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post-autistic economics
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Issue no. 14; June 24,
2002
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In this issue:
Economics and
physical reality:
Dietmar
Lindenberger and Reiner Kümmel
Thermodynamics
and Economics
Jane King
Assessing
economic potential: what the physical sciences have to offer
What is worth keeping in standard microeconomics?
Peter Dorman
Doctrine-centered
versus problem-centered economics
Joseph Halevi
High
priests and run-of-the-mill practitioners
Geoffrey M. Hodgson
Theoretical
substance should take priority over technique
Steve Keen
Two
perspectives to Guerrien’s question
Anne Mayhew
Superior
Analysis Requires Recognition of Complexity
Julie A. Nelson
What
should be retained from standard microeconomics
K.M.P. Williams
An
American undergraduate point of view
And:
Frank Rotering
Towards a New Economics
Economics and physical
reality
Thermodynamics
and Economics
Dietmar Lindenberger (Institute
of Energy Economics, University of Cologne, Germany)
Reiner
Kümmel (Institute of Theoretical
Physics, University of Würrzburg, Germany)
Since
Georgescu-Roegen´s statement on entropy, there has
grown a vast literature on the
implications of the laws of thermodynamics for economics. Most of this
literature is related
to the environmental consequences of the 2nd law, i.e. that any economic
activity unavoidably
causes pollution1.
This important insight could, at least to some extent, be integrated into
(environmental) economic theory. Other implications of thermodynamics will
probably be more
difficult to be incorporated into the prevailing neoclassical framework, if
this is possible at all.
An example is the notion of irreversibility, which implies at least some sort
of non-equilibrium.
A corresponding micro-economic modelling approach was proposed recently in
this journal [1].
Another example is discussed in the following. We address the issue of
appropriately including
the indispensable production factor energy into macro-economic theories of
production and
growth, and try to draw some conclusions.
In conventional neoclassical theory the production factor energy
is either neglected altogether,
which is inconsistent with thermodynamics, or attributed only marginal
importance. The
argument is that energy's share in total factor cost is small compared to the
cost shares of
labor and capital. However, the recessions after
the oil price crises in 1973/74 and 1979/81
have posed the question how a production factor of monetarily minor
importance can have
such grave economic consequences.
The conventional view of the low economic importance of energy dates back to
the first stages
in the development of neoclassical economic theory. Initially, the focus was
not so much on
the generation of wealth, but on its distribution and the efficiency of
markets. Consequently,
the early thinkers in economics started with a model of pure exchange of
goods, without
considering their production. With a set of assumptions on rational consumer behavior it
was shown that through the exchange of goods in markets an equilibrium
results in which
all consumers maximize their utility in the sense that it is not possible to
improve the
situation of a single consumer without worsening the situation of at least
one other consumer
(Pareto optimum). This benefit of (perfect) markets is generally considered
as the foundation
of free-market economics. It shows why markets, where "greedy"
individuals meet, work at all.
But later, when the model was extended to include production, the problem of
the physical
generation of wealth was coupled inseparably to the problem of the
distribution of wealth,
as a consequence of the model structure: Since the neoclassical equilibrium
is characterized
by a (profit-maximizing) optimum in the interior -and not on the boundary- of
the region in factor
space accessible to the production system according to its state of
technology, factor
productivities had to equal factor prices. In the resulting production model
the weights with
which the production factors contribute to the physical generation of wealth,
i.e. the
elasticities of production, have to equal the
factor cost shares. These cost shares, in the
industrialized countries, are typically 0.7 (labor),
0.25 (capital) and 0.05 (energy).
Consequently, according to the neoclassical model, the elasticities
of production of the
factors, which -roughly speaking- measure the percentage of output growth if
a factor input
increases by one percent, would have to have these values: labor 0.7, capital 0.25, and
energy 0.05. With these input weights a decrease of energy utilisation of up
to 7%, as
observed during the first oil crisis between 1973 and 1975, could explain a
decrease of value
added of only 0.05(7% = 0.35%. The actually observed decreases of economic
output,
however, were roughly ten times larger.
Furthermore, a substantial part of observed long-term economic growth cannot
be explained
by the growth of the factor inputs, if these are weighted by their cost
shares. Large residuals
remain. In most cases the residuals play a more important role than the
explanatory factors,
which, according to Gahlen, makes the neoclassical
theory of production tautological [2].
Solow, after noting "...it is true that the
notion of time-shifts in the [production] function is a
confession of ignorance rather than a claim of knowledge'' [3], comments:
"This ... has led
to a criticism of the neoclassical model: it is a theory of growth that
leaves the main factor
in economic growth unexplained'' [4].
As it has been shown recently, the residuals of neoclassical growth theory
can mostly be
removed by taking into account the production factor energy appropriately
[5-11]. It turns out
that the crucial point is to drop the neoclassical equilibrium assumption,
and to determine
the elasticities of production of the factors by
purely technological and empirical considerations
instead. Thereby, the previously unexplained technological progress reveals
its two principal
elements: The first one is the activation of the increasingly automated
capital stock by energy;
and, of course, the people who handle capital have to be qualified
appropriately. The second
one consists of improvements of organizational and energetic efficiencies of
the capital stock.
The short-term impact of the first element is much bigger than that of the
second element,
but the reverse may be true for the long-term impact, if efficiency
improvements fundamentally
change the course of economic evolution [11]. The efficiency improvements are
identified by
shifts of the corresponding technology parameters in the production
functions, whereas energy's
high productive power in increasingly automated production processes is
revealed by its high
elasticity of production: Energy's elasticity, in industrial sectors of the
economy, is typically
of the order 0.5, i.e. as large as those of capital and labor
together. In service sectors it still
exceeds energy's low cost share significantly [7]. Both in industrial and
service sectors, labor's
elasticity is far below its cost share. Only in the case of capital, do elasticities of production
and cost shares turn out to be roughly in equilibrium, as neoclassical theory
presupposes.2
What are the consequences of these findings? Let us frame one selected point
as follows.
If wealth had been distributed according to the "marginal productivity
theory", labor would
have received only a share of national income much smaller than the observed
70%. But
apparently, in the past most of the value added by energy was attributed to labor. The
underlying mechanism of distribution was that of wage-negotiations in which
free labor
unions, powerful during times of high employment, regularly succeeded in winning
wage
increases according to the growth of productivity, i.e. increased production
due to increased
and more efficient energy utilization. This way most of the population in the
industrialized
countries benefited from the wealth generated by the production factors
capital, labor, and
energy.
With increasing automation in production, however, human routine labor becomes more and
more dispensable. A possible consequence is the increasing inequality in the
distribution
of income, as can be observed in the US, where, due to flexible labor markets, the hours
worked per year have increased, but the problem of the "working
poor" remains unsolved.
Consequently, if society wishes to organize labor
markets more competitively, while
socially unacceptable distributional effects are to be avoided, the question
arises how the
institutional settings within market-economies have to be adapted to the
changing
technological conditions.
Certainly, increased investments in education and the design of appropriate labor market
and social policies are crucial issues. Here, let us address the issue of how
such policies
may be financed in a sustainable way. In the past the financial burden
resulting from social
policies was mainly put on the production factor labor.
This is one of the causes of the
identified disequilibrium between the cost shares and productive powers of labor and energy,
which, in turn, accelerates technical progress towards increasing automation.
If this
disequilibrium is sufficiently steep, the newly emerging and expanding
sectors of the
economy will no longer be able to compensate for the losses of jobs due to
increased
automation in the existing industries, thus destabilizing the system as a
whole. Therefore,
in view of social and fiscal stability, it might be worthwhile to consider a
shift of taxes and
levies in the industrial countries in such a way that the production factors labor and energy
are burdened more according to their productive contributions to value added.
