Heterodox Economics

from the

post-autistic economics review
Issue no. 31, 16 May 2005
article 3



      issue 31 contents                            PAE Review index                               home page




Teaching Heterodox Microeconomics

Frederic S. Lee   (University of Missouri-Kansas City, USA)

© Copyright: Frederic S. Lee 2005


Microeconomics is an important, though not a very popular, field of research in heterodox economics.  This is due, in part, to the underlaboring role of micro-entities, such as the business enterprises, costs, pricing, profit mark ups, wage rates, markets, and investment, in most of the research conducted by heterodox economists in macroeconomic theory, monetary theory, and economic policy.  Given its theoretical importance, it is surprising that the number monographs devoted largely to delineating a heterodox microeconomic theory are so few.1  One reason for this is that some heterodox economists believe that it is necessary for all economic students to learn neoclassical microeconomic theory; and the learning of heterodox microeconomics is of second-order importance.  The unintended consequence of this attitude is that there is little interest among heterodox economists to delineate a comprehensive microeconomic theory.  A second reason has to do with the role of microeconomic theory in heterodox economics.  In particular, microeconomic theory is correctly viewed by most heterodox economists as providing a non-reductionist foundation to macroeconomic and monetary theory.  And it is these theoretic areas that contribute most to macroeconomic policy issues in which they are interested.  Given this macro-policy concern, there is little interest among heterodox economists to engage in the near thankless and largely obscure task of foundation building.


But there is more than just macroeconomic policy issues that heterodox economists should be engaged with.  Antitrust, public utility regulations, workers rights, environment regulation, discrimination, environmental issues, and economic penetration of the social-political spheres are all “micro” issues and deserve as much if not more attention than macro policy issues because they actually affect the lives of individuals in an intimate way that the latter does not.  However, many heterodox economists have typically considered these policy areas as of second-order importance.  Consequently, this division of labor has resulted in an undeveloped microeconomic theory.


To redress this state of affairs is the intent of this article.  It will be done by first arguing that heterodox economists must promote the teaching of microeconomic theory and followed by delineating the framework for the teaching of it.  The third section of the paper will outline the subject matter of heterodox microeconomic theory.  Then there will be the conclusion.



To Teach or not to Teach Heterodox Microeconomic Theory, That is the Question


The immediate response by most economists, including heterodox economists, to the suggestion that heterodox microeconomics should be taught to all students is that the advocate is against the teaching of neoclassical microeconomic theory altogether.  This knee-jerk response is designed to silence the advocate by implying that his/her real aim is to impose a single micro theory on students.  The appropriate response to this is that it depends on the students being taught.  With regard to undergraduate teaching, the heterodox professor should take the position that all social knowledge is contestable and that this view must be conveyed to students.  Hence, all undergraduate economic students should be introduced to a variety of different microeconomic theories:  neoclassical vs. heterodox in various forms.  Teaching different microeconomic theories to undergraduates provides them (in principle) with the capability of understanding the different theories as well as with the capability of evaluating them and choosing the one they think is the best for understanding and explaining the capitalist economy in which they live.2


The teaching of graduate students is different since it is presumed that the applicants to a graduate program are adults capable of making an informed choice of the kind of microeconomic theory which they would want to study.3  Hence the core theory courses of graduate programs can be restricted to a specific theoretical approach, be it  neoclassical or heterodox.  The programs may still provide their graduate students through elective or optional courses alternatives to the core microeconomic theory of the program.  However, a heterodox graduate program should ensure that its students are familiar with neoclassical theory.4  What does this imply about the teaching of microeconomic theory in a heterodox graduate program?  First, neoclassical microeconomic theory should be taught, but in a fashion that is designed to give graduate students a solid foundation, while at the same time providing them with a critical understanding of its shortcomings.  The theory should also be taught in a way as to provide students with a critical awareness of how heterodox microeconomic theory is organized, structured, and different.  So the teaching of neoclassical microeconomic theory is a way of preparing students for studying heterodox microeconomic theory.5  Secondly, since the core microeconomic theory taught in the graduate program is heterodox, it must predominate overall in the teaching of microeconomic theory; thus, graduate students are expected to know it thoroughly.


The second response to the advocate for the teaching heterodox microeconomic theory is ‘Why’?  Clearly, neoclassical economists believe that neoclassical microeconomic theory is theoretically coherent and provides the best explanation of economic activity; therefore there is no good reason to not teach it, if not exclusively.  Many heterodox economists also broadly agree with this position, although not with all the particulars.6  However, sufficient evidence exists showing that as a whole neoclassical microeconomic theory is theoretically incoherent and without empirical support (see Lee and Keen, 2004; and Keen, 2001).  Moreover, the methodological underpinning of neoclassical microeconomics is open to criticisms.  The methodological approach of neoclassical economics is based on a pre-vision of supply and demand and/or a Walrasian general equilibrium all combined with scarcity and constrained maximization. Accepting this vision as a matter of faith, neoclassical economists construct axiomatic-based arguments via a deductivist methodology (with or without the use of mathematics) to articulate this pre-vision.7  There is no attempt to establish that the pre-vision has any connection to or is grounded in the actual capitalist economy it purports to explain.  Hence the method of constructing theory is not tied to or informed by the real world, which means that the axioms qua assumptions used are not chosen because of their realism or some other way grounded in reality but solely because they contribute to articulating the pre-vision.  Therefore with a methodology unconcerned with the real world, the theories derived there from are theoretically vacuous and hence not really explanations.  They are in fact non-knowledge.  Consequently the methodology of neoclassical economics is not just wrong, it is also misleading in that it cannot inherently provide any understanding of how the real works or even predict outcomes in the real world.8


