Form and Content in Neoclassical Theory
Asatar Bair (Doctoral
Candidate, University of Massachusetts at Amherst, USA)
© Copyright 2003 Asatar Bair
I find it
fascinating that those of us who are critical, in one way or another, of neoclassical
economics would accept uncritically a defense of
the theory offered by one of its most famous modern proponents. I refer to Milton Friedman’s essay on
methodology, where he basically argues that the theory should not be judged
on the basis of whether or not its assumptions are realistic, but whether it
This is sort of like saying, since supply and demand analysis explains
prices, we can forget about the excesses that are so easy to find in the
stringent assumptions necessary to obtain perfect competition and general
equilibrium. For example, the
omniscient Auctioneer who oversees the exchange of commodities in the general
equilibrium model of Arrow and Debreu.
If we accept
the terms of this argument, it becomes very simple for the proponents of
neoclassical theory to defend it, such as Deirdre McCloskey’s defense of the criticisms of Bernard Guerrien
in Post-Autistic Economics Review, Issue No. 15:
It just won't do, therefore, to
say as Guerrien does that price theory (as we Chicago
types prefer to call it) "obviously contradicts almost everything that
we observe around us." Huh? When OPEC (viz., Saudi Arabia)
cut the supply of oil in 1973, didn't the relative price of oil rise, just as
a simple supply-and-demand model would suggest?
Isn’t this is a bit like saying “Supply and demand works, so the theory must
be correct”? (By the way, I am not
attributing this position to McCloskey, a sophisticated and original thinker,
who, although committed to the small-s
science of microeconomics, is also in her own way one of its most ardent
critics. This is evinced by her
writing not just in the PAE Review,
but many other places, including the recent volume Postmodernism, Economics & Knowledge, edited by Cullenberg, Amariglio, and Ruccio. It is not
against the McCloskeys of the world that we must
primarily debate, for I believe that if she had her way, the terms of the
debate would in fact be much more open.)
The point is, there are so many ways to criticize neoclassical theory
– why use the criticisms that are the easiest to brush off, simply by
reference to already existing arguments?
The issue is not whether supply and demand analysis can be used to explain
the movement of prices. Even Marx uses
supply and demand analysis to make certain points about the movement of
prices. (See, for example his 1865
work Value, Price and Profit).
The issue is, what are the assumptions that form the basis of the theory and
what are its conclusions? This is
deeper than merely criticizing the form of the theory, for neoclassical
theory can be formulated without math – see The Economist or The Wall
Street Journal – or with a lot of math – see any graduate program in
economics or The American Economic
Review. To me, the debate in these
pages and elsewhere about formalism only scratches the surface. Sure, it’s a problem that neoclassical
economics tends to be dry as dust because it relies on abstract, formal
mathematical proofs, and indeed, sometimes the emphasis on technical minutiae
means that even its advanced practitioners can’t communicate (or maybe even
don’t fully grasp themselves) the big philosophical ideas of neoclassical
economics. These are the ideas that
have been around for a long time. Such
as, how can a society maximize its wealth?
What is the relationship between economic categories of production,
consumption and distribution and the fulfillment of
human happiness and human potential?
How should we produce things?
Does capitalism involve exploitation?
And perhaps, the newer question: is there only one correct answer to
each of these questions? I will go out
on a limb and label these as interesting questions. Unfortunately, they are not often discussed
in economics, despite the appearance of some of them on page 2 of most
introductory textbooks. Could this
absence have something to do with many students’ hatred of economics? The proofs and formulae of modern
neoclassical theory have not made the questions go away, merely elaborated
one position out of many that are possible.
What about pluralism? Is neoclassical
economics the truth, and the other theories false? This would be the only position that
justifies the exclusion of other theories from economic discourse, but as so
many have pointed out, including McCloskey in The Rhetoric of Economics or Wolff and Resnick
in Economics: Marxian versus
Neoclassical, such a position is untenable. There simply is no external standard by
which to judge the veracity of contending theories.
Instead of looking at the form of the theory, we should look at its
content. Any theory can be
formalized. Take for example, one of
my favorites: Marxian theory. This approach to economics is sometimes
formulated in terms of proofs and theorems.
What is produced is merely a mathematized
version of Marxism. Of course there
are many kinds of Marxism, sharing some points of agreement and differing on
other points. But despite being formal
in the mathematical sense (which may make it rather dry, for those not
mathematically inclined), it will still be quite different in its content
from neoclassical theory.
My sense is that debates over form and content have been collapsed because
many students find both the form and content of neoclassical economics to be
objectionable. For example, let’s
consider one of the central assumptions of the theory: human beings behave in
their own narrow self interest. Many
of my own students find this idea repellant as a
separate matter from their dislike of indifference curves. I happen to agree. There is no reason to assume that there is
such a thing as human nature that exists independently of one’s culture,
language, politics, economic circumstances, etc. Is it not remotely possible that if people
seem to often act selfishly it is at least partly due to our societal elevation
of greed to a virtue? Isn’t it a kind
of debasement of human beings to assume the worst of ourselves – indeed, to
argue that whenever a human being seems to be acting unselfishly, sacrificing
herself for the sake of another, this is really just the same old greed in
disguise, charmingly called by microeconomists
Of course, the amusing thing about this assumption – if we accept Friedman’s
formulation that we should overlook the realism and look at its predictive
value – is that it turns out to have very limited value when it comes to
actually predicting human behavior. It seems that people are actually quite
concerned with the welfare of others, even when it conflicts with their own
pecuniary interest, as experimental results have demonstrated. By now these results are well known -
perhaps the simplest evidence comes from the Ultimatum Game, in which one
experimental subject is given a sum of money, to be divided between himself
and the other player, who has the ability to veto the division, in which case
both get nothing. Self interest would
dictate that the second player accept any offer, because something is better
than nothing, and you don’t care what the other player gets, because his
utility has no effect on your own. Would
you pick up a dollar on the street?
