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Product Details
| ISBN-13: | 9780745336077 |
|---|---|
| Publisher: | Pluto Press |
| Publication date: | 05/15/2016 |
| Series: | Iippe |
| Edition description: | Critical |
| Pages: | 224 |
| Product dimensions: | 5.90(w) x 8.90(h) x 0.60(d) |
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CHAPTER 1
Locating Microeconomics
Overview
The purpose of this chapter is to provide a specification of the nature of mainstream microeconomics in a number of ways, not least by locating it within the history of economic thought (Section 1.2). In part, understanding the nature of microeconomics is aided by understanding its origins and history.
First, not necessarily following it in chronological order, is to trace how microeconomics got to be the way that it is, presenting its journey from the marginalist revolution of the 1870s to the formalist revolution of the 1950s (Sections 1.3 and 1.5).
Second is to describe each of these revolutions. The marginalist revolution brought into play many of the concepts that are now taken for granted within the mainstream. It also involved the break with classical political economy with which it is contrasted across a number of key elements (Section 1.3). The formalist revolution took off from the marginalist revolution, elevating the role of mathematics within economics (Section 1.6). Together these two revolutions underpinned the creation of what will be termed both a technical apparatus, of production and utility functions, and a technical architecture, of general equilibrium, both of which are more fully explained and explored in subsequent chapters.
Third is to pinpoint how, following the formalist revolution, the technical apparatus and architecture have been decisive in expanding the influence of microeconomics over both economics as a whole (even incorporating macroeconomics) and across other social sciences and topics in a process that is termed here the (historical logic of) economics imperialism (Section 1.7). In short, from very narrow foundations with limited scope of application – individual optimisation for given utility and production functions in order to specify market supply and demand – microeconomics has become almost unlimited in scope.
Fourth is to highlight in more detail the so-called reductionism characteristic of mainstream economics. This ranges from its narrow and flawed methodological content, which is increasingly unwitting and uncritically taken for granted, through its highly unrealistic conceptualisations and assumptions from the perspective of other social sciences, and even to the technical assumptions within its own framework that are essential for the technical apparatus and architecture to prevail, (Section 1.4).
Fifth, the result is that microeconomics today has a schizophrenic relationship to its origins in the marginalist revolution of the 1870s. On the one hand, it remains securely founded on the core principle of individual optimisation and the core concepts of utility and production functions, efficiency and equilibrium. It is equally centred on supply and demand and the determination of market prices and quantities. On the other hand, it has become prodigiously promiscuous and even incoherent in its incorporation of whatever other factors and subject matter take its fancy, especially where these are amenable to mathematical modelling and econometric investigation. This reveals the intellectual and analytical weaknesses of the mainstream – its inability to explain its primary subject matter, the economy, on the basis of its core principles and concepts so that it has to introduce extraneous material to rescue itself. On the other hand, this is also to reveal the disciplinary strength and stranglehold of the mainstream. So secure are its principles that it is able to project them wherever it pleases with whatever it pleases. In an Appendix to this chapter, some discussion is offered on how economists might defend what they do although, in practice, this is often arbitrary and far from deeply considered.
1.1 Microeconomics as History of Economic Thought
Textbooks in microeconomics generally begin with the optimising behaviour of individuals. Consumers, sometimes understood to represent households despite their composition of varieties of individuals and possibly conflicting interests, are presumed to maximise their utility, or preference level, subject to prevailing prices. This gives rise to demand for consumer goods and supply of labour (subject to any other assets that may be held). Firms maximise profits contingent on the technologies available to them and prices at which they can buy inputs and sell outputs.
Such consumer and producer behaviour is dealt with in Chapters 2 and 3, respectively. There, as will be seen in more detail, whilst economics and economists have become unquestioningly habituated to such framing of microeconomics, at least as a starting point, doing so involves a series of serious oversights that it is the purpose of this chapter to highlight.
First is to recognise that microeconomics as such is of a relatively recent vintage. Indeed, it is nominally less than a hundred years old, with the major division of the discipline of economics into the two fields of microeconomics and macroeconomics only explicitly emerging in the 1930s as macro, especially in the form of Keynesianism, sought to deal with the mass unemployment attached to the Great Depression. This is, of course, to enter the domain of the history of economic thought, something that modern microeconomics (and economics more generally) has studiously overlooked. Nor is delving into the history of our discipline simply to provide a narrative of what came before and when, possibly with the presumption that the theory just got better and better, building on what has gone before, especially with the increasing adoption of mathematical techniques. As will become apparent, the results of situating microeconomics historically are much more extensive, rewarding and challenging. We gain the prospect of learning why the theory emerges as it does, when it does, with what scope of application and with what content. And we can also draw lessons concerning the nature of microeconomics as it is today.
Such issues might be understood in terms of a sociology of knowledge; why does microeconomics emerge and evolve as it does? There are at least two broad approaches to such questions. The first or 'absolute' approach places emphasis on the internal development of the discipline itself as it raises and solves problems of its own making. The second or 'relative' approach suggests that external influences play a role in theory development, although these may be due to circumstances (was Keynesianism a response to mass unemployment?) or to vested interests, ideological or otherwise (was monetarism a response to, and/or support for, neoliberalism and/or financial interests?).