Notes
1. I.e., the emission of
heat and substances into the environment due to entropy production.
2. The production systems are
operating in boundary cost minima in factor space, where the boundaries, at a
given point in time, are established by the state of technology in
information processing and automation and
prevent the system from sliding at once into the absolute
cost minimum of nearly vanishing labor input.
References
[1] Martinás, K., "Is the Utility
Maximization Principle Necessary?", post-autistic economics review,
issue no. 12,
March 15, 2002, article 4 and references therein, http://www.btinternet.com/~pae_news/review/issue12.htm.
[2] Gahlen, B., Der Informationsgehalt der neoklassischen Wachstumstheorie
für die Wirtschaftspolitik,
J.C.B.
Mohr, Tübingen, 1972.
[3] Solow, R. M., Investment and Technical
Progress, in: Mathematical Methods in the
Social Sciences,
K.J. Arrow, S. Karlin,
and P. Suppes (Eds.). Stanford, 1960, p. 89-104.
[4] Solow, R.M.,
Perspectives on Growth Theory, Journal of
Economic Perspectives 8, 1994, p. 45-54.
[5] Kümmel, R; Strassl,
W.; Gossner, A.; Eichhorn,
W., Technical Progress and Energy Dependent Production
Functions, Journal of Economics
45, 1985, p. 285-311.
[6] Beaudreau, B.C., Energy and organization: growth and distribution re-examined,
Westwood (CT),
reenwood Press, 1998.
[7] Lindenberger, D., Wachstumsdynamik
industrieller Volkswirtschaften
- Energieabhängige
Produktionsfunktionen und ein
faktorpreisgesteuertes Optimierungsmodell,
Metropolis-Verlag, Marburg, 2000.
[8] Ayres, R.U., The minimum complexity of
endogenous growth models: the role of physical resource flows,
in: Energy - The International Journal
26, 2001, p. 817-838.
[9] Ayres, R.U., Warr,
B., Accounting for growth: the role of physical work, in: Reappraising Production Theory,
Workshop of the Max Planck Institute for Research into Economic Systems,
Jena, 2001.
[10] Hall, C; Lindenberger, D.; Kümmel,
R.; Kroeger, T; Eichhorn,
W. (2001), The Need to Reintegrate the
Natural Sciences with Economics, BioScience 51 (8), 2001,
663-673.
[11] Kümmel, R.; Henn,
J.; Lindenberger, D., Capital, Labor,
Energy and Creativity: Modelling Innovation
Diffusion, Structural Change and Economic
Dynamics, 2002 (in press),
http://theorie.physik.uni-wuerzburg.de/TP1/kuemmel/profile.html
(fields of research, Ref. 14).
SUGGESTED CITATION:
Dietmar Lindenberger and Reiner
Kümmel, "Thermodynamics and Economics", post-autistic economics review,
issue no. 14, June 21, 2002, article 1. http://www.btinternet.com/~pae_news/review/issue14.htm
Assessing economic potential:
What the physical sciences have to
offer
Jane King (Resource Use
Institute, UK)
Perhaps
one of the gaps in traditional economics teaching has been the failure to
incorporate physical science into economic analysis. Economists have
traditionally been
wary of intervention by outsiders. Scientists, for their part, have tended to
leave analysis
of the economy to those trained in economic techniques. Economics and Science
rest
on different paradigms. However co-ordination between the two can offer new
insights in
a situation where economic development is increasingly coming up against
physical
constraints whether in terms of limited resources, such as oil, water or fish,
or of the
amounts and nature of pollutants we exude.1 I am one of a growing number of people
who believe that economics urgently needs to find a way of dealing with these
physical
realities. But to do so, it will have to innovate in a fundamental way: it
will have to use, in
addition to monetary evaluation, a system of physical evaluation.
Money
and energy: two units of account
In
an unconstrained world the appropriate unit of account for economic analysis
would
undoubtedly remain that superb concept already devised to assign values and
preferences
within a given range of economic possibilities - namely money. The drawback is that in
looking into the future, and in particular the long-term future, estimates
have to be made of
the evolution of monetary value; and as we all know in the case of projected
oil prices, such
estimates can be notoriously misleading. Indeed they can in certain cases
even lead one
beyond the range of theoretical physical possibility. Monetary evaluation is admirably
suited to analysing past economic behaviour or to evaluating short-term
trends, but it
cannot be relied on for exploring economic potential with a longer time
horizon.
An alternative numeraire is offered through Natural Capital Accounting (NCA), an approach
based on physical principles.2
NCA reflects the fact that production or delivery of a service,
is a process of reducing the entropy of the set of components that go to
produce the final
product; an inevitable conclusion from
the second law of thermodynamics.
It follows that in order to reduce the entropy of a system,
somewhere else there has to be
a sacrifice of negative entropy of at least equal magnitude. In practical
terms that sacrifice
is the effort involved in terms of the
energy required to create the inputs well as the fuel
needed to operate the economy. In other words the dissipation of a
non-renewable resource.
Output is thus quantitatively linked to input as a causal relationship.
Production can only
occur if the necessary inputs are physically available. Significantly the
different linkages do
not vary over time, give or take a certain amount of technological
improvement.
Modelling the economy in physical terms
Natural
Capital Accounting can be articulated through the generic model known as ECCO
(Evaluation of Capital Creation Options) and can be applied with appropriate
modifications
to different regions or countries (a world ECCO
model also exists). It should be made
clear
that rather than conflicting with established economic approaches ECCO in fact complements
them. Its purpose is not to explore the collective economic behaviour of
individuals in a
somewhat different manner from the traditional, but to determine the physical
potential for
growth of the economic system as a whole. That potential will depend on the
policies imposed
on the model by the user which might,
for example be the outcome of an econometric forecast.
It cannot be denied that what is not physically possible can never be economically
possible.
This is not the place to give an exhaustive description of the
structure and application of
ECCO, for which refer to www.eccosim.org.uk
Briefly, it is a holistic dynamic simulation
model of an economic system. The potential supply of human-made capital is
set against
the demands implicit in the user's policies. All transformations (such as the
formation of
physical capital) require a reduction in entropy. That reduction is measured
in terms of the
consumption of depletable natural capital expressed
in energy units of standard quality. It
follows that a unit of human-made capital produced may then be quantified in
terms of the
energy embodied in it.
A useful aspect of Natural Capital Accounting models is that
assumptions do not have to be
made about economic growth rates. Potential growth rates evolve from the
models themselves
according to the policies imposed on them by the model user. If sufficient
human-made capital
cannot be created to meet demands, then something within the system will
ultimately give.
By way of example the following sectors are included in a
current European model.
- Manufacturing
- Construction
- Market
services to industry
- Market
Services to people
- Non-market
services (government - health - education)
- Non-energy
physical resource extraction
- Fossil-energy
extraction by type - coal, lignite, natural gas, oil
- Electricity
generation by type - nuclear, coal, natural gas, hydro, other
- Domestic
housing
- Transport
- roads, rail, air & infrastructure
- Consumption
- consumer goods, services, transport, fuels
- Agriculture,
forestry and fishing
- Water
- Capital
transfers (external to EU), balance of
international payments
- Internal
and external debt
- Income
re-distribution (pensions, benefits), average (EU-wide)
taxation
- Environmental
significant outputs - CO2, SO2
- Employment
- by different sectors.
The application of Natural Capital Accounting
The
purpose of Ecco models is not to forecast the
behaviour of the economy but rather to
determine whether the economic objectives set by decision makers can lead to
the desired
results, and what trade-offs may thereby ensue. Given that ECCO is not an
optimisation
model, there is never any unique solution.
