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Neoclassical Micro And Macro Economics–Science Or Silliness?


 In the forums there is an exchange about the economics profession – where a number of folks have asked questions, etc. 
I wrote a piece, a long time ago, about the discipline…and noticed it hasn’t been ported to the new site….so here it is, pending porting… 
the system of supply and demand equations (the economist does this with pen and paper, the market does it by trial and error that hones in on the desired result) one finds a set of prices at which every market will be in equilibrium, which is, of course, the famous general equilibrium solution.

BY ITS own claims economics is the most scientific "social science." Yet non-economist critics such as E.F. Schumacher tell us that "to produce [economic] figures about the unknown, the current method is to make a guess about something or other–called an assumption–and to derive an estimate from it by subtle calculation. The estimate is then presented as the result of `scientific reasoning,’ something far superior to mere guesswork…" More surprising, even a noted economist like John Kenneth Galbraith claims that "on the largest and most important questions facing the governments of the industrial countries the economics profession–I choose my words with care–is intellectually bankrupt. It might as well not exist."

Still, as dissidents Schumacher and Galbraith are criticizing other economist’s theories and can be written off by those other economists as having an ax to grind. In this light, even more surprising and little known is that the most famed creators of modern micro and macro economic theories also denigrate their disciplines and minimize their claims to scientific credibility. To understand their cynicism, first we describe the contours of these modern theories, then we both survey the creators’ skepticism and inquire how a discipline can continue when its own creators doubt its relevance. To close we will offer a few words about alternatives.

 

Microeconomics

Since the earliest days of their theorizing economists have wondered how independent producers and consumers, each pursuing their own separate ends without conniving in any way, nonetheless act so the total of their efforts constitute an orderly affair.

(1) In an economy there are many firms each producing goods to be sold on "product markets" in malls and the like, where consumers will purchase them. These consumers, however, are also workers and get their money by selling their ability to do work for wages on "labor markets" to the owners of General Motors and Bell Telephone and Pittston Coal and the corner market. Owners also buy resources, equipment, buildings, and other "inputs" to their own production processes supplied by other owners on "factor markets." GE buys from GM. The corner stores buys from General Foods, and so on.

(2) All the "commodities" that are bought and sold on the economy’s markets including cars, frozen dinners, baseballs, and rolling mills have prices which can fluctuate. At any particular prices each worker will have a preference about what he or she wants to buy as a consumer and how much time he or she wants to spend working at a job for a wage. Likewise, each capitalist will have a preference about how much to produce and put up for sale and how many workers to employ for what lengths of time to produce it in order to get profits with which to make, like everyone else, preferred consumer purchases.

(3) An equilibrium on any market is a condition in which at the price that is holding the amount that buyers wish to purchase and the amount that sellers wish to sell are equal so that neither buyers nor sellers are disappointed by the ensuing transactions. Consumers don’t go away with less milk than they sought to buy at the market price of milk, and capitalists don’t go away having sold less milk than they wanted to at the market price. There are no shortages of bread and lines of unfulfilled customers for radios. There is no excess of tires or wasteful overproduction of iron or books that then need to be scrapped.

Workers sell their energies for wages. Capitalists buy resources and intermediate goods as well as worker’s energies to create products they then sell. Consumers finally buy those products.

Remembering the immense number of actors and their diverse preferences, is it possible that they can all act individually and nonetheless establish an "equilibrium" in which everyone buys and sells the amounts they want at the prices that are established? Moreover, if this is possible, will the result have special characteristics that make it a better type of economic organization than all others one could imagine?

As the economic historian Mark Blaug describes: "…what reason do we have for thinking that the whole process hangs together? Business firms enter product markets as suppliers, but they enter factor markets as buyers; households on the other hand are buyers in product markets but suppliers in factor markets. Is equilibrium in product markets necessarily consistent with equilibrium in factor markets? Does the market mechanism guarantee convergence on a general equilibrium solution? If so, is this equilibrium unique, or are there several configurations of prices that will satisfy a solution? Even if a unique general equilibrium exists, will it be stable in the sense that a departure from equilibrium sets up automatic forces that bring the system back into equilibrium?"

Blaug’s quotation incorporates much of what preoccupies general equilibrium economists.

In order to systematically assess the questions Blaug raises one must have some notion of how each firm decides how much to supply and how each individual decides what to consume and how much to work. The theory assumes that each actor seeks to maximally fulfill "personal preferences."

The consumer’s preference is to enjoy consumption goods within a budget constraint fixed by his or her income. The consumer tries to maximize what the economists call "utility" including personal well-being, pleasure, and fulfillment by working to gain wages and by then spending the wages on rent, movies, beer, hospital bills, marijuana, gasoline, toys for tots, and the like.