Then you also wouldn’t turn down an offer of a dollar, even if it
meant the other player got $999. Well,
it turns out people do care, and are willing to give up substantial sums of
money to punish the other player’s greed.
This experiment is very simple. For
God’s sake, why wasn’t it done in the 1880’s instead of the 1980’s? Could it be that the assumption of self
interest was adopted in part to obtain the grand conclusion of neoclassical
economics, elaborated by Adam Smith?
Namely: if individuals are free to act in their own self interest and
society has established private property and competitive markets, then that
society will be guided as if by an invisible hand, to the maximum wealth it
Forget whether or not this is true or realistic: this is a powerful
idea. We want this idea to be
true. We want it to be okay to be
selfish, to pursue our own goals, and to have it work out that instead of
this being inimical to the social good, it ends up being the very same thing
as working for the good of society.
So this is my first suggestion: in teaching economics, we should really
discuss the meaning of the assumption of self-interest, including its appeal
and its limitations, rather than merely adopting it unquestioningly.
My second suggestion is that we should think about and talk about theories of
distribution. The neoclassical theory
of distribution says that each productive input, for example, labor, land and capital, receives a reward that is equal
to its marginal productivity: wages, rent and profits respectively. We should discuss this with our students in
a serious way. What does it mean? The implications are clear: provided that
markets are competitive, workers, landlords, and capitalists deserve exactly
what they get. Each receives a reward
perfectly commensurate with his or her contribution to production. You can’t get anything more fair than
this. Any suggestion that capitalists
or landlords exploit or somehow take unfair advantage of their workers or
tenants is expunged.
It sure looks good on paper. But it
seems to go wrong somehow when applied.
Say we are considering the situation of the landholders of European
descent in Zimbabwe. They represent
10% of the population, and they own 90% of the land. Do they deserve the rents and profits they
obtain, which in neoclassical theory came from the land and capital they
contributed to production? How did
they come to own this land anyway?
Pretty much the same way property rights in land were established
everywhere at various times in history: theft accompanied by force.
What about the capitalists? Do they
deserve to live off the profits, as my conservative students sometimes tell
me, because they take risks, are responsible for workers, work hard
themselves, and contribute to the economy?
Or more in line with neoclassical economics, because they make the
capital that they own available for production, and thus the capital receives
a reward equal to its marginal product of capital? This makes sense. I guess the machines, tools, and raw
materials that make up the capital really should get a reward. Throw some cash on the lumber pile! Open up the back of the machine and throw
in a handful of coins! There you go –
and thanks! Or do capitalists receive
profits not from the productivity of the capital they own, but because of the
unpaid surplus labor they unjustly steal from their
This brings me to my third suggestion, that we discuss and take seriously
theories of class. I admit that I am
particularly interested in the Marxian notion of class defined as an
individual’s relationship to the surplus labor
performed at a given productive site.
This is fertile ground for exploring how production and the class
processes therein affect individual development, social and political
dynamics, economic fluctuations, and so forth – and how each of these realms
in turn shapes the class processes.
Not only can class help to illuminate society and the economy in new
ways, most of these insights have been excluded from mainstream economics.
The issue – as McCloskey and others have pointed out – is not whether or not
the theory is true, so much as does it persuade. Neoclassical economics prefers to hide its
excesses in math, where people are less likely to understand the role of the
assumptions being used. Is it
The dull, stifling formalism of neoclassical economics persuaded many people
in its heyday, when more people believed that math equals truth. People are less apt to believe that now, so
there can be no more retreating into the safety of proofs with unquestioned
assumptions. Perhaps this means we
will go back to debating substantive ideas rather than muddling through
endless comparative statics. I hope so.
If we want economics to fulfill its promise, to be
a serious scholarly field of inquiry that considers all points of view rather
than excluding certain theories and approaches on ideological grounds, we
must begin in the classroom, at the introductory level. To me, the post-autistic economics movement
has made this clear in the most basic way: students have dramatically shown
that they are not persuaded by mainstream economics.
Stephen, Jack Amariglio, and David Ruccio (2001) Postmodernism,
Economics, and Knowledge.
New York: Routledge.
McCloskey, Deirdre. (2002) "Yes, There is Something Worth Keeping in
economics review, issue no. 15, September 4, 2002, article 1.
McCloskey, Deirdre. (1985) The
Rhetoric of Economics. Madison:
University of Wisconsin Press.
Wolff, Richard D. and Stephen A. Resnick. (1986) Economics: Marxian versus Neoclassical.
Asatar Bair, “Form and Content in Neoclassical Theory“, post-autistic
economics review, issue no. 2 April 2003, article 2, http://www.paecon.net/PAEReview/issue19/Bair19.htm