The model provides many indicators which may
be selected as criteria of success. It is up to the user to decide which.
Seeking an
acceptable outcome is an iterative procedure.
Many of the policies explored by ECCO
models relate to the environment, but by no means
all. A few are given by way of example.
- How
fast is it possible to develop an alternative energy regime in view of
declining
supplies of fossil-based fuels?
To what extent would the material quality of life be
affected?
- Is
it possible to sustain the economy in the future without nuclear energy?
- What
is the effect, in terms of resource use, of different modifications to
the
transport system
- What
are the implications for the economy of attempting to meet the Kyoto and
subsequent
agreements on limiting CO2 emissions?
- How
fast and for how long can the material standard of living be increased
- What
is the effect on the economy of
demographic growth rates
There is much talk today about the over-compartmentalisation of
knowledge and the need for
"interdisciplinarity". How different the
world was two centuries ago. In the Edinburgh of that time
Adam Smith, David Hume the philosopher
and James Hutton the geologist, met in the street,
dined and argued together. In Paris Voltaire, de Bourgainville,
the explorer, Fourier, the
mathematician and Lavoisier the chemist all lived
in a Paris that was then a compact city.
They shared each other's knowledge and
wisdom. Today not one of us can absorb
the huge
body of skills and understanding that has been built up in these last centuries.
However what
we can do, indeed must do, is to link up the relevant parts of economics and
science within a
single system including both the
economy and the biosphere within which it operates.
Notes
1. Crane, D.C. Balancing pollutant emissions and economic growth
in a physically conservative world, Ecological
Economics, 1996,16, pp 257-268
2. Slesser, M &King, J 'Not By Money Alone:
Economics as nature intended' , ISBN 1-897766-72-6, Jon Carpenter
Publishing, Oxford, 2002
_____________________________
*Jane King may be contacted at king@rui.co.uk or
kingslesser@btinternet.com
SUGGESTED CITATION:
Jane King, "Assessing economic potential: what the physical sciences
have to offer", post-autistic
economics
review, issue no. 14,
June 21, 2002, article 2. http://www.btinternet.com/~pae_news/review/issue14.htm
What is worth keeping in standard
microeconomics?
For background to this debate, see post-autistic economics
review, issues no. 12, March 15, 2002,
http://www.btinternet.com/~pae_news/review/issue12.htm
and no. 13, May 2, 2002,
http://www.btinternet.com/~pae_news/review/issue13.htm
Doctrine-centered versus problem-centered economics
Peter Dorman (The
Evergreen State College, USA)
Bruce Caldwell's response to Bernard Guerrien
illustrates exactly what is wrong with
mainstream economics as it is taught and applied: it is doctrinaire. He believes that he has
made an advance over more typical teaching approaches by scaling down the
math, but I
can see no change in the overall project of imposing a dogma in the name of
an academic
discipline. It is sad to have to
conclude this, given Caldwell's large contributions to economic
methodology, but there it is.
His examples of "economic reasoning" for the improvement of
undergraduate minds are worth
a closer look. I could take up all of
them, but I will confine myself to the two that are given
the most attention, the role of price supports in agriculture and the
advantages of free trade
over protection.
Agriculture
Agricultural policy has many dimensions.
It is a social policy that can support, change or
weaken rural culture. It is certainly
an ecological policy, whether by intent or not. It influences
food security in the face of ineradicable
uncertainties in supply. It is
competition policy,
favoring either centralized or decentralized market
structures. And, or course, it has a
political
economic dimension, responding to the various interest groups that have a
stake in the
choices made by government.
What do Caldwell's price ceiling diagrams tell us? If they are like all the other price
ceiling
diagrams I have seen, they announce that, as a first-round effect, price
supports are
economically inefficient, sending false signals to the marketplace and
incurring deadweight
loss. The second-round effect, alluded
to by Caldwell, is political: there is rent-seeking that
further absorbs resources and distorts policy.
It seems obvious to me that the price ceiling analysis, while it
has some value, is hopelessly
inadequate as a primary guide to what to do about agriculture. The role of uncertainty and time,
of environmental externalities and public goods (such as a healthy rural
culture) ought to be
central to any serious analysis of this topic, and to short-circuit the
process in the way Caldwell
describes is to abandon higher-order for lower-order thinking. In practical terms, it also silences
students, because their common-sense intuitions about agriculture (many of my
own students
have rural backgrounds) often have no standing amid the supply and demand
curves.
Trade
Caldwell
would have students learn the theory of comparative advantage as a guide to
making
sense of globalization and combating the naive belief that interference with
trade can ever be
a good idea. He talks in precise dollar
terms about the cost per job saved by tariffs on steel,
as though the complex effects of such a policy can be perfectly know and
calculated. Yet
trade policy is complex, and it is fair to say that economists have not yet
put together a
convincing model of how the system works.
In particular, comparative advantage depends on
the assumption of balanced trade at the margin - that every extra dollar or
euro of imports will
be automatically and simultaneously balanced by an equivalent additional
value of exports.
If this were true in the real world, of course, we would have a simpler, more
pleasant life: no
country would experience balance of payments crises, there would be no
pressure on
countries to be "competitive", and one policy alone - free trade -
would be all we would need
to follow. (For a more extended
critique of this sort of cost-of-protectionism analysis, see
Dorman, 2001.)
Unfortunately, life is not like that. Laid off steel workers will not
automatically find jobs in
exporting sectors, and not only because they have the wrong skills or live in
the wrong cities,
but also because the effect of more steel imports may simply be that the
trade deficit
increases. (Yes, I know, there is also
a theory that says that this can't happen because it
would require investors to change their already-perfect international
allocation of asset
positions. No comment!) This doesn't mean that protective tariffs
are a desirable policy
response, just that an a priori dismissal of them contradicts the creative,
disciplined thinking
that teachers ought to encourage in their students - and that denying the
legitimacy of
reasonable ideas that might occur to students pushes them into passivity or
out the door
altogether.
Conclusions
I
have two concluding thoughts. First,
the level of math is not the issue.
One can be dogmatic
with blackboard diagrams and open-minded with reams of equations. In general, less math is
generally better, because it lowers the barrier to critical thinking, but
simply getting rid of math
is not the point. Second, the solution
is not to replace one dogma by another or even by a
menu of competing dogmas, but to redefine, for our students and ourselves,
economics from
being a doctrine-centered to a problem-centered enterprise.
Instead of agreed-upon theories
dictating simplified or completely fictitious examples (with their widgets,
perfectly behaved
functions, etc.), real-life cases in all their messiness should be the
measure of any theories we
throw at them. Such an economics would
not only be post-autistic, but also a lot more fun.
Reference:
Dorman, Peter. 2001. "The Free Trade Magic Act",
Economic Policy Institute Briefing Paper.
For details visit
http://www.epinet.org/briefingpapers/dorman-bp2/dorman-bp2.pdf
SUGGESTED CITATION:
Peter Dorman, "Doctrine-centered versus
problem-centered economics", post-autistic economics review,
issue no. 14, June 21, 2002, article
3. http://www.btinternet.com/~pae_news/review/issue14.htm
High priests and run-of-the-mill practitioners
Joseph Halevi (University
of Sidney, Australia)
Geoff Harcourt and Bernard Guerrien are speaking
about two different sentences in the same
paragraph, as it were. Harcourt points out that textbooks usually treated the
microeconomic
theory of perfect competition as approximating some immanent tendencies of
actual economic
behaviour. Guerrien notes that the perfectly
competitive model has got nothing to do with a
market economy, it rather requires a centralised system. Both statements are
correct. Many
textbooks still present the competitive model as a first approximation and
they are wrong of
course precisely on the account of Guerrien's
observations. I tend to agree with Guerrien's
view that Stiglitz's asymmetric information stories
do not represent novel findings or new
theoretical developments but they simply introduce imperfections in an
otherwise standard
approach. In other words, Stiglitz's reasoning would not exist without having at
its foundations
traditional micro-theories. I think that this is true also for macroeconomic
models which
once were flagged as most innovative such as those pertaining to rationed equilibria. They
all postulate the existence, somewhere, of a Walrasian
equilibrium.