Given the above theoretical and methodology criticisms of neoclassical theory, it is not unreasonable to advocate the teaching of heterodox microeconomics.  But even if the criticisms were less severe than they are, it is still possible to advocate the teaching of heterodox microeconomics.  In the domain of contestable social knowledge, it is in principle possible to articulate an alternative account of how capitalism works that does not utilize any components of neoclassical theory.9  The alternative account, heterodox microeconomic theory, is in fact superior to neoclassical microeconomics in terms of coherence, explanation, empirical groundness, and predicting future events even though it is incomplete.



Introduction to Heterodox Microeconomic Theory


At the undergraduate level, most students enter their introductory microeconomic (or macroeconomic) course with little or no knowledge of economics, economic theory, or awareness that there are different ways of doing economic theory.  This problem is common to the teaching of neoclassical and heterodox microeconomics.  It is a problem that cannot be solved here, but rather avoided by assuming that students have had an introductory, intermediate, and (perhaps) a graduate course in neoclassical microeconomics (and also the same courses in macroeconomics).  Given this background, what other courses should a student take before enrolling in a graduate course in heterodox microeconomic theory?


The Prerequisites


The student should have one course in the history of economic thought and another course in the theoretical and social history of a specific heterodox approach, such as radical, Marxian, Institutional, or social economics.  The rationale is that heterodox microeconomics is part of a historical discourse that starts with classical political economy and includes Marxism, the historical school, Veblen and Institutionalism, and Keynes.  Familiarity with the older arguments and arguments from the different heterodox approaches will help the student to understand the structure and organization of heterodox microeconomic theory as well as the theoretical, empirical, and policy issues that it addresses.  In addition, the student should have three courses in 19th and 20th century economic and social history of the United States, of the United Kingdom and the rest of Europe, and of the history of business enterprises.  The rationale for these courses is that they provide the student to some degree with empirical qua historical knowledge of the social provisioning process in capitalist economies.  A third set of three courses a student should have covers philosophy and methodology.  In particular, a student should have two courses on 18th and 19th century philosophy, on pragmatism, on modernism and post-modernism, on philosophy of science, on social philosophy and theory; and a course on qualitative and historical methodology.  The rationale for the ‘philosophical’ courses is that they introduce the student to ways of thinking that have an impact on how heterodox theory is articulated but which are not discussed in detail in the theory itself.  The latter course on methodology, which is a complement to the undergraduate econometric course taken by the student, shows that there are ways other than econometrics to undertake economic research and that empirical evidence consists of something more than numbers and statistics.  Finally, a student should have at the minimum two courses in calculus and more importantly a course in linear algebra, but an additional course in linear algebra or numerical analysis would also be highly desirable.  The reason for taking the latter two mathematics courses is that they deal with the mathematics and models that underpins the input-output production and price models that constitute the framework of heterodox economics.10


The Introduction


The course starts with a four-part introduction to heterodox microeconomic theory that consists of history of heterodox economics, the scope and methodology of heterodox microeconomics, and the structural organization of economic activity.  This block of material is designed to introduce the student to the foundational material upon which the microeconomic theory is established.11  It also has the purpose of making it very clear to the student the extent to which heterodox microeconomics is different from neoclassical microeconomics.  Not only does heterodox microeconomic theory have a different history, scope, definition, aim, and methodology, it explicitly repudiates fundamental aspects of neoclassical economics, such as the concepts of equilibrium, relative scarcity, neoclassical rationality, optimalization and with it maximizing and minimizing, and methodological individualism.  In short, heterodox microeconomic theory rejects the basis of neoclassical microeconomic theory and sets out to provide a complete alternative.


1. History of Heterodox Economics


Since the student has taken prerequisite courses in the intellectual history of heterodox economics, the history of heterodox economics in this section deals with the social, organizational, and political history of heterodox economics in the 20th century.  One reason for including this particular material is to make the student aware that what currently constitutes heterodox economics and heterodox economic theory has a history that was formed in the heated crucible of contestability.  For the American student, the material covered in this synoptic history can have the following topics:

            1.         The Contested Landscape of American Economics, 1900 – 1970s;

            2.         Radical Economics in Post-War America Emergence of the Union

for Radical Political Economics, 1945 – 1970;

3.         Institutionalism and the Emergence of the Association for Evolutionary Economics, 1945 – 1970; and

4.         Heterodox Economics in the United States, 1970 – present.12


And indicative readings associated with the topics include:

            1.         Rutherford, M.  2000.  “Institutionalism Between the Wars.”  Journal of Economics Issues 34.2 (June):  291 – 303.