The capitalist, on the other hand, is also a consumer interested in maximizing utility by buying trips, cars, cocaine, paintings, houses, and the like and his (or rarely her) road to that end is to get as much wealth from being a capitalist as possible–which he or she accomplishes by maximizing profits. A further incentive to maximize profits is that only those who do so will be able to stay in the game; second best profit maximizers like Lee Iaococa will, in the model at least, have too little money to invest to keep up with best maximizers, like the hotshot over at GM.

Daniel Bell, certainly no theoretical revolutionary, nonetheless writes: "Modern economic theory is based upon two specific assumptions about economic behavior and its social setting. One is the idea of utility maximization as the motivational foundation for action; the other is a theory of markets as the structural location where transactions take place. The assumptions converge in the thesis that individuals and firms seek to maximize their utilities (preferences, wants) in different markets, at the best price, and that this is the engine that drives all behavior and exchange. It is the foundation for the idea of the comprehensive equilibrium."

Each consumer decides what to buy at a given set of prices as well as where to work for how long, and each capitalist decides how much to put up for sale. Do the capitalists put up more or less than the consumers want? Do they wish to hire more or less labor than the workforce wants to supply? Or is there a pleasurable mesh such that at the particular reigning market prices everyone buys and sells the amounts they wish to buy and sell? And, if there is a set of prices which allows this happy equilibrium, then as Blaug asks is there only one such set of prices or many? More, if we are at those prices and some buyer or seller acts peculiarly, is the whole system thrown into a frenzy or does it return to an unchanged or perhaps slightly altered equilibrium?

These are important questions. If the general equilibrium economist’s general picture of things is accurate and if the workforce wants to work a lot at a going wage but employees wish to hire less, there is unemployment. If a market economy with private ownership of the means of production by capitalists has no equilibrium, we can expect unemployment or stagnation. If it has one or more sets of equilibrium prices and wages, but if any disturbance will always push the economy further and further away from these, again we can expect turbulence.

In a celebrated work Kenneth Arrow and Frank Hahn, two of the most respected modern economists, summarize the issues well. "There is by now a long and fairly imposing line of economists from Adam Smith to the present who have sought to show that a decentralized economy motivated by self-interest and guided by price signals could be compatible with a coherent disposition of economic resources that could be regarded, in a well-defined sense, as superior to a large class of alternative dispositions. Moreover, the price signals would operate in a way to establish this degree of coherence."

It is important to understand how surprising this claim may be to anyone not immersed in this tradition. Greed breeds bliss. That this self-serving answer that "a decentralized economy motivated by self-interest and guided by price signals" is superior to all alternative designs has long been claimed true and has permeated the economic thinking of even most non-economists is sufficient ground for investigating it seriously. Since the proposition is put forward by policymakers, social commentators, and most economists, it is important to know not only whether it is true, but whether it even could be true. Much of what mathematical economists devote themselves to, therefore, is demonstrating the validity of such claims.

General equilibrium theory starts from consumers, workers, and firms in context of a competitive market. It attributes to each a variety of characteristics including the disposition to maximize utility and/or profit. The focused-on features are then expressed mathematically with a variety of additional assumptions incorporated to facilitate a proof of the existence and stability of a market equilibrium. As Hahn puts it: "It is clear from what has already been said that in part at least General Equilibrium Theory is an abstract answer to an abstract and important question: Can a decentralized economy relying only on price signals for market information be orderly? The answer of general equilibrium is clear and definitive: One can describe such an economy with these properties. But this of course does not mean that any actual economy has been described. An important and interesting theoretical question has been answered and in the first instance that is all that has been done. This is a considerable intellectual achievement, but it is clear that for praxis a great deal more is required."

  • Each consumer has a budget governed by his or her income which is in turn a function of how long the consumer chooses to work at going wage rates. Consumers decide how long to work by comparing the utility gained from extra income to the utility lost due to having to go to work for more hours. Consumers allocate their available funds for purchases by deciding what combination of commodities at each particular price level would maximize their utility.
  • Each firm decides how much to produce by determining what quantity of production and sales would maximize profit at each price/wage level.
  • The consumer’s demands sum to give a societal demand for each commodity.
  • The capitalist’s dispositions to supply different amounts given a different price/wage level sum to give an overall supply function.
  • By solving

An interesting by-product of this approach, which may go a long way to explaining its appeal, is that if we accept all the assumptions and characterizations as being accurate or at least indicative representations of reality, it shows that each agent operates with a maximum of efficiency and that no agent can be made better off without some sacrifice by another agent. In the economist’s terminology, the general equilibrium is "pareto optimal." Once we achieve an equilibrium, for you or I to get more pleasure, someone, somewhere, must get less. There is no wasted capability, no inefficiency in how things are produced or allocated, at least in this sense that to get anyone better off someone else would have to suffer a loss.

To get a more complete feeling for the contours of what general equilibrium theory can and cannot explain we need to look at what some practitioners have had to say about its limits just as we have presented their views on its principle achievement, the solution of the "equilibrium question."

