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.
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.
(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.
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 turbule
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