            2.         O’Boyle, E. J.  1994.  Homo Socio-Economicus:  Foundational to Social Economics and the Social Economy.” Review of Social Economy 52.3 (Fall):  286 – 313.

            3.         Lee, F. S.  2000.  “The Organizational History of Post Keynesian

Economics in America, 1971 – 1995.”  Journal of Post Keynesian

 Economics 23.1 (Fall):  141 – 162.

            4.         Lee, F. S.  2004.  “History and Identity:  The Case of Radical Economics

and Radical Economists, 1945-70.”  Review of Radical Political Economics 36.2 (Spring):  177 – 195.

            5.         Lee, F. S.  2004.  “To Be a Heterodox Economist:  The Contested

Landscape of American Economics, 1960s and 1970s.”  Journal of Economic Issues 38.3 (September):  747 – 763.


A second reason for the history is to make the student aware of the different approaches to heterodox economics and therefore the need to keep an open and inquisitive mind as they learn about them in the context of heterodox microeconomic theory.  This can be reinforced by providing the student with a list of heterodox economic web sites (see below for an indicative list) and a list of heterodox economic journals, such as found in Lee, Cohn, Schneider, and Quick (2005).

  Association for Evolutionary Economics http://www.orgs.bucknell.edu/afee

  Association for Heterodox Economics                http://www.hetecon.com

  Association for Institutional Thought                   http://www.afit.cba.nau.edu/

  Association for Social Economics                     http://www.socialeconomics.org

  Cambridge Social Ontology Group                     http://www.csog.group.cam.ac.uk/index.htm

  Conference of Socialist Economists                   http://www.cse.web.org.uk/

  European Association for Evolutionary

Political Economy                                  http://ww.eaepe.org

  Heterodox Economics Web                              http://www.orgs.bucknell.edu/afee/hetecon.htm

  International Association for

Feminist Economics                              http://www.facstaff.bucknell.edu/jshackel/iaffe

  International Confederation of Associations

for Pluralism in Economics                     http://ww.econ.tcu.edu/econ/icare/main.html

  International Society for Ecological Economic     http://ww.ecologicaleconomics.org/

  Post-Autistic Economics Network                     http://ww.paecon.net/

  Society for the Advancement of Socio-

Economics                                            http://www.sase.org/homepage.html

  Union for Radical Political Economics                http://www.urpe.org


2. Scope of Heterodox Microeconomics


Given the general historical background, the next step is to introduce the student to heterodox economic theory itself, then delineate the nature and scope of heterodox microeconomic theory, and conclude with a brief historical sketch of its antecedents.  The discipline of economics as concerned with explaining and proposing and advocating changes to the process that provides the flow of goods and services required by society to meet the needs of those who participate in its activities, that is, economics is the science of social provisioning.  Thus, economics has two interdependent parts:  theory and policy.13  Heterodox economic theory is a theoretical explanation of the historical process of social provisioning within the context of a capitalist economy.  Therefore it is concerned with explaining those factors that are part of the process of social provisioning, including the structure and use of resources, the structure and change of social wants, structure of production and the reproduction of the business enterprise and other relevant institutions, and distribution.  Because the social provisioning process involves issues of ethical values and social philosophy and the historical aspects of human existence, heterodox economists feel that it is also their duty to make economic policy recommendations to improve human dignity, that is, recommending ameliorative and/or radical, social, and economic policies to improve the social provisioning for all members of society and especially the disadvantage members.  Moreover, they adopt the view that policy recommendations must be based on an accurate historical and theoretical picture of how the economy actually works—a picture that includes class and hierarchical domination, inequalities, and social-economic discontent.


The scope and objective of heterodox microeconomic theory is to identify, describe, and develop a narrative--that is a theoretical explanation--utilizing structures and causal mechanisms of the “micro-events” that contribute to the overall social provisioning process in a capitalist economy.  Because of the significance of the price mechanism to neoclassical economics, one theoretical concern of heterodox microeconomic theory is the business enterprise, markets, demand, and pricing.  Also, since heterodox economists see investment as the principle director and driver of economic activity, a second theoretical concern is investment decisions, the financing of investment, and the profit mark up.  Finally, the third theoretical concern of heterodox microeconomic theory is the delineation of a non-equilibrium disaggregated price-output model of a monetary economy.  The integration of the theories of the business enterprise, markets, demand, investment, and finance with a theoretical model of the economy forms a nexus of theory that can be identified as heterodox microeconomics.14

To ensure that the student does not, like most neoclassical students, take the theory at face value and without a past, a brief historical overview of the various heterodox microeconomic approaches that contributed to the intellectual and theoretical background of heterodox microeconomic theory should be offered.  Consequently, the student is introduced, for example, to the administered prices doctrine, normal cost doctrine, and the mark up price doctrine, to the marginalist and administered prices controversy, and to Institutionalist, feminists, and social economics contributions.  Indicative readings associated with the topics covered in this section include:

1.                   Bortis, H.  1997.  Institutions, Behaviour and Economic Theory:  A

Contribution to Classical-Keynesian Political Economy.  Cambridge:  Cambridge University Press.