Thus the substantive issue is whether or not there is something
to be retained from
micro-theory. My own answer is in the negative. The existing body of
microeconomics
has no cognitive content in relation to its object of inquiry. In this
respect Bernard Guerrien,
a mathematician who has brought out before any English speaking economist the
significance
of the Sonnenschein-Mantel-Debreu theorems, has
done extremely valuable work in pointing
out the lack of interpretative value in the standard approach.1 I do not agree with the view
that bits and pieces may be salvaged
and retained on the account of their practicality. If the
demand curve can be of any shape, that is if there is no compelling reason to
assume that
the demand curve should be downward sloping then there is no point to retain
the theories
built upon that premise just for practical matters. Practicality is in itself
a constructed
process and if it is based on particular premises which have no reason to be
selected as
the more relevant ones, it becomes a trivial ex-post rationalization as well
as justification of
the theory. These sort of things belong more to the domain of the sociology
and politics of
research and of ideas in general, yet they have nothing to do with the
cognitive dimension
of a particular theoretical construction.
I would extend my negative conclusions also to
macroeconomic theory as taught in most textbooks. The latter is even in a
worse shape
than micro-theory since it is heavily biased towards representative agent's
models and
flawed aggregate notions such as capital as a factor of production. Micro-macro
theory as
it stands today in textbooks provides neither a form of basic reasoning in
practical terms,
nor does it help to apprehend economic concepts. Just consider the most
crucial of them:
price. No price is determined the way traditional theory would like us to
believe. If anything,
prices are likely to be determined in a monetary manner and they are
connected to the
process of production and the formation of multiple profit margins and rates
of profit.
Furthermore a classification of price behaviour would show many different
forms of
adjustments hardly having anything to do with the fairy tale taught in
standard lectures.
While micro-macro textbooks may easily be disregarded with no
loss of knowledge as to
the functioning of contemporary societies, the teaching of traditional
economics, and indeed
all of economics, should be linked to Joan Robinson's principle of critically
knowing a
subject in order not to be fooled by its high priests and run of the mill
practitioners. This is
especially true when in today's polity economics performs the same role of
theology in the
past as the conduit for the expression of social, economic and political
interests.
Note
1. Bernard Guerrien, Concurrence, flexibilité et stabilité, Paris: Economica,
1989.
_____________________________
Joseph Halevi
is co-editor of Restoring Demand in the World Economy: Trade, Finance and Technology
SUGGESTED CITATION:
Joseph Halevi, "High priests and
run-of-the-mill practitioners", post-autistic
economics review, issue no. 14,
June 21, 2002, article 4. http://www.btinternet.com/~pae_news/review/issue14.htm
Theoretical substance should take priority over technique
Geoffrey M. Hodgson (University of
Hertfordshire, UK)
Essentially,
neoclassical theory involves actors who are rational in that their behaviour
is
consistent with the maximisation of utility with a given preference function.
Two other features
follow. The concept of maximisation points towards equilibrium outcomes and a
disposition
towards equilibrium conceptions and solutions. Furthermore, the concept of
capable preference
involves a more-or-less well-defined choice set, involving either certainties
or calculable
probabilities. As a result, chronic information problems such as radical
uncertainty, ignorance
or interpretative ambiguity are excluded.
I would prefer to define neoclassical economics in this way, and
not in terms of any ideology
or predisposition towards competition or markets. I agree entirely with
Bernard Guerrien on
this point. Theorists have attempted to apply the neoclassical approach to
socialist planning
and capitalist monopoly, as well as to competitive markets. Just as we have
individualistic,
pro-market neoclassical economists (such as Milton Friedman) we have liberal
or social-
democratic neoclassical economists (such as Kenneth Arrow and Paul Samuelson)
and
also 'Marxist' neoclassical economists (such as Oskar
Lange, John Roemer and Jon Elster).
The essential core of neoclassical theory involves rationality, equilibrium
and adequate
information. This theoretical core is quite adaptable, and has served a
variety of ideological
positions, from left and right.
Having defined neoclassical theory, we can now attempt to answer
Guerrien's question. What
is 'worth keeping'? Many mainstream economists today, especially in the last
20 years,
accept some of the limitations of the neoclassical core theory. For example,
Herbert Simon's
concept of bounded rationality is now acknowledged. Many experimental
economists are
sceptical of the neoclassical axioms. Yet still the core neoclassical
assumptions still
dominate the journals and textbooks.
When we ask 'what is worth keeping?' there are really two
questions here. One concerns
what should be taught on the economics curriculum. The second concerns the
adoption,
application or development of a theory by a researcher. I'll deal mainly with
the first question
and touch briefly on the second.
There are several reasons why the curriculum is still dominated
by the neoclassical approach.
Among these, economics has almost turned into a branch of applied
mathematics, where the
application and development of the technique has become more important than
the explanation
of the (economic) phenomena involved.
A second reason is equally important: heterodox critics of neoclassicism
have failed to develop
a substantial alternative theory that addresses the questions of individual
agency and choice
that should be part of the core of any viable analysis. The development of
such a theoretical
alternative is a major priority. There is progress, but it is frustratingly
slow, and it is discouraged
by the prevailing incentive structures of modern academic economics.
So, where do we go from here? The first injunction is: concepts
have first priority, mathematical
techniques second. Those that complain that it is necessary to devote an
entire curriculum to
neoclassical theory, on the grounds that there is 'not enough time available'
to teach anything
else, are typically driven by techniques, not by concepts. They stress the
paraphernalia of
technique rather than core ideas. They are often ignorant of the theoretical
alternatives that
do exist.
Pedagogic economies can and must be made. The core ideas of
neoclassical theory should
not be excluded from the curriculum but placed alongside alternatives. For
example, the
psychological assumptions that underlie 'rational economic man' should be
made explicit
and compared with other psychological approaches. Just as much emphasis
should be placed
on the conceptual limitations of game theory as on its techniques. Students
should be
encouraged to identify, compare, contrast and criticise key ideas.
One of the problems now is that teachers of economics have been
trained in a technical
fashion and are ignorant of from where the key concepts come. Economists
should regain
and enhance the capacity to scrutinise concepts, and give those abilities
more weight than
mere competence with techniques. The awful truth is that the reform of
economics may now
require the retraining of a whole generation of teachers of economics.
An important first step in revitalising economics would be to
give more space and prestige to the
methodology of economics and the history of economic thought, where greater
understanding
of the meaning and historical evolution of concepts and ideas can be
obtained. Conceptually
minded and critically able economists will once again be attracted to the
profession.
Another vital step would be to introduce a plurality of
theoretical approaches. Overall, in the
curriculum, neoclassical theory should be just one approach alongside
institutional, evolutionary,
behaviouralist and other alternatives.
Turning to the second question: what use is neoclassical
economics as a theoretical approach?
This question is very complicated and an adequate answer would take much more
space than
I have available here. But I would like to stress the following points.
First, for all their defects,
the different versions of neoclassical theory have enormous heuristic power.
It is a good
intellectual work-out to read and criticise some parts of neoclassical
theory. Second,
neoclassical theorists such as Alfred Marshall, Leon Walras
and Vilfredo Pareto were subtle
and powerful thinkers and it is still worth reading their texts. Third, and
above all, neoclassical
approaches are deeply flawed but we have not yet developed an adequate
alternative.