Hahn, quoted above on the virtues of the approach also points out, "it is not possible to pose any monetary questions in the context of the Arrow-Debreu (general equilibrium) model since, according to that construction, money would have no role and hence would not be visible." That is, in the rigorous presentations of general equilibrium theory, money is irrelevant and changes in the supply of money, for example, can have no effect on real variables like output and investment. Likewise, again according to Hahn, the model "cannot take account of certain forms of uncertainty and certain forms of market expectations which are important in Keynesian theory and important for policy."

That is, the model cannot easily or usefully account for the reality that economic agents do not actually know such things as future prices, future availability of goods, changes in production techniques or in markets to occur in the future, etc. Instead, to achieve its results–proofs about equilibrium conditions–the model assumes that actors have perfect knowledge at least of the probabilities of all possible outcomes for the economy. Sir John Hicks, also of great economics fame, says "One must assume that people in one’s models do not know what is going to happen, and know that they do not know what is going to happen. As in history!" Yet economists assume just the opposite. Abstracting from time and uncertainty, they ignore that agents have different consciousness and life experiences and that approaching problems of decision-making in the absence of sure knowledge, they have different expectations and make different choices than economic models suggest.

Hahn also points out that: "No meaning can be given in neoclassical general equilibrium theory to the notion of an equilibrium with involuntary unemployment. The neoclassical axiom, that wages will fall as long as not all those wishing to work can find a job, sees to that. In this world (of the model) there is no occasion for Keynesian policies. Indeed, no very good sense can be made of the Keynesian opus, a circumstance reinforced by the fact that Keynes and most of his followers never attempted to ground their theory rigorously."

While the last part of Hahn’s assertion bears on the relation of general equilibrium theory to "macro-theory," a point we address further below, the first part is relevant right here. General equilibrium theory has no room for unemployment. Certainly this is an interesting prediction in a society where some sectors of the workforce suffer unemployment rates as high as thirty percent.

Oligopoly and imperfect competition have also been abstracted from so that the theory does not allow one to answer interesting questions which turn on the asymmetry of information and bargaining power among agents, whether due to size, or organization, or social stigmas, or whatever else.

Moreover, within general equilibrium, the firm itself is a peculiar entity. It has no start-up costs, there are never increasing returns to scale, and there is no internal structure which might bear upon the firm’s assumed disposition to always seek only to maximize profits. In short, general equilibrium theorists treat institutions as theoretically negligible. What do governments who may engage in as much as 60 percent of all economic transactions in capitalist market economies maximize? The question is irrelevant to this theory. How do markets themselves affect people’s preferences or the decision-making criteria of capitalists? The question can’t be asked much less answered in microeconomics even though it purports to the theory explaining the virtues and dynamics of markets. How do institutions demarcate economic actors into opposed interest classes and how do struggles between these classes in turn impact on decisions and structures in allocation, production, and consumption? Again this is a question that the theory’s concepts can’t even conceive of asking much less answering.

Of course one could continue. In addition to ignoring the effects of markets on personal preferences, the inevitability of unemployment and inflation, the structure of workplaces and the role of classes and class struggle, the theory also leaves out unions, racism, sexism, and for the most part, the state. Commodities and work are considered buyable in any quantities whereas they really often come only in "lumps." The prevalence of "public goods" and "externalities" (where my consumption or production affects not only me but others or even everyone, as in when it generates drunkenness or oil spills, for example) is systematically underemphasized. The stratification of the workplace to achieve greater long-run control rather than to ensure immediate profit-maximization is deemed inconceivable even though it is ubiquitous in our economy.

Regarding this last point, Harvey Leibenstein tells a story as a preface to his own correction to general equilibrium theory because it completely contradicts the counter-realistic expectations any equilibrium theorist must hold about the economy. He quotes a worker recounting her experience with management: "The owner of the factory never came out there, he just sat in New York and took the money…The manager was a very sharp type. I told him I could increase production, so I worked out an incentive scheme whereby for a 50 percent increase in production they {the workers} could make 30 to 40 percent more in wages…. The girls really began to put out. They got very much interested in their work, and the good ones were soon earning $16 and more a week.

"To her astonishment, the manager didn’t like it. I’m not going to have these girls thinking they are good, he said. I’m going to get rid of the good girls. I don’t pay them to get above themselves.

"He deliberately slowed down supplies and made things awkward for the smarter girls, so they lost spirit and left."

So much for profit-maximization and efficiency. The real factory and the model factory are not identical, a recognition which is self-evident to anyone who has ever worked in the former. Finally, the neoclassical theory doesn’t even have categories in which to entertain hypotheses about "alienation," "powerlessness," "self-management," "dignity," "health and safety," etc. The bottom line of the theory is like the bottom line in the workplace. It incorporates attention to units produced and consumed, amounts paid and earned, and especially profits. But there are no entries for limbs broken, lungs diseased, spirits crushed, skills atrophied, or dignity lost.