            2.         Dugger, W. M.  1996.  “Redefining Economics:  From Market Allocation

                        to Social Provisioning.”  In Political Economy for the 21st Century, pp. 31

                         – 43.  Edited by C. Whalen.  Armonk:  M. E. Sharpe, Inc.

            3.         Lee, F. S.  1998.  Post Keynesian Price Theory.  Cambridge:  Cambridge University Press.

            4.         Fullbrook, E. (ed.)  2003.  The Crisis in Economics:  The Post-Autistic

Economics Movement:  The First 600 Days.  London:  Routledge.

5.                   Ferber, M. A. and Nelson, J. A. (eds.)  2003.  Feminist Economics Today: 

Beyond Economic Man.  Chicago:  The Chicago University Press.


3. Methodology of Heterodox Microeconomics


Heterodox microeconomic theory is not an already made doctrine to be applied to an invariant economic reality.  Rather it is still in the process of being created and developed because for some micro phenomena there are no existing heterodox theoretical explanations, because some existing heterodox theoretical arguments are insufficient and hence have to be redone, and because some aspects of economic reality have changed hence requiring the creation of a new heterodox theory.  Therefore this section sets out for the student how heterodox economists understand the economic reality to be examined, the method of creating theory to explain that reality, and an overview and evaluation of the various qualitative and quantitative methods used to create theory.  Thus the student is first introduced to the philosophical foundation of social theorizing and then to critical realism and the role of open systems theorizing (which embraces non-equilibrium and rejects optimalization), causal mechanisms, and structures in the context of what constitutes a theory of economic activity.15  Following this, the student is introduced to the method of grounded theory as the way of creating and developing theory.  This method of theory creation rejects the neoclassical approach of deductivism; on the other hand, it argues that theory must be constructed from empirical evidence.  And the heterodox theories (which are non-equilibrium theories) that emerge from this method are historically grounded and historical analytical explanations of economic reality.  Finally, there is a discussion about evaluating empirically grounded theories that revolves around explanation, new data, and scholarly community engagement in the evaluation process.  The issue of prediction as the sole method of evaluating a theory is rejected.


In addition to being introduced to the method that heterodox economists use to construct theory, the student is also introduced to a number of methodological issues, such as the role of assumptions and logical coherence in theory creation, the importance of both qualitative data and quantitative data, the use of multiple research strategies--surveys, interviews/oral statements, ethnographic studies, participant-observation, questionnaires, fieldwork, and statistical/quantitative work, the importance of case studies, the use of mathematics and economic models, and the possible usefulness of econometrics.  Thus, the student emerges with the view that quantitative-econometrics approaches are only one of many ways to construct and evaluating heterodox economic theories.  In fact, the student is confronted with the argument that causal mechanisms and the role of agency can only really be captured by qualitative data gathered by “qualitative” research methods.16  Indicative readings for methodology include the following:       

            1.         Downward, P. (ed.)  2003.  Applied Economics and the Critical Realist

Critique.  London:  Routledge.

            2.         Finch, J. H.  2002.  “The Role of Grounded Theory in Developing

Economic Theory.”  Journal of Economic Methodology 9.2:  213 – 234.

            3.         Locke, K.  2001.  Grounded Theory in Management Research.  London: 

                        SAGE Publications.

4.                   Lawson, T.  1997.  Economics & Reality.  London:  Routledge.

5.                   Denzin, N. K. and Lincoln, Y. S. (eds.)  1998.  Strategies of Qualitative Inquiry.  Thousand Oaks:  SAGE Publications. 


4. Structural Organization of Economic Activity


The aim of the final section of the Introduction is to present to the student a theoretical picture of a capitalist economy that will serve as the foundation for developing an empirically grounded microeconomic theory of the social provisioning process as well as an empirically grounded model of the economy.  This involves delineating the core structures of a capitalist economy relevant to the social provisioning process and locating within them the organizations, institutions, and agency that direct, engage in, or facilitate the economic events that result in social provisioning.  And the economic events of specific interest are those that affect the production, pricing, demand, and distribution of goods and services.  The structures help shape and govern economic events while the organizations and social institutions (that are located in the structures) house the causal mechanisms in which agency is embedded.  What these structures are will in part determine the kind of heterodox microeconomic theory that is developed.  The core structures include the input-output schema of circular production (which is incompatible with the neoclassical concept of relative scarcity), income flows relative to goods and services for social provisioning, and the flow of funds that ensure that monetary production and monetary social provisioning are taking place; the core organizations, social institutions, and core agencies relevant to the social provisioning process and embedded in the structures include the business enterprise, market organizations such as cartels, family, government, and the social individual that makes decisions and choices in a non-neoclassical optimizing manner.  Indicative readings for the section include:

            1.         Okubo, S. O., Lawson, A. M., and Planting, M. A.  2000.  “Annual Input-

Output Accounts of the U.S. Economy, 1996.”  Survey of Current Business 80.1 (January):  37 – 86.