The development of an alternative to neoclassical theory must
involve adequate answers to
a number of key questions. For example: how are market prices formed? I do
not believe
that Marxian or Sraffian theories are sufficient
here because they both lack an adequate
conceptualisation of the human agency and decision-making processes.
Evolutionary and
institutional approaches may provide an answer, but as yet one has not
emerged.
Of course, a new economics will create new questions, as well as
providing new answers
to old questions. But it will not replace neoclassical theory unless it can
show overall
superiority in both respects. The task of developing a new theory is an
urgent priority.
What is required is a new generation of theorists, with a broad and critical
training in
economics, which is lacking in the modern curriculum. Dealing with the first
'what is worth
keeping?' question may well provide a solution to the problem raised with the
second.
_____________________________
Prof. Hodgson's latest book is How Economics Forgot History: The Problem of
Historical Specificity in Social Science.
Also see http://www.geoffrey-hodgson.ws/wsn565D.html
SUGGESTED CITATION:
Geoffrey M. Hodgson, "Theoretical substance should take priority over
technique", post-autistic
economics review,
issue no. 14, June 21, 2002, article 5. http://www.btinternet.com/~pae_news/review/issue14.htm
Two Perspectives to Guerrien's
Question
Steve Keen (University of Western
Sydney, Australia)
There
are many perspectives from which Guerrien's
question "Is There Anything Worth
Keeping in Standard Microeconomics?" can be answered. I will consider
two: the empirical
and the mathematical.
The Empirical Perspective
There is little doubt that the conventional theory of the firm and of
consumer behaviour are
bad empirics.
On the former front, there are now numerous surveys in economic
literature which establish
that what neoclassical economics teaches as "the" behaviour of the
firm -- profit maximisation
by equating rising marginal cost to falling marginal revenue -- applies to at
best less than 5
per cent of firms and 5 per cent of products. Research into the actual cost
structure facing
most products, have routinely found that in 95 per cent or more of cases,
marginal costs
remain constant or fall across the relevant range of output. Research into
the actual behaviour
of firms shows similarly that, in 95 or more per cent of cases, firms chase
the maximum
possible level of sales without any consideration of declining marginal
revenue (Fred Lee is
the modern chronicler of this literature, with his book Post Keynesian Price
Theory being the
ultimate reference).
Similarly, the vision of consumers deciding what to purchase by
working out the point of
tangency between the budget hyperplace and
indifference hypercurve has failed miserably
in experimental work. The latest and best reference on this, Sippel 1997, concludes very
honestly with the observation that the theory failed to predict students
behaviour in a very
well designed controlled experiment, and that as a consequence economists
"should therefore
pay closer attention to the limits of this theory as a description of how
people actually behave".
The fact that despite these empirical failures, economists
continue to teach the standard
theory of the firm and consumer theory is perhaps the strongest indictment
one can give
against standard microeconomics. It has acted as a barrier to an honest
confrontation with
the real world, and deserves to be dropped on that ground alone.
But of course, it won't be: because ever since Friedman's defence of the
"as if" approach to
economic methodology, economists have felt justified in ignoring the real
world since whatever
firms and consumers think they are doing, they must be behaving "as
if" they were doing what
economists say they do, otherwise they wouldn't be profit maximisers
or rational consumers.
The Mathematical Perspective
Well, if economists can't be persuaded to consider reality
because it conflicts with their
mathematics, we're going to have to turn our attention to the mathematics
itself. And it
turns out that there are good mathematical reasons to reject standard
microeconomics.
Let's take first of all the theory of consumer behaviour. The
standard presentation-of a
consumer making a choice between two commodities-makes the exercise appear
simple.
But whoever heard of a consumer living on just two commodities? Yet each
additional
commodity considered involves an additional set of axes-three for three
commodities,
4 for four-and each axis increases by an order of magnitude the number of
choices facing
the consumer.
Once we get anywhere near the number of commodities and number of units per
commodity
that a typical Western consumer buys on a monthly basis, the number of
choices explodes
to such a level that simple "rational" utility maximisation is
inconceivable. For example, if
we simply consider a purchase of less than ten items each from a set of 30
commodities, the
number of combinations to be considered is 1030 (to put this number in
perspective, the age
of the universe is under 1018 seconds).
This "curse of dimensionality" is a well-known phenomenon in
computer science, and it is
well-known that an exhaustive maximisation approach is simply impossible with
such problems.
Instead, consumers have to be following algorithms that drastically reduce
the choice space:
letting their choices be guided by custom, convention, habit,
income-constrained tastes, etc.
The conventional, simplistic vision of consumers as rational utility maximisers is a positive
hindrance to serious study of the interesting question of how consumers manage
to make
consumption decisions in the face of overwhelming choice. By not honestly
considering the
mathematical implications of their theory of consumer behaviour, economists
are practicing
bad mathematics.
The same applies in the theory of the firm, where students start off being
taught bad
mathematics. All economists know the "perfect competition"
assumption that the derivative
of the market demand curve with respect to the output of a single firm is
zero. Not enough
know that George Stigler-hardly a radical there-pointed out in 1957 that this
is mathematically
invalid: if the market demand curve is negatively sloped with respect to
market output, it is
negatively sloped with respect to the output of a single firm. This is a
simple application of
the chain rule for a continuous function (and also a product of the
assumption of atomism).
A minority of economists appear to know Stigler's attempt to get
around this by redefining
marginal revenue for the individual firm as market price plus market price
divided by the
number of firms times the market elasticity of demand, coupled with the
assertion that "this
last term goes to zero as the number of sellers increases indefinitely"
(Stigler 1957: 8). Too
few realise that this was a sleight of hand: the term is a constant if there
is a minimum firm
size, and therefore the firm's marginal revenue is always less than price.
So-called mathematical economists have attempted to evade this by assuming
that each
industry consists of an infinite number of firms each producing an
infinitesimal output (not
an infinitesimal fraction of total industry output, but an infinitesimal
output!). But this makes
a mockery of the theory of exchange-how can consumers buy a single unit of
anything if
they have to go to an infinite number of producers to buy a single unit?-and
of the theory
of production itself-how can diminishing marginal productivity apply (the
foundation of the
proposition that marginal cost rises) if the minimum firm size is zero?
All these nonsense propositions have been put forward to defend
the indefensible concept
of perfect competition, and they are propositions that any decent applied
mathematician
would reject outright.
Yet this kind of behaviour-proposing decision processes that are
empirically impossible,
making assumptions that are absurd in order to preserve an initial
proposition that has
been shown to be fallacious-is a direct consequence of adherence to the
conventional
theory of microeconomics. It is bad, unscientific behaviour, that should have
no place in
a serious discipline.
References
Lee, F., (1998). Post Keynesian Price Theory, Cambridge
University Press, Cambridge.
Sippel, R, (1997). 'Experiment on the pure theory
of consumer's behaviour', Economic Journal 107: 1431-1444.
Stigler, G.J. (1957). "Perfect competition,
historically considered", Journal of Political Economy, vol. 65: 1-17.
_______________________________
Steve Keen is the author of Debunking
Economics: The Naked Emperor of the Social Sciences
SUGGESTED CITATION:
Steve Keen, "Two perspectives to Guerrien's
question", post-autistic
economics review, issue no. 14, June 21,
2002, article 6. http://www.btinternet.com/~pae_news/review/issue14.htm
Superior Analysis Requires Recognition of Complexity
Anne Mayhew (University of
Tennessee, USA)
Neoclassical
microeconomic theory is, both in its simple, and in its most rarefied forms,
a theory of how a unit will respond when faced with the commercial logic that
says buy
cheap, sell dear, and if you don't cover your costs over some reasonable period
of time,
you will cease to exist. It does not
matter whether the prices to which the unit responds
are changed through competitive or uncompetitive markets or by an auctioneer;
the analysis
is of response to price.