AND SO we reach the time for assessment. In a work on the crisis of economics Daniel Bell, no critic of capitalism, is unstinting in his criticism of general equilibrium theory. Remarkably, his feelings, quoted immediately below, are also those of many of the economists he is implicitly questioning. General equilibrium theory "is a work of art, so compelling that one thinks of the celebrated picture of Apelles who painted a cluster of grapes so realistic that the birds would come and pick at them. But is the model "real"? Obviously there is disequilibrium in the labor market…If the model as elaborated by Arrow et. al. has validity, it is only as a "fiction"–logical, elegant, self-contained, but a fiction nonetheless."

This cannot be representative. Scientists do not describe their own work as a "fiction." Like the critical views of Schumacher and Galbraith quoted at the outset, this must be dismissable. Working economists can’t except this sort of assertion, lest how could they continue writing their texts for young students and giving policy advice to government officials? But then what do the general equilibrium theorists themselves think of their own intellectual edifice? What is their self-evaluation?

Consider the following statement from the eminent economist, Lord Kaldor: "The powerful attraction of habits of thought engendered by `equilibrium economics’ has become a major obstacle to the development of economics as a science…the process of removing the scaffolding, as the saying goes–in other words of relaxing the unreal basic assumptions–has not yet started. Indeed, the scaffolding gets thicker and more impenetrable with every successive reformulation of the theory, with growing uncertainty as to whether there is a solid foundation underneath."

Or, if that is insufficient, the eminent economist Paul Davidson argues: "There are certain imaginary intellectual problems for which general equilibrium models are well designed to provide precise answers (if anything really could). But this is much the same as saying that if one insists on analyzing a problem which has no real world equivalent or solution, it may be appropriate to use a model which has no real-world application. By the same token, if a model is designed specifically to deal with real-world situations it may not be able to handle purely imaginary problems…. Models derived to provide answers of the angel-pinhead variety, or imaginary problems involving specifying in advance the optimal allocation path over time, will be unsuitable for resolving practical, real-world economic problem."

This is easily as damning as Galbraith but perhaps Davidson just has a bone to pick with the deans of the school of thought. Maybe his comments are somehow subjective and therefore unreasonable. What does "Dean" Hahn himself say? "It cannot be denied that there is something scandalous in the spectacle of so many people refining the analyses of the economic states which they give no reason to suppose will ever, or have ever come about. It is probably also dangerous."

In his study on economic methodology, to take the case a step further, another respected economist, "Dean" Hutchinson, says: "One cannot easily justify the extensive cultivation of abstractions which have no discernible applicability or relevance in the world as it is, on the grounds that one day, somewhere or other, some kind of applicability or relevance might conceivably turn up."

In short, neoclassical equilibrium theory is a "fiction," "impenetrable" for its "forest of assumptions" and unable to become less abstract, perhaps without "solid foundation," suitable only for "imaginary problems" of the "angel-pinhead variety," "scandalous," "dangerous," and "likely unjustifiable." Yet this same theory is the core of what students of economics labor to learn and the centerpiece of the reigning social "science" which supports such "common sense wisdom" as the notion that competitive capitalist market systems are optimally efficient.

As a last commentary, consider the words of the famed economist "Dean" J.R. Hicks: "With every step that we have taken to define this equilibrium model more strictly, the closer has become its resemblance to the old static (or even stationary) equilibrium model; its bearing upon reality must have come to seem even more remote. It has been fertile in the generation of classroom exercises; but so far as we can see, they are exercises, not real problems. They are not even hypothetical real problems, of the type `what would happen if’ where the `if’ is something that could conceivably happen. They are shadows of real problems, dressed up in such a way that by pure logic we can find solutions for them."

Beyond answering interesting questions about an unreal system’s equilibrium properties, what do general equilibrium economists expect their theoretical edifice to provide that will actually help explain the real relations that hold in capitalist economies? Consider "Dean" Kenneth Arrow’s answer: "The point of the argument is this: the fundamental element of neoclassical theory, that agents will, if it is open to them, take actions they consider advantageous, cannot be ignored by any grand theory of power and conflict. Indeed, if such theories ever mature, this feature of the situation may also be central for them. There may of course be more sociologically based definitions of `advantageous’ and a much broader class of actions than the neoclassical ones may have to be considered. But it is very hard to see how anything can be achieved without at some stage coming to grips with the agent and his interests. It is therefore not at all clear that from the vantage point of such an achieved theory, General Equilibrium analyses will not be seen as a stepping stone rather than a cul-de-sac."