            2.         Bortis, H.  2003.  “Keynes and the Classics:  Notes on the Monetary

                        Theory of Production.”  In Modern Theories of Money, 411 – 474.  Edited

                        by L.-P. Rochon and S. Rossi.  Cheltenham:  Edward Elgar.

            3.         Davis, J. B.  2003.  The Theory of the Individual in Economics:  Identity

and Value.  London:  Routledge.

            4.         Potts, J.  2000.  The New Evolutionary Microeconomics:  Complexity,

Competence and Adaptive Behaviour.  Cheltenham:  Edward Elgar.

            5.         Fullbrook, E. (ed.)  2002.  Intersubjectivity in Economics:  Agents and

Structures.  London:  Routledge.


5. Mathematics and Modeling:  A Digression


The representing of the structures, organizations, institutions, and agencies to create an integrative picture of the foundations of heterodox microeconomic theory can be assisted by mathematics and economic models.  Their uses are, however, restricted since the tenets of realism, critical realism, and the method of grounded theory prescribe that the type of mathematics used and economic models constructed are derived from (as opposed to being imposed upon via analogy or metaphor) the empirically grounded theories being developed.  Consequently, the economic model reflects the narrative of the theory from which it is derived. To translate a grounded theory into an economic model, its structures and causal mechanisms (which embody accurate measurements and observations) have to be converted, as far as possible, into mathematical language where each mathematical entity and concept is in principle unambiguously empirically grounded, meaning in part they also have to be measurable and observable.  As a result, the mathematical form of the model is determined and constrained by the empirically grounded structures and causal mechanisms, and hence is isomorphic with the theory and its empirical data.  This relationship between mathematics and empirically grounded theory is similar to the late 19th century view in which mathematical rigor was established by basing the mathematics on physical reasoning resulting in physical models.  However, the difference here is that rigor results when the mathematical model is based on social reasoning represented by empirically grounded theory.  In this manner, mathematical model-based analysis remains subjugated to the study of economic activity.  Thus, while mathematics helps illuminate aspects of the grounded theory and making clear what might be obscure, it does not add anything new to the theory, that is, it does not by itself produce new scientific knowledge.


As suggested above, the structure of the economy is pictured in terms of an input-output matrix; hence the mathematics of input-output models is what students studying heterodox microeconomic theory need to know.  The “mathematical-methodological” reason for working with input-output models is that they are inherently measurable; that is, input-output models and the mathematics of the models are empirically grounded.  A secondary benefit of input-output models is that they permit the exploration of various theoretical themes in classical political economy, Marxism, and the capital controversies as they relate to heterodox microeconomics.  Useful introductions to input-output models and their mathematics are L. L. Pasinetti’s, Lectures on the Theory of Production (1977) and H. Kurz and N. Salvadori’s, Theory of Production (1995).



Heterodox Microeconomic Theory:  The Core Content


Because of the grounded theory approach to theory creation, the core of heterodox microeconomics consists of a series of substantive theories that are empirically grounded and are part of an overall formal microeconomic theory.  However, since the empirical groundness of the substantive theories is uneven and far from complete, development of the overall theory is still incomplete.  The requirement that all theories must be empirically grounded means that, in a discipline which traditionally does not empirically ground theories, this process is quite slow.  The core can be divided into four components:  three substantive areas--the business enterprise, the market and the business enterprise, and market governance; and a formal area which deals with the three substantive areas together.  More specifically, the three substantive areas concentrate on delineating ‘micro’ structures and causal mechanisms and developing substantive theories of the business enterprise, of market demand, and of market governance.  With the structures, causal mechanisms, and substantive theories in place, the final step is to develop a holistic heterodox microeconomic theory and with it the microfoundations of heterodox macroeconomics.  Thus, in the formal area a disaggregated price-output model of a monetary economy will be developed and then utilized to delineate the impact of the micro—that is prices, profit mark ups, finance, and investment--on the overall level of economic activity.


The Business Enterprise


The business enterprise is conceived as a non-static, historically changing going concern, that is, as an entity that has an indefinite life span and which undertakes production, employment, pricing and investment activities in this context.  Thus the enterprise is more than simply a collection of productive resources, that is, physical resources (such as plant, equipment, stocks of various material inputs and outputs and ownership of 'land') and human resources, that is, workers and management.  It is also an organization that is structured and contains causal mechanisms that direct its activities.  It is within these structures and causal mechanisms (which change over time) that these resources are utilized in various activities in a changing economic environment.  The business enterprise comprises of three structures: legal and organizational structure, decision-making structure, and production and cost structure.  The causal mechanisms, on the other hand, concern pricing, prices, investment, wages, employment, and production and reflect the motivation of the management of the enterprise involved in making the decisions.  From the structures and causal mechanism a series of empirically grounded theories on pricing and prices, on investment, and on wages, employment, and production are delineated; and these theories integrated together constitute the theory of the business enterprise.17  Indicative readings for the section include:

            1.         Earl, P. E.  2002.  Information, Opprtunism and Economic Coordination. 

                        Cheltenham:  Edward Elgar.

            2.         Lee, F. S.  1998.  Post Keynesian Price Theory.  Cambridge:  Cambridge

                        University press.