The question to ask, in answering Guerrien's
question, is whether or not the commercial
logic is applicable to units whose behavior one
wishes to analyze. The sleight of hand
performed at the beginning of most introductory economic textbooks, and
assumed
thereafter in more advanced work, is that given conditions of unlimited wants
and limited
resources, the logic does apply widely.
The wants can be wants for revenue for firms, utility
for consumers, benefits for recipients of government services. If the wherewithal to get those
wants (costs of inputs for firms, work or disutility for consumers, tax
revenues for governments,
resources for all of society) are limited then commercial rationality is
assumed to be the only
possible rationality; the alternative is assumed to be irrationality.
The power of economic analysis described by Bruce Caldwell (PAE Review no. 13)
in his
defense of the use of microeconomic theory is the power to explain the impact
of price
ceilings or floors, price supports, and the like given that the units
involved react to price
according to the commercial logic. I
would agree with Caldwell that if this condition is met,
then microeconomic theory does have wide applicability.
However, there is a large issue that requires further
exploration, and it has nothing to do
with the contestable assumption that wants are unlimited and resources
finite. I am quite
prepared to grant these assumptions for short-term analysis of many economic
issues.
What I am not prepared to grant is that two additional conditions for
application of the
commercial logic are in fact met by most of the economic units with which
economic
analysis must deal if such analysis is to be useful in thinking about
economic issues.
The first condition is that there must be a numeraire
that can be used to perform the double-
entry bookkeeping that is core to the commercial logic. A numeraire, or
common measurement
for otherwise diverse elements, is required to know if you are buying cheaply
and selling dearly,
and, in fact, is required if the commercial logic is to have any meaning at
all.
From this observation follows the second condition that must be
met if commercial logic
is to apply: the goals of the units being analyzed must be the goal of having
commonly
measured inflows at least equal to or in excess of outflows. However, as is widely recognized
the goals of many social units, such as families and even large commercial
corporations,
are multiple and cannot be toted up as a simple double-entry bookkeeping
exercise. To take
a simple example: children are not produced in accord with variation in the
current, or even
projected, price of labor, so that even if the
amount of labor offered from an existing stock of
people varies with price (a doubtful assumption), labor
markets will also be rendered slightly
odd by virtue of the failure of the model of commercial logic to capture the
full array of relevant
variables. For large firms with
political, social and market power, long-term strategies of
location, survival, and other goals are likely to outweigh and obscure the
simple application
of commercial logic.
Where both numeraire and the simple
commercial goal exist, microeconomic theory can be
a useful way of describing probable action and outcomes. Many of Bruce Caldwell's examples
of the power of economic reasoning probably meet these requirements. If new rental housing
is added in response to expected revenues from rent, and if apartment rental
rates weigh
heavily in consumer demand, then rent control may reasonably be expected to
result in
shortages. If, however, as is
apparently the case with minimum wages, there are other
factors that weigh more heavily than price on behavior
of units involved (relatively fixed staffing
requirements, number of unskilled people in the labor
force, and so on) then neoclassical
price theory becomes less useful. It
is certainly less useful in exploring the behavior
of large,
international corporations with multiple goals, and of families with a
variety of lifestyle options,
than it is in explaining the behavior of small
firms that operate in markets consisting of other
such firms.
The answer to Guerrien's Essay is,
therefore, it depends on what you are analyzing. There
is certainly something worth keeping in standard microeconomics, but we
should not be
deluded by the fancier ways of
articulating what remains a simple model, a model so simple
that it cannot capture the complexity of interaction in economies. Superior analysis requires
recognition of this greater complexity.
SUGGESTED CITATION:
Anne Mayhew, "Superior Analysis Requires Recognition of
Complexity", post-autistic
economics review,
issue no. 14, June 21, 2002, article 7. http://www.btinternet.com/~pae_news/review/issue14.htm
What Should be Retained from Standard Microeconomics
Julie A. Nelson (Global Development
and Environment Institute, Tufts University, USA)
Bernard Guerrien's question, "Is There
Anything Worth Keeping in Standard Microeconomics?"
is one that I have been thinking about a lot, recently. In working with colleagues on writing an
alternative Principles of Microeconomics textbook, we've had to address the
question of what
it is that we actually want students to know.
My co-authors and I come from a variety of
backgrounds-ecological, social, feminist,
institutionalist, and radical. While, to have a chance at adoption in most
departments, a
textbook must cover a number of neoclassical concepts, we've given ourselves
some leeway
in putting these "in context," and in deciding which to stress, and
which to downplay.
We certainly don't think that the number one priority is to
inculcate students into adopting a
free market ideology, which is the apparent goal of many of the currently
available textbooks.
Nor should it be to teach students about the elegance of mathematical and
graphical modelling.
Even if that were to remain a priority at more advanced levels (which we
would debate), the
vast majority of Principles students will use their knowledge for
citizenship, not further study.
Lastly, we don't think, given the pressing nature of real-world economic
problems, that our
number one priority should be to tell beginning students about our internal
professional debates
about philosophy and methodology. So
what should we teach?
We've rejected the usual emphasis on models of "producer
and consumer choice," with all
its focus on technique and all its bizarre assumptions (e.g., that efficiency
is the only goal,
that households are not productive, that perfect competition is the default
scenario). But-and
here we differ from Guerrien-we do see value in
teaching some parts of the standard introductory
microeconomics toolbox. For example:
- The
general notion of choice. Choice behavior is
one facet of human economic behavior-
though not the only one. Putting
choice in context means also recognizing the roles of
habits or customs (as stressed by institutionalists)
and power (as stressed by radical
economists) in explaining behavior. Certain
traditional microeconomic concepts like
opportunity cost, and "rational" (read: reasonable) economic
decision-making, in the
sense of weighing both costs and benefits in coming to a decision, we
have concluded,
are worth teaching.
- Supply
and demand curves. We introduce
these as mental constructs that can give
us some insight into real-world price variations, not as curves that
exist "out there" in
the world. While we also (for adoptability of the book) expose students
to marginal cost
curves and utility theory, we demonstrate that the usefulness of supply
and demand
analysis does not depend on identifying supply curves with marginal cost
curves, nor
with identifying demand curves with the result of indifference curve
analysis. In fact,
our central example in the supply and demand chapter is a highly
politicized national
market for petroleum. Further
elaboration introduces students to the relevance of
elasticities for business and government
policymaking.
- Gains
from trade. Ricardo's old
England-and-Portugal story is the basis for the neoliberal
push for globalization today, so it is important that students
understand the argument.
However, we also complement this story with a discussion of the
drawbacks of trade.
In addition, we include transfer as an important form of distribution
right alongside
exchange, bringing discussions about intra-household and government
transfers into
the core of analysis.
Our book, Microeconomics in Context, takes well-being as
the goal of economic activity.
Teaching from it will probably feel less "secure" for many
instructors in that it will hold fewer
cut-and-dried answers and subjects for chalk-and-talk lectures, and more
opportunities for
discussion. But, we believe, such
teaching will be a considerably more intellectually
challenging and socially responsible.
Of course, much of Bernard Guerrien's
criticism might more aptly be taken to apply to
advanced graduate work and professional research-Slutsky
matrices and general equilibrium
theory are not usually the stuff of Principles classes. I would attribute
much of our profession's
fascination with mathematical elegance, over understanding of the real world,
to warped
notions of "rigor" and a misguided attempt to achieve certainty and
absolute control (see
Nelson essay in post-autistic economics review, Issue no. 9, 20 October 2001). By keeping
our eyes on the more pragmatic goal of developing and disseminating economic
knowledge
in the service of promoting well-being, I think we can keep what is useful in
existing bodies
of work-even neoclassical-while working towards developing new and more
adequate forms
of research and teaching.
