neoclassical micro and macro: science or silliness?
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.”
(...) 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.
(...) 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.
(...) 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.
(...) General equilibrium theory has no room for [involuntary] 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.
(...) 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.
(...) 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.”
(...) 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.”
(...) 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.
(...) 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?
(...) 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.”
(...) 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.
(...) “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!”
(...) 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.
(...) 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.
(...) 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.