optimal human behavior imposes serious constraints on dwindling sources of oil and on an increasingly polluted environment Humans used to living in relative seclusion and comfort can suddenly discover deterioration of their collective welfare. So, the paradigm of individual utility maximization is self-contradictory.

What is construed to be individually optimal – based on own utility maximization with no regard to deterioration of social welfare resulting from actions chosen by such utility maximization paradigm – may indeed be suboptimal for the individual.  This paradigm thus suffers from self-contradiction.

It is suboptimal for an individual to remain oblivious of the adverse impact of his individual choices on the welfare of the society where he lives. These issues are analyzed to evolve optimal policies in a book, "Prosperity: Optimal Governance, Banking, Capital Markets, Global Trade, Exchange Rate."

The rational paradigm accounts for any disutility of social instability on individual wealth or prosperity. The optimal course of action for an individual stemming from this paradigm balances social instability with individual prosperity. This optimal action indeed restores a balance between myopically observable individual prosperity and farsighted cost of social instability.

For example, it may appear to be optimal to pay little tax to the government because doing so appears to enhance individual prosperity. But this may be myopic. Individuals should not be oblivious of the adverse impact on their own welfare of an undermined social infrastructure due to lower taxes and of wealth concentrated in a few households. Any rise in the probability of social instability can dilute individual prosperity.

To balance social stability with individual prosperity, the wealthy may on own volition rationally (optimally) prefer to pay higher taxes than what they could consider expedient otherwise (myopically). But how would one know that there is myopia in, say, the current tax policy of USA? It is impossible to say if the current tax policy of USA is suboptimal or irrational unless we have data on undermining of social stability due to this policy. If the number of individual households with declining prosperity (net assets) is increasing, then social stability is correspondingly deteriorating. It is, therefore, absolutely essential to measure net assets of individual households over time. Measurement of household net worth data has been proposed in the above captioned book and communicated to the White House and key Senators. Only such data over time can allow a society to fathom the degree of social instability and if stability is deteriorating under the veneer of growth in gross domestic product.

Sankarshan Acharya     

Founder, Citizens for Development and Pro-Prosperity.Com

PS: The economics literature is replete with scholarly discourse on rational utility maximization theory and Game Theory and Rationality.

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