______________________________
Julie A. Nelson is the author of Feminism,
Objectivity, and Economics (London: Routledge, 1966) and (with
Marianne A. Ferber) Beyond Economic Man:
Feminist Theory and Economics (Chicago: Uni. of Chicago Press,
1993). She may be contacted at julie.nelson@tufts.edu.
SUGGESTED CITATION:
Julie A. Nelson, "What should be retained from standard
microeconomics", post-autistic
economics review,
issue no. 14, June 21, 2002, article 8. http://www.btinternet.com/~pae_news/review/issue14.htm.
An American Undergraduate Point of View
on Economics Education
K.M.P. Williams
(Wells College, USA)
As
an economics student who has recently had to suffer through the course
material, I
would like to contribute to the debate regarding "what should be kept in
microeconomics".
To this end, I have posed two questions.
My first concerns the definition of economics. Widely used micro
and macro textbooks define
it as the study of the distribution of scarce resources. I wanted to know what future teachers,
especially future social studies teachers who are likely to introduce
students to economics,
thought economics was. Through email, I surveyed education students at Wells
College,
asking them, "What is the definition of economics?" I received 16 responses. Here are some
samples, the first three from students intending to teach high school social
studies.
- "The
way money and things representative of money are used by people. (???
who
knows???)"
- "Economics
is the study of income and commerce - it is the management of
money."
- "I'm
not entirely sure, to be honest. I guess I would say the study of the
economy."
- "Economics
was the most boring and un-interactive class I have ever taken of which
I
remember absolutely nothing!"
- "Economics
is the study of money and consumerism."
- "I
would define economics as the science that deals with income and
expenditures."
Only one of these future teachers has studied economics beyond
high school and, except
for an environmental science student who wants to take Environmental
Economics, none plan
on studying it further.
In light of these answers, I asked myself a second question:
What should be the purpose of
economics education? This question
connects with the first. In fact, I
believe that the way
economists answer this pair of questions is the primary cause of the
alienation that so many
students and non-economists feel toward economic theory and economics
courses. Karl
Polanyi's answer to the first question was that
economics is the study of how people transform
nature to meet their needs.1
This is very different from regarding economics as a distribution
problem and has implications for answering the second question. Indeed, if Polanyi's
definition
of economics is adopted, the mission of economics courses becomes clear-to
help students
understand the 'economy' in its broadest sense. This is the position that I have come to,
and
from it I would like to offer a few comments on the debate begun by Bernard
Guerrien.2
I disagree with Bruce J. Caldwell when he says that the
conclusions from neoclassical
microeconomics are a good representation of a 'basic economic reasoning' that
predates it.3
To say "we live in a world in which scarcity makes choice
necessary" is an ideological
statement when followed by conclusions of neoclassical economics such as that
there is an
economically determined 'optimal' level of pollution, or that the
intersection of some curves
representing technical and allocative efficiency
can ameliorate the problems of making
choices about scarcity. Likewise, the
assertion that "producing goods for which one has a
comparative advantage permits gains from trade" is shown to be a
'not-so-covert defense of
globalization' when, for example, mobility of capital and comparative
immobility of labor are
incorporated and the human costs of exploitation are examined.
I believe Jacques Sapir's
"Response to Guerrien's Essay"4
represents a much more coherent
rationale of why neoclassical microeconomics does not need to be totally
thrown out.
Abstraction is not an evil to be rooted out of the discipline. But
microeconomics needs to
be radically changed if it is to help us understand the economy. If
neoclassical theory is
exposed in the curriculum for 'what it is'-a theory explaining an imaginary
world-and not the
'core' or most 'basic' way to explain the economy5, then students
can profit from its being
taught. Just as neoclassical economists are wrong to deny 'economist' status
to those
outside the neoclassical mainstream, we should not make it our aim to banish
neoclassical
theory forever.
The way for economics to avoid alienating non-economists,
especially students at the
undergraduate level, is to broaden the scope of the curriculum, while at the
same time going
deeper into each of the issues and problems presented. Micro-theory can play
a role in this.
The future teachers surveyed above may be put into positions
where they are forced to
indoctrinate the next generation into believing in neoclassical economic theory.
As Gilles
Raveaud has noted, too many people believe
"economics has nothing to do with reality. Here
we draw curves and manipulate equations that have no counterpart in
reality."6 In the US, at
least, students learn this in high school, and apparently it is reinforced in
colleges and
universities. However, if students are
taught from the beginning to understand microeconomic
theory critically, including how to challenge accepted ideology and to learn
from that process,
then progressive theories designed to someday replace neoclassical theory
will have a greater
chance of being relevant for everyone, not only radical economists.
As Joan Robinson once said, the reason to study economics is to
avoid being duped by
economists.7
References
1. Polanyi, Karl (1957). Trade and market in the early empires; economies in
history and theory. Free Press: Glencoe, Ill.
2. Bernard Guerrien, "Is There Anything Worth
Keeping in Standard Microeconomics ", post-autistic economics
review, issue
no. 12, March 15, 2002, article 1. http://www.btinternet.com/~pae_news/review/issue12.htm
3. Bruce J. Caldwell, "In Defense
of Basic Economic Reasoning", post-autistic
economics review, issue no. 13,
May 2, 2002, article 4. http://www.btinternet.com/~pae_news/review/issue13.htm
4. Jacques Sapir, "Response to Guerrien's Essay", post-autistic economics review, issue no. 13, May 2,
2002,
article 5. http://www.btinternet.com/~pae_news/review/issue13.htm
5. Gilles Raveaud, "For Guerrien... and Beyond", post-autistic economics review,
issue no. 13, May 2, 2002,
article 6. http://www.btinternet.com/~pae_news/review/issue13.htm
6. Ibid.
7. Robinson, Joan (1971). Economic
heresies: some old-fashioned questions in economic theory.
Macmillan: New York.
SUGGESTED CITATION:
K.M.P. Williams, "An American undergraduate
point of view", post-autistic
economics review, issue no. 14, June 21, 2002, article 9. http://www.btinternet.com/~pae_news/review/issue14.htm
Towards a New Economics
Frank Rotering (UET, Canada)
About
a dozen years ago I heard a Canadian environmentalist, David Suzuki,
passionately
denounce standard economics for its "stupidity". Suzuki was incensed at economics for
its blind faith in growth and its ignorance of "natural
capital". I was concerned about
the
environment and wanted to see what the fuss was about, so I interrupted my
computer
career and returned to university to study economics.
I found exactly what the PAE movement
is now rejecting: pointless abstraction, dogmatism,
and a fervent right-wing bias.
Evidently economics training in Canada is much the same as
in France and elsewhere. I took eight
or nine economics courses, dropped some upper-level
subjects because of their revolting technicality, and slunk back to my
computer career with
a Bachelor of General Studies degree and an extended minor in economics.
In other words, I didn't become an economist, and I'm not an
academic. However, I have
continued to study economics intensely, and now feel justified in putting the
coveted UET
designation after my name - Unaffiliated Economic Thinker. As a self-appointed UET,
let
me offer my views on the PAE initiative.
To begin, we have to separate the teaching of economics from the
discipline itself. PAE
started as a reaction against both the suffocating methods of instruction and
the aloof
formalization of neoclassical theory.
But as several contributors to PAE Review
have
remarked, it's time to move beyond the teaching and focus on the theory.