            3.         Downward, P.  1999.  Pricing Theory in Post Keynesian Economics:  A

Realist Approach,  Cheltenham:  Edward Elgar.

4.       Bewley, T. F.  1999.  Why Wages Don’t Fall During a Recession. 

            Cambridge:  Harvard University Press.

5.       Champlin, D. P. and Knoedler, J. T. (eds.)  2004.  The Institutionalist

Tradition in Labor Economics.  Armonk:  M. E. Sharpe, Inc.


The Market and the Business Enterprise


The business enterprise decisions concerning production and investment determine its demand for industrial goods while those same decisions and the decisions about pricing are based on views about the demand for the goods produced by the enterprise.  A central feature to these double-edge decisions is the structure of market demand; and central to market demand is concept of market.18  These two issues are addressed in this section as a prerequisite to dealing with competition and the theory of market governance in the following section.  The concept of market is an empirically grounded in terms of standard industrial classification and followed by its delineation as a social structure that has a legal component, a set of institutional practices and rules of exchange, and involves issues of market control.  Turning to the structure of market demand, the analysis focuses on the demand-for-goods decisions by households, enterprises, and non-market organizations, especially with regard to price.19  Finally, the structure of market demand and the market price is related to the enterprise as a going concern represented in terms of the Marxian schema M-C-M’.  It is argued that, since price and sales are unconnected, a decline in the enterprise’s price reduces its propensity to be a going concern by affecting M’ relative to M.  Indicative readings for this section include:

            1.         Nightingale, J.  1978.  "On the Definition of 'Industry' and 'Market',"

Journal of Industrial Economics 27 (September):  31 - 40.

            2.         Granovetter, M.  1985.  "Economic Action and Social Structure:  The

Problem of Embeddedness," American Journal of Sociology 91 (November):  481 - 510.

            3.         Fligstein, N.  2001.  The Architecture of Markets:  An Economic

Sociology of Twenty-First-Century Capitalist Societies.  Princeton:  Princeton University Press.

4.       Lavoie, M.  1994.  "A Post Keynesian Approach to Consumer Choice." 

Journal of Post Keynesian Economics 16 (Summer):  539 - 562.

5.       Robinson, R.  1961.  “The Economics of Disequilibrium Price.”  Quarterly

Journal of Economics 75 (May):  199 – 233.


Market Governance       


All enterprises have some market power, that is, the ability to inflict unacceptable consequences upon competitors.  This is manifested in terms of setting and changing prices, thereby affecting the cash flows (that is M’) of competitors, especially in markets where market price and sales are unconnected.  Thus, any propensity towards price wars and other factors (such as business cycles or secular changes in demand) generating fluctuating prices among competitors inhibits the enterprise as a going concern.  This section develops a theory of market governance to explain why and how business enterprises utilize social, economic, and political processes to co-operatively establish institutions and organizations that regulate horizontal market transactions among themselves.  The particular forms of market governance embodied in the theory include social networks, bilateral agreements, trade associations, cartels, price leadership, and government regulation.  Indicative readings for this section include:

            1.         Richardson, G. B.  1965.  "The Theory of Restrictive Trade Practices,"

Oxford Economic Papers 17 (November):  432 - 449.

2.                   Campbell, J., Hollingsworth, J., and Lindberg, L.  (eds.)  1991. 

Governance of the American Economy.  Cambridge:  Cambridge University Press.

3.                   Fligstein, N.  1990.  The Transformation of Corporate Control.  Cambridge:  Harvard University Press.

4.                   Colombo, M. G. (ed.)  1998.  The Changing Boundaries of the Firm: 

Explaining Evolving Inter-Firm Relations.  London:  Routledge.

5.                   Mizruchi, M. S. and Schwartz, M.  (eds.)  1992.  Intercorporate Relations: 

The Structural Analysis of Business.  Cambridge:  Cambridge University Press.


Microfoundations of Heterodox Macroeconomics


With the structures, causal mechanisms, and substantive theories in place, the final step is to develop a holistic heterodox microeconomic theory and with it the microfoundations of heterodox macroeconomics.  Thus, a disaggregated price-output model of a monetary economy is developed based on the foregoing theories of the business enterprise and market governance and the arguments of about the structure of market demand and the non-relationship between market price and sales.  It is then utilized to delineate the impact of the micro—that is prices, profit mark ups, finance, and investment--on the overall level of economic activity.  In particular, the disaggregated price model resembles a Sraffian price model based on normal output or capacity utilization; while the disaggregated quantity model is derived from a Leontief quantity model.  The connection between the two via the profit mark-up qua prices and enterprise investment decisions and government expenditures or effective demand is examined, especially with regard to issues of prices and the going concern and co-ordination of economic activity, aggregate economic activity, and disaggregated effective demand.  Finally, the impact of micro pricing, investment, production and employment decisions on distribution and social welfare under capitalisms is examined.   Indicative readings for this section include:

            1.         Lee, F. S.  1998.  Post Keynesian Price Theory.  Cambridge:  Cambridge

                        University Press.