A century of thought, countless volumes, infinitely rigorous mathematical analysis, how many hours out of how many student’s lives reading "Dean" Paul Samuelson et. al.–and the ultimate contribution to wisdom of the whole miasma is the assertion that economic agents tend to do what they find "advantageous." This is what the "deans" of economic theory offer? This immense and "satisfying" intellectual edifice has no capacity to predict and no facility for assisting the practitioner in creating "viable, useful economic policy." The economist-king is wearing no clothes and even knows it but prances forth without modesty anyhow? This yields an interesting query: why do economists continue to pour so much energy into the refinement and teaching of this elaborate "fiction." And why do students put up with it?

Another renowned economist, "Dean" A.K. Sen, has this to say: "The primary concern (of general equilibrium theorists) is not with the relation of postulated models to the real economic world, but with the accuracy of answers to well-defined questions posed with preselected assumptions which severely constrain the nature of the models that can be admitted into the analysis."

But if the questions don’t gain credence from having explanatory or policy implications, what does give them their mesmerizing qualities? And if the "preselected" assumptions constrain the ability of the theorists to answer truly interesting and relevant questions, why make those particular assumptions? In addressing the same conundrum, "Dean" Ragnar Frisch offers a possible answer that may explain some of this behavior: "What is the relevance of intrinsic paths and the turnpike type of theorem of the type I have mentioned {in prior paragraphs}. To be quite frank I feel that the relevance of this type of theorem for active and realistic work on economic development, in industrialized or non-industrialized countries, is practically nil. The reason for this is that the consequences that are drawn in this type of theorem depend so essentially on the nature of the assumptions made. And these assumptions are frequently made for the convenience of mathematical manipulation rather than for reasons of similarity to concrete reality."

Is this palatable? A vast edifice that claims to be a science but really has little if anything to say to serious people concerned with how our economy works continues to exist because practitioners are eager for mathematical elegance before all else? Perhaps Frisch is correct that this is a motivating factor in the daily efforts of many economists, but if so it would seem to be the last in a long line of factors relevant to the maintenance of the whole theoretical structure–more a rationale than a real cause. For surely economists could exercise their mathematical faculties in context of real analysis or, alternatively, if that is too difficult, those with especially active mathematical inclinations could simply become pure mathematicians and dispense with excessive pretensions about being scientists of real economies.

And surely, if one examines the history of general equilibrium theory, then the transition from what was without doubt a desire to understand and explain real economic relations (Ricardo, Smith, Mill, Marx, and even Walras, the father of general equilibrium theory) to the tendency to show-off mathematical prowess must be explained by something deeper than merely a mathematical "peacock disposition."

Another proximate cause of the continuing distortion of great intelligence to the pursuit of narrow ends is suggested by "Dean" Edgeworth who describes what would happen if economists took seriously the existence of monopoly in their theoretical work: "Among those who would suffer by the new regime, there would be one class…namely the abstract economists, who would be deprived of their occupation: the investigation of conditions which determine value. There would survive only the empirical school, flourishing in a chaos congenial to their mentality."

Perhaps this explains why many established economists cleave to their craft as it is and seek to pass it on uncriticized. They are protecting their own jobs from being replaced by new ones that they would not be so able to carry out. But it fails to explain either the initiation of this trend or, more important, why newly trained economists don’t make a break and do more productive work.

Here are some new economists starting out on their careers. They can read the assessments of general equilibrium of the deans of the discipline, just as we have. Why don’t these students seek to provide policy makers, businessmen, union leaders, and other people in society who would presumably welcome it a theory that better explains what is going on and better provides insights relevant to policy? In every other science young practitioners start out lusting to overthrow existing notions, not to ratify them. Indeed, that is the perhaps the defining insignia of a scientist, though not of economists.

It can’t be that newly trained economists uncritically accept orthodoxy because they don’t wish to upstage their elders or to threaten their comfort in teaching the same old courses year in and year out. The upstarts do not yet have personal advantages to defend. Wouldn’t they get hired to better positions if they made new discoveries? Wouldn’t they gain prestige by uncovering errors of their teachers? Wouldn’t they be published and not perish if they had original thoughts rather than regurgitations of old thoughts? Apparently the answer to each question is no, but how could this be?

Consider this passage from the work of Stanislaw Andreski quoted in "Dean" Hutcheson’s classic volume on methodology: "The sophisticated mathematical models, which one finds in books on economics, might mislead an unwary reader into believing that he is facing something equivalent to the theories of physics… It is important to bear in mind that even in the branch (of social science) which has opportunities for measurement unrivaled in the other social sciences, an infatuation with numbers and formulae can lead to empirical irrelevance and fraudulent postures of expertise. The most pernicious manifestations of the last-named tendency (abetted by the natural proclivity of every occupation to extol its wares) have been the claims of numerous economists to act as arbiters on matters of planning, on the assumptions (whose efficacy depends on its being tacitly made rather than explicitly recognized) that the factors which can be measured must serve as the basis for decision…. The assumption in question has often led economists to aid and abet the depredations of a soul-destroying and world-polluting commercialism, by silencing the defenders of aesthetic and humane values with the trumpets of one-sided statistics."