In his useful A Brief History of the Post-Autistic Economics
Movement, Edward Fullbrook
states that we are now at stage three - creating a new framework for analysis
and pressuring
economics itself to change. I
agree. In the remainder of this
article I will therefore emphasize
the discipline of economics rather than its instruction.
The necessary starting point in building a new theory is to be clear about
the shortcomings
of neoclassical economics. Numerous
problem areas have been cited by PAE
contributors.
Besides the disconnected models and excessive use of mathematics,
neoclassical economics
is said to suffer from methodological individualism, from a lack of
historical perspective, from
a lack of contact with concrete reality, and from ignorance of culture,
gender, social institutions,
and the environment.
All true to some degree, but missing the essential point, which
is that neoclassical economics
was built for capital. Neoclassical
economics is not a "stupid" theory, despite Suzuki, but one
with the specific purpose of serving capital's practical and political
needs. Consider the history.
Capitalism's development began around 1500. The classical economists - Steuart, Petty,
Smith, Ricardo - grappled more or less objectively with the workings of the
new system, until
an ideological split occurred about 1800.
Ricardo and Marx carried on the classical tradition,
basing their analysis on the labor theory of
value. Say and Senior, among others,
went in a
direction more suited to the rising capitalists and essentially founded
neoclassical economics.
The classical branch was aggressively developed by Marx, but did
not advance much after his
death in 1883. Too much deference to
the great man, and excessive focus on his historical
and political writings, virtually froze his trenchant economic analysis in
time.
The standard branch, on the other hand, was actively developed
by mainstream thinkers,
most importantly the marginalists: Jevons, Menger, and Walras. They
uprooted the labor
theory of value and replaced it with a utility theory. This purged economics of any revolutionary
content and left it with a shallow analytical method, perfectly suited to
capital's needs.
Why "perfectly suited"? Because the theory is fixated on the
hurly-burly of exchange, which
is where capitalists live. It guides
them individually in competition and collectively in pressing
their political demands. And it fills
the intellectual space for economic ideas, crowding out
theories that might probe the system's systemic depths and expose its nasty
secrets.
So what's most fundamentally wrong with neoclassical economics
is ... it's theirs. To the
extent that we don't share capital's social role and economic objectives,
neoclassical
economics is a foreign tool.
It's true that, within limits, neoclassical economics can be
modified and extended for
alternative purposes. Paul Krugman does good things
with it in his New York Times column,
defending workers and whacking Republicans.
Herman Daly and the ecological economists
apply neoclassical economics concepts to environmental issues. Amartya Sen invokes the
spirit of Adam Smith to guide the development process, although for him the
standard garb
is an awkward fit.
But while an adroit person can drive a nail with a rock, a
hammer is the better implement,
and using a rock to pull a nail is an exercise in futility.
Neoclassical economics, for instance, is a rock that can't
address the human ends and
human costs of economic activities. It
simply has no terms or concepts for these things.
It can't deal with class relations because it long ago rejected the social
basis of prices and
exchange. It can't handle capitalism's
underlying dynamics or secular tendencies because
its tools are restricted to market activity at the surface. And it really can't deal with ecological
constraints, because it was built with infinite resources as a core assumption.
No modifications or extensions will fix these problems. If we want to seriously examine
such issues we have to discard the rock and fashion ourselves a hammer.
If you had any doubts about the possibility of alternatives to
neoclassical economics, by
the way, put them to rest. Any science
is an interpretation of reality and is therefore based
on a specific viewpoint. In a
class-based, gender-divided society, multiple viewpoints are
inevitable, particularly in the social sciences. Economics is by no means a natural
monopoly;
it cries out for competition.
The sobering fact, however, is that entry to this intellectual
market is costly. It took
neoclassical economics 100 years to get from Smith to the marginalists,
and 130 more
to arrive at its present state. Along
the way many brilliant people did a lot of hard work.
While I'm not proposing a project lasting a century or two, there's much to
do, so we
should understand what the task entails.
An economic theory is a logical structure with a well-defined
axiomatic foundation, consistent
concepts derived from those axioms, and analytical tools based on those
concepts.
Neoclassical economics qualifies because it posits the
individual and the firm, utility
maximization and profit maximization, and builds a fully integrated structure
from there.
We may not like the structure, but it's there. In my view, the various heterodox
approaches
are variations on the neoclassical theme, not fully developed theories.
A new theory must begin by specifying its analytical
purpose. For example, a theory might
be created to evaluate an economy's inputs and outputs in terms of their
effects on human
life and health.
The next step would be to state the theory's axioms, which in
most cases are embedded
in the definitions of core terms. For
our theory we might adopt John Ruskin's intrinsic value
and effectual value on the consumption side, and define absolute cost as the
health effects
of production.
Then, to the extent that the theory is amenable to
quantification, we have to graph the
relationships. This frequently points
to internal contradictions. Once these
have been
removed we can build the analytical tools.
Using our value and cost definitions, we could
construct methods to determine the optimal quantity and quality of outputs,
and to address
economic well-being and distribution.
With such a beginning in place, or even earlier, the proposed
theory must be opened to
criticism and incremental improvement.
This is critical. If an
approach has an undocumented
foundation and opaque logic, it will allow passionate debate but little
scientific development.
Alternative economic theories must expose themselves to the rigors of
transparency and
refutation.
If this process is successful we will be rewarded with a
rigorous analytical method,
independent of capital's viewpoint and influence.
The PAE movement should continue to
push for less stultifying ways to teach neoclassical
economics. But alongside this effort
we should begin to formulate new theories in a disciplined
manner. With luck, our children will
one day open their university calendars and find our
theories in the curriculum. And if
we're really lucky, their teachers will be superb.
_________________________
Frank Rotering may be contacted at frank_rotering@yahoo.com
SUGGESTED CITATION:
Frank Rotering, "Towards a New
Economics", post-autistic
economics review, issue no. 14, June 21, 2002, article 10.
http://www.btinternet.com/~pae_news/review/issue14.htm
____________________________________________________________________________________________
Call for Papers from Students
The post-autistic economics review is
planning a special all-student issue for autumn 2002. It
will include between 6 and 9 essays, 2,000* words or less, dealing
with the need and ways to
reform economics and economics teaching. Submissions not chosen for the review but of
suitable quality will be posted on a
permanent section of www.paecon.net. Graduate
and undergraduate students are eligible. Submissions should be sent as an
email Word
attachment to pae_news@btinternet.com Deadline for submissions is September 15,
2002.
* previously announced as 1,500
words.
_____________________________________________________________
Correction: Regarding his
essay “Teaching students of political science post-autistic
economics” in issue
13 of this review, Poul Thøis
Madsen reports that his attribution to Keynes of “It is better to
be vaguely right
than exactly wrong” is incorrect.
“if anybody – it was probably Marshall.” Does anybody know for certain?
___________________________________________________________________________________________
EDITOR: Edward Fullbrook
CORRESPONDENTS:
Argentina: Iserino; Australia: Joseph Halevi, Steve Keen: Brazil: Wagner Leal Arienti;
France: Gilles Raveaud, Olivier Vaury,
J. Walter Plinge; Germany: Helge Peukert; Greece: Yanis Varoufakis;
Japan: Susumu Takenaga; United Kingdom: Nitasha
Kaul, Michael Murphy; United
States: Benjamin Balak,
Daniel Lien, Paul Surlis: At large: Paddy
Quick
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Dow, Kurt Jacobsen, The Cambridge 27, Paul Ormerod,
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E. Earl, Marc Lavoie, Jean
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Frankfurter, Elton G. McGoun,
Yanis Varoufakis, Alex Millmow, Bruce J. Caldwell, Poul
Thøis Madsen,
Helge Peukert
___________________________________________________________________________________________
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and suggestions for articles
should be sent to the editor at
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