            2.         Milberg, W. (eds.)  1992.  The Megacorp and Macrodynamics:  Essays in

Memory of Alfred Eichner.  Armonk:  M. E. Sharpe, Inc. 

            3.         Eichner, A.  S.  1987.  The Macrodynamics of Advanced Market

Economies.  Armonk:  M. E. Sharpe, Inc.

            4.         Lutz, M. A.  1999.  Economics for the Common Good:  Two Centuries of

Social Economic Thought in the Humanistic Tradition.  London:  Routledge.

            5.         O’Boyle, E. J.  1996.  Social Economics:  Premises, Findings and Policies. 

                        London:  Routledge.







In contrast to the commonly held view, this article shows that there is a heterodox microeconomics that is teachable to students.  Clearly it is not as well developed as mainstream microeconomics, but then in the 1880s or even in the 1920s neoclassical microeconomic theory was not well developed and yet it was taught.  Teaching an incomplete theory is not a problem if the professor believes that the central components of what is being taught are empirically and theoretically sound and help provide a better understanding of the phenomena under examination.  The early neoclassical economists held this position and then spent two, three, five and more generations developing and extending their theory.  What is presented above as heterodox microeconomics and its theoretical core is, like neoclassical microeconomics in the 1880s, quite incomplete—but it is not non-existent!  Further developments are needed and in fact demanded; and it is not improbable that over the next couple of generations of heterodox economists it could be greatly transformed.  All that is needed is for heterodox economics to overcome one major obstacle:  the propensity of most heterodox economists to dismiss and ignore heterodox microeconomics and to direct their graduate students to pursue research agendas that do not engage with heterodox microeconomic theory.  But whether this is possible is an open question!





1. Some of the monographs delineating to some degree heterodox microeconomics theory include Eichner (1987), Kregel (1975), Robinson and Eatwell (1973), Lavoie (1992),  Wolff and Resnick (1987), and Earl (1995).

2. The contrast with neoclassical professors is striking.  For much on the 20th century only neoclassical microeconomic theory has been taught to undergraduates.  The exclusion of alternative microeconomic theories was deliberate and through.  Illustrative of the exclusive teaching of neoclassical microeconomic theory to students is found in the United Kingdom where in 2003-04 some 45% of undergraduates in economics get no introduction to heterodox microeconomic theories with another 27% have a minimal to approaching zero introduction.  Thus 72% of all undergraduates in economics are really not introduced to alternative approaches in microeconomic theory. [Lee, 2004]

3. In reality most applicants to graduate programs have not been introduced to heterodox theoretical approaches and hence are not really capable of making informed choices.  This issue cannot be resolved in this paper.

4. As a result graduate students from such a program will have a sufficient command of neoclassical microeconomic theory to teach it at the undergraduate level and even at the M.A. and Ph.D. level at many universities.  In fact, their knowledge of neoclassical theory is better than students coming out of strictly neoclassical programs, although their technical skills may not be at the same level.  In short, they are competent to teach neoclassical microeconomics, but their real expertise and hence capabilities for doctoral teaching are in heterodox microeconomic theory.

5. For a more detail discussion of the teaching of neoclassical microeconomic theory for heterodox graduate students, see Lee (2005).

6. In addition, it is argued by many heterodox and neoclassical economists that heterodox microeconomic theory either does not exist or it is in such a confused, incoherent, contradictory state that it is not possible to teach it.  Since this article is based on the premise that a coherent, teachable heterodox microeconomic theory exists, the argument will be ignored.

7. For a critique of deductivist methodology and its use in neoclassical economics, see Lawson (1997 and 2003).  Moreover, there are arguments to be made that neoclassical economists misuse mathematics in their efforts to explain the real world.

8. It should be noted that the role of Friedman’s methodology position that prediction is the goal of economic theory was really a clever way of rejecting the emerging ‘realist’ criticism of marginalism in the 1940s and 1950s.  It made it easier for neoclassical economists to develop a methodology that was anti-empirical in terms of developing theory.

9. Neoclassical economists are in general not open to considering alternatives to their microeconomic theory.  They accept their theory as an uncontestable truth.  This position turns neoclassical economic theory into a matter of religious faith.  Consequently microeconomic theory as taught by neoclassical economists should be located in departments that teach about faith-based documents that are outside the area of the social sciences and academic economic departments.

10. A course in mathematical economics is not recommended because the mathematics generally taught and the textbooks used are directed towards neoclassical microeconomic theory and hence are irrelevant for a heterodox microeconomic course.  For example Wade Hands’ Introductory Mathematical Economics, Edward Dowling’s Introduction to Mathematical Economics, Akira Takayama’s Analytical Methods in Economics, Michael Klein’s Mathematical Methods for Economics, Peter Hess’s Using Mathematics in Economic Analysis, and Alpha Chiang’s Fundamental Methods of Mathematical Economics devote less than 15% of their content to linear and matrix algebra and to Leontief-Sraffian input-output models.