Here is the crux of the matter. Whatever the inclinations of particular economists, in fact the mathmatization of neoclassical micro-theory is mystification with a purpose. First, it legitimates the occupation of economics by clothing its prescriptions in language that looks like the language of physics. Physics is valid and the lay person must take its results as they are presented; so too for the new economics. Second, and much more important, this elaborate mathematical structure serves the aims of "soul-destroying," "world-polluting" commercialism by deprecating the importance of "aesthetic and humane factors" in economic calculations. General equilibrium theory shows the viability of an unreal system and this is translated into assertions about the world that we live in until most people just accept that "our economy is efficient and stable, the best one possible." Theories can pursue truth or serve vested interests. In the later capacity they will incorporate only concepts suited to attaining the results desired. An economic theory, for example, may highlight profits, quantities of output, amount of investment, and prices, and leave out class struggle, alienation, direction of investment, and bargaining power. Then the theory will serve capitalists, and, since capitalists pay economists’ wages and endow their universities, economists and their students who comply, will benefit as well.

So whatever the motives of a particular economist might be, the sleight of hand called micro economics is not art or science, but propaganda. The explanation for the longevity of the confidence game is rendered obvious: the commercial magnates who decide what is and what is not to be valued in society, who is and who is not to be respected and well paid, legislate by countless means that general equilibrium theory is jolly good while maverick critics are fringe lunatics. And students can read this handwriting on their classroom doors even more clearly than they can read Samuelson’s text. They know that they will never gain credentials and wealth worth protecting if they don’t play the game as it is meant to be played, firstly propping up capitalism and capitalists and only then and cons within that foremost aim incidentally trying to find some non-threatening new "truths" or old rehashes on which they can build a career.

Consider what Benjamin Ward has to say on the matter: "Neoclassical economics] is especially well adapted to serving the needs of bureaucrats…It gives the bureaucracy a tremendous advantage in dealing with outsiders…simply because of its highly technical nature, and the large costs that must be incurred to generate a `scientific’ result….If this were the only way to get at the truth…then we would all be in the freedom-is-the-appreciation-of-necessity box together. But…in fact, much of the technical side of economics is pure mystification, self-serving to the affluent and powerful economics professors. Relatively simple techniques, which can be understood by very broad sectors of the population, suffice to support nearly all our current genuine knowledge about how economies work.

"A second problem with neoclassical economics is that its technical structure fundamentally reflects its philosophical origins. It is the science of society of the rising bourgeoisie. As such it assumes right at its heart that individuals are what count and that the relations of production are thoroughly privatized…. For example, a fundamental assumption of the theory of consumer behavior is that one person, or family, or consumption unit’s satisfaction from a particular consumption package is independent of the satisfaction of other consumption units. Exit socialism right there!"

 

Macroeconomics

Macroeconomics is the study of aggregate variables addressing the state of the whole economy. The focus is on the price level, the employment level, economic output in real and monetary terms, the quantity of money in the economy, overall consumption, savings, and investment, the wage level, etc. The aim is to provide insights to guide the formation of economic policy. If unemployment is higher than we would like, what can we do about it? Should we pump more money into the economy? Should the government increase investment or alter tax laws? Or will the economy take care of the situation itself?

Thus where microeconomists use equilibrium to mean "market-clearing," macroeconomists use it to refer to a condition of stability, with no apriori assumptions that markets will necessarily all clear. Indeed, the whole point of the macro-theorists is to recognize the possibility that the economy might "function smoothly" and yet have a high rate of unemployment or inflation or underutilize some of its productive capacity.

Another difference between micro-and macro-theory has to do with how we conceive of models. In the micro case, as we saw, the theorist describes a world populated by agents and institutions–consumers, workers, capitalists, firms, and the market–each with certain properties which could be described verbally by such terms as "competitive," "profit-seeking," "utility maximizing," etc. Then, on top of this descriptive model, the micro-theorists make constraining assumptions about behaviors and their possible outcomes to allow the desired degree of mathematical precision (and to ensure the results their employers want them to ratify).

But in the macro case something different occurs. The links between the theory and any description of agents or institutions are more tenuous and contrived, even though they refer to a far more real world. In a deep sense, the macro-theory’s model is itself intrinsically mathematical. The economic description is a kind of afterthought rationalization. This is a considerable irony considering that unlike their micro-theorist counterparts the macro-theorists are seriously concerned to explain reality.