11. This block of material is similar to the block of material covered in the preliminary chapters in introductory and intermediate neoclassical microeconomic texts.  These chapters define economics and specify the contribution of microeconomic theory to understanding the allocation of scarce resources among alternative uses to human wants; provide a brief whiggish view of the historical emergence of modern microeconomics; introduce fundamental concepts such as wants, relative scarcity, production possibility frontier, opportunity costs, supply and demand, methodological individualism, and circular flow of economic activity; structural determinants of prices and quantities; briefly delineate the positivist methodology and the equilibrium qua marginalist method used by neoclassical economists; and quickly covers the mathematics utilized in presenting the theory in the rest of the book.

12. If a heterodox microeconomic theory was taught in the United Kingdom a similar history would cover the following topics:

(1) The Contested Landscape of British Economics, 1900 – 1970;

(2) Heterodox Economics in Britain:  Conference of Socialist Economists, 1970 – 1995;

(3) Heterodox Economics in Britain:  Non-Marxist-Post Keynesian Developments, 1970 – 1995; and

(4) Research Assessment Exercise and the Attack on Heterodox Economics in the United Kingdom, 1992 – 2000.

       Other countries will have their own heterodox histories.

13. Neoclassical economics is also concerned with explaining the social provisioning process, although it does not say it in this way.  Their theoretical explanation centers on the phrase “the allocation of scarce resources among competing ends;” and their policy prescriptions follow from the theory.  Thus the fundamental difference between heterodox and neoclassical economics is in their theoretical explanation of the social provisioning process and secondarily in what they advocate for economic policy.

14. Others heterodox economists would probably argue that I have drawn the core boundaries too tightly; and they may be correct.  Further argument, discussion, and different heterodox views need to be brought to bear on what are the major theoretical concerns of heterodox microeconomics.  This article is an invitation for such a debate.

15. Social theory and the philosophy of the social sciences should be part of the intellectual make-up of all economists and certainly of heterodox economists.  However, the principle problem with this is that graduate programs in economics generally do not make room for such courses and undergraduate economic majors are not encouraged to take such courses.  However, because of the interdisciplinary nature of the Ph.D. program at the University of Missouri-Kansas City, many of our economic students take a minor in social theory.

16. Graduate students at the University of Missouri-Kansas City do take graduate courses in econometrics; but because of the interdisciplinary nature of the doctoral program they are also encouraged to take method courses in sociology (such as ‘qualitative methodology’) and historiography and method.

17. Since the theory is historically grounded and a historical analytical explanation of the activities of the business enterprise, it could be claimed that it is a evolutionary theory of the business enterprise.  However, ‘historical’ does not have the same meaning as ‘evolutionary’, thus the reluctance to use the concept.

18. Heterodox economists do not consider the demand for labor power the same as the demand for goods; and do not accept the concept of labor market while accepting the concept of goods market.  Hence neither of these issues are discussed in this section.

19. This issue is from a mainstream perspective about whether market demand curves exist and have a negative slope.





Earl, P. E.  1995.  Microeconomics for Business and Marketing.  Cheltenham:  Edward Elgar.

Eichner, A. S.  1987.  The Macrodynamics of Advanced Market Economies. Armonk:  M. E. Sharpe, Inc.

Keen, S.  2001.  Debunking Economics:  The Naked Emperor of the Social Sciences.  New York City:  St. Martin’s Press.

Kregel, J. A.  1975.  The Reconstruction of Political Economy:  An Introduction to Post-Keynesian Economics.  2nd Edition.  London:  Macmillan.

Kurz, H. D. and Salvadori, N.  1995.  Theory of Production:  A Long-Period Analysis.  Cambridge:  Cambridge University Press.

Lavoie, M.  1992.  Foundations of Post-Keynesian Economic Analysis.  Aldershot:  Edward Elgar.

Lawson, T.  1997.  Economics and Reality.  London:  Routledge.

Lawson, T.  2003.  Reorienting Economics.  London:  Routledge.

Lee, F. S.  2004.  “Research Assessment Exercise, the States, and the Dominance of Neoclassical Economics in British Universities.”  Unpublished.

Lee, F. S.  2005.  “Teaching Graduate Neoclassical Microeconomics From a Heterodox Perspective.”  Unpublished.

Lee, F. S., Cohn, S., Schneider, G., and Quick, P.  2005.  Informational Directory for Heterodox Economists:  Journals, Book Series, Websites, and Graduate and Undergraduate Programs.

Lee, F. S. and Keen, S.  2004.  “The Incoherent Emperor:  A Heterodox Critique of Neoclassical Microeconomic Theory.”  Review of Social Economy 62.2 (June):  169 – 200.

Pasinetti, L. L.  1977.  Lectures on the Theory of Production.  New York:  Columbia University Press.

Robinson, J. and Eatwell, J.  1973.  An Introduction to Modern Economics.  Revised Edition.London:  McGraw-Hill.

Wolff, R. D. and Resnick, S. A.  1987.  Economics:  Marxian versus Neoclassical.  Baltimore:  The Johns Hopkins University Press.




Frederic S. Lee, “Teaching Heterodox Microeconomics
”,  post-autistic economics review, issue no. 31, 16 May 2005, article 3, http://www.btinternet.com/~pae_news/review/issue31.htm