For example, in Bent Hanson’s popular text on general equilibrium systems, there is a chapter called "The Keynesian System." After some scene setting, the time arises to present the model. Hanson chooses "Dean" Klein’s version and writes, "With a few unimportant changes, Klein’s Keynesian model is" and there follows a list of eight equations relating the aggregate variables mentioned above. For example, one equation relates the supply in real terms to the rate of interest and real national income; another equation relates labor supply to real wages; a third relates investment to rate of interest and income; and so on. The eight equations constitute a system which is the model to be discussed. It can be changed by increasing the number of equations and variables or by altering any one or more of the component equations. Moreover, there are lots of parameters that depend on the particular attributes of the capitalist economy under study and which can only be set by researching its features.

The study of the model depends on the fact that the same variables always appear in more than one equation. The equations are thereby interconnected in such a way that finding a unique value of all the variables to satisfy all the equations simultaneously is at least theoretically possible though it would require setting all the parameters accurately. However, even short of finding solution values for wage level, national product, investment, etc., economists can ask useful questions about their characteristics. In comparative statics, for example, we can ask what will be the direction of change in investment when things settle down after the money supply in the model is increased by a government injection of more dollars? Being able to answer this kind of question allows policy issues to be raised and assessed, even in abstract models where details of parameters may be unknown or fluctuate.

Each of the equations of a macro-system is backed by an economic description of why one should believe it. Yet, few of these descriptions amount to rigorous statements about how all component institutions of the economy function and how their interrelated activity sums to an aggregate relation embodied in the equation. Instead, for the most part supporting arguments just translate the mathematical expression into a verbal story about the same variables, still at the macro level. For example, a supporting argument about the GNP response to new taxes won’t demonstrate on the micro level how each unit and all consumers and other actors in the economy react to the taxes in terms of their individual preferences and circumstances and how the results sum into a rise or fall in average overall prices or consumption and investment and how that in turn influences GNP, but will instead simply say something like "a rise in taxes engenders a rise in prices which in turn causes a drop in demand which then… and then …, etc." Some stories are more compelling than others and serious debates are always in progress over the exact form the different equations in the macro-system should assume. But none of the stories have a detailed micro underpinning (we already saw that micro theory can’t underpin anything requiring realism) and the gap between the mathematical model and any really descriptive economic model grows even larger as economists try to specify the functions and their parameters more precisely.

The essential characteristic of the Keynesian system, in almost all its variants, is the prediction that by the government properly engaging in fiscally adjusting of the economy it will be able to hold unemployment and inflation to acceptable levels. In opposition, supply-siders, who have recently gained political prominence in the U.S. and use a different macro model, claim that the government must not intervene in market operations at all–except to build a huge military and otherwise redistribute tax moneys toward the already wealthy–instead leaving markets ever freer to attain their own desirable ends. Regrettably, from the perspective of policymakers and even more so from the point of view of the unemployed, our current economic problems seem intractable before the bromides of both Keynesians and supply-siders. Interestingly, from the point of view of science, no choice between the theories seems conclusive to the practitioners. Thus the crisis of macroeconomics is upon us.

In fact, at best the whole of macro-theory is a kind of "art" in which analysts use hunches, intuitions, or prejudices, plus their own experience of real world trends, to hypothesize certain mathematical relations between macro-variables in the hope that their model systems will then function like the world they seek to explain. At worst macro theory is an ad hoc construction designed to intellectually legitimate policy prescriptions proposed in the first place for interest-based reasons having nothing to do with theory.

It is either honestly fitting data to a curve so as to predict future data by extrapolating from the existent curve into new regions, or dishonestly deciding where you want the future curve to go and then working backwards to proclaimed current data and trends which would support the prediction if they were true. However, even in the honest approach, the extreme fuzziness of available economic data precludes fitting a curve, so all that is left is to tell the "stories" we mentioned above.

But even if the data-picture were clearer, as Karl Popper says, "it is important to point out that laws and trends are radically different things." Laws let us know that certain processes can be expected to occur under certain conditions, inexorably. Trends tell us only that a certain trajectory of developments has been visible and that if it continues as it has gone in the past, it will lead in such and such a direction. Without clear specification of why the trend exists and therefore what its roots in economic behavior and institutional relations are, we do not know the conditions under which it will continue and those under which it will not. We do not know, for example, if our own meddling in economic events to influence them will somehow undermine the very conditions which gave us the trend in the first place.

The fact that macroeconomics has insufficient roots in micro theory is enough of a weakness to merit serious medicinal treatment. That its prescriptions do little to deal with modern periodic stagflationary problems heightens the urgency of the diagnosis. Another grave problem, related to the role of economics as a handmaiden of the interests of those who pay the bills, ie. the capitalists, is that while it is seriously interested in understanding some real economic phenomena, macroeconomics only focuses on a part of what is interesting about a capitalist society. It does not, for example, ask what the relative benefits accruing to workers and capitalists are of unionization or automation. It does not investigate the impact of racism and sexism on wage rates or investment. And macro-theory says nothing about the non-quantitative features of our economy including why investments accumulate in the military sector or why our resources don’t go to rebuilding cities and developing better school and health care systems, or why the ecology is crumbling. As with general equilibrium theory, the human implications of social institutions and particularly class structure are largely absent from macro economic theory.

Issues of pollution and the class basis of income distribution and policy formation don’t even get raised in traditional macro economic formulations. Yet, because the discourse is abstract and mathematical the field is clear for prejudices to mold thinkers into believers. As Patinkin says about the motivations of macro-theorists, "…I will begin to believe in economics as a science when out of Yale [where the theorists favor fiscal policy] there comes an empirical Ph.D. thesis demonstrating the supremacy of monetary policy in some historical episode–and out of Chicago [where the theorists favor monetary policy] one demonstrating the supremacy of fiscal policy."

Patinkin might have added that an even more telling indicator would be if out of either school there comes an empirical Ph.D. demonstrating the overall irrelevance of mainstream micro-and macro-theory to the real concerns of daily life, not only unemployment and inflation, but the quality of work and consumption, income distribution, and the effects of market participation on personality and preferences and the orientation of investment decisions.

 

Radical Alternatives

The radical camp is primarily populated with Marxists and neoRicardians or Sraffians. Among the Marxists there are many subdivisions and some of the boundary lines are as fiercely contested as boundaries anyplace in the world of theory.

Orthodox Marxists subscribe to the continuing efficacy of Marx’s original words, of course in their own particular interpretations. They contend that "the labor theory of value" is the lynch pin of Marxist theory and the key to intelligent analysis of the "capitalist mode of production." They consult and quote Capital with an energy that tends to severely diminish when they examine their surroundings for economic patterns which might transcend anything discussed in Marx’s writings. Yet, despite these failings, the orthodox Marxists’ theory has many advantages, precisely because Marx was a genius so that even the mindless regurgitation of even mildly distorted versions of his thought retains considerable cogency.

Yet Marx’s studies were premised upon an analysis of competitive rather than monopoly capitalism and in those days the notion that economists should worry about the impact of sexual or racial relations on economic variables was hardly in the air. Moreover, Marx had no compelling theory of the state, only an incomplete analysis of capitalist class structure, and an insufficient regard for the importance of how markets and planning (as compared to private ownership which he did effectively analyze) influence the choices and class alignments of economic actors.

Neo-Marxists regard the labor theory of value either as useless mysticism or as a good heuristic teaching device that one shouldn’t get too caught up in. But in the absence of a good substitute, (for example, a fully developed theory of bargaining power based on institutional, social, and class relations), their calumnies against the labor theory of value fall on deaf orthodox ears. Undaunted, the neoMarxists drop the Marxist "falling rate of profit" and its theory of inevitable crisis but retain and even increase their emphasis on the importance of the labor versus labor power distinction which Marx first uncovered–that is, that when we work we do "labor" and that when we sell something to capitalists for a wage what we sell is "labor power" or our ability to do work, so that the capitalists then have the task of extracting "labor" from the "labor power" that they have bought. Finally, in another major gain, neoMarxists also try to account for the impact of race and sex divisions on quantitative and qualitative economic relations. For this camp, class remains a powerful conceptual lever for understanding capitalist societies, but not the sole lever.

The neoricardians or Sraffians, led by Joan Robinson and more recently Ian Steedman, also completely cast aside the labor theory of value but in its place they erect an edifice based on Sraffa’s theory of commodities producing other commodities. As with the orthodox Marxists, again there is no monopoly, at least in the most common formulations. There is, however, a version of this approach which claims only to be a first approximation, still to be extended toward a more complex real-world analysis. As far as it goes, it is hard to complain about all this. We might argue that it has built-in characteristics that will tend to prevent its practitioners from ever substantially reducing the level of abstraction to include qualitative dimensions of economic life, but of course such an assertion cannot become compelling until some time has passed to allow judgment.

In any case, what is in many respects most appealing about the members of the neoRicardian school, probably learned from Joan Robinson herself, is their absolute irreverence toward all enshrined theory. Robinson was a tireless critic of neoclassical economics, including micro and macro theory, and also of Marxist orthodoxy. Indeed, as a provocative way to close, consider this extract from Robinson’s "Open Letter to a Marxist": "Again, suppose we each want to recall some tricky point in Capital, for instance the schema at the end of Volume II. What do you do? You take down the volume and look it up. What do I do? I take the back of an old envelope and work it out. Now I am going to say something still worse. Suppose that, just as a matter of interest, I do look it up, and I find the answer on my old envelope is not the one that is actually in the book. What do I do? I check my working, and if I cannot find any error in it, I look for an error in the book. Now, I suppose I might as well stop writing, because you think I am stark raving mad. But if you can read on a moment longer, I will try to explain…"

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