A choice does not need to be made between the absolute and relative approaches if accepting that external and internal influences mutually interact and condition one another. It is usually, however, much easier to trace the logical development of a discipline than to explain how external influences encouraged, or allowed, such development to be generated and accepted. This would require a detailed examination of what was going on in the economy, politics and ideology, as well as the institutions of higher learning.
1.3 From Marginalist Revolution ...
Such a task is beyond our account of microeconomics other than to emphasise that its history and content are not reducible to the strengthening of an irrefutable body of theory that was simply waiting to be discovered and refined for the modern textbook. Ways of seeing the microeconomy are as much open to dispute as they are to discovery – or amnesia! And, not only in name is microeconomics a new arrival on the scene, deriving from the 1930s. For the principles underpinning microeconomics were established only 50 years or so earlier during what is known as the marginalist revolution of the 1870s. The moniker 'marginalist' derives from the idea that optimisation (for example of consumer or producer decisions) will have been achieved when a small, or 'marginal, change in some decision (for example, how much to produce or consume), leaves the optimiser no better off, everything else remaining the same (or ceteris paribus). The margin as such is usually captured by differentiating giving rise in particular to marginal cost, product or utility.
It is also worth rehearsing what was involved in this marginalist 'revolution, partly because many students never even get to learn about it so neglected is the teaching of the history of their discipline, and partly because it did establish the broad principles that govern the economics of today as opposed to how economics was conceived previously. A revolution involves a before, an after and a transition between the two. Prior to the marginalist revolution, economics as we understand it now was dominated by what is termed classical political economy, around which figures such as Adam Smith, David Ricardo, John Stuart Mill and Karl Marx loom large (although there are many differences amongst even these few representatives). Following the revolution, there was established mainstream, orthodox, neoclassical economics (I will use the terms interchangeably although mainstream most of the time), very much as we know it today. The transition between the two did not take place in a day, a year or a decade, but was extended across different issues over a number of decades before and after the 1870s (and it might be argued that the revolution began in the early nineteenth century and was only complete in the 1950s, see below).
This leads some to argue that there is no such thing as the marginalist revolution as such. But a simple comparison of before and after suggests otherwise across a number of elements. First, whilst the basic unit of analysis of microeconomics is the optimising individual, classical political economy focuses upon class relations, especially across capital, labour and land.
Second, microeconomics has a preoccupation with equilibrium. This is so even when it is dealing with (what is termed steady-state balance) growth of the economic system as a whole. By contrast, classical political economy is concerned with the processes of growth and change (not least because it is seeking to come to terms with what is the relatively new era of industrialisation with major economic and social impacts). Whilst microeconomics is concerned with static considerations, or at most stability, classical political economy addresses the historical and dynamic properties of the economic system.
Third, microeconomics is concerned with issues around the efficient use of given resources in the context of given production conditions. In this respect, it is ahistorical, tending to overlook the different economic and social relations under which such efficiency may or may not be generated (although presuming that market-type behaviour is universal wherever it can flourish). Classical political economy, on the other hand, is sensitive to different historically organised economic systems – after all, efficiency under feudalism or slavery is different than under capitalism.
Fourth, as today's students know only too well, microeconomics is based upon a deductive method: one makes some assumptions (optimising individuals) and draws out conclusions on this basis. Classical political economy is more inductive, seeking to base its theory on close empirical observation of society (such as its class nature).
Fifth, microeconomics bases its understanding of value (and price) on a subjective theory of value. Ultimately, what things are worth is what individuals are willing to pay for them at the margin of consumption (although this is a subjectivity of the individual that is very different from postmodernism, in which subjectivity is invented, bound up with forging of identity, etc., as opposed to being given by a utility function). Classical political economy is more committed to an objective theory of value, one based on cost of production independent of demand, especially drawing upon the labour theory of value in which labour time to produce something underpins its value.
Last, microeconomics is intradisciplinary to the extreme, with its principles far removed from the concerns of other social science disciplines (with their preoccupation, for example, not only with class but also power, conflict and ideology). Classical political economy is very different, not least as signified by its name, embedding its understanding of the economy into broader economic and social factors beyond the market, and not confining itself to what has become the traditional subject matter of economics.
1.4 ... Through Methodology ...
As is at least implicit in what has gone before, microeconomics adopts a stance on certain methodological issues. It chooses methodological individualism (of a special type, utility maximisation as opposed to broader behavioural or motivational determinants – as in psychology for example) over methodological holism (the study of the system as a whole prior to the study of its individual components); deduction (and especially mathematical technique) over induction; an intradisciplinary over an interdisciplinary approach; and an ahistorical or universal methodology (applicable at all times, places and circumstances without regard to history and context) over theory attuned to the specific nature of the object under study (such as capitalism as opposed to slavery). In addition, previously explicitly if less so more recently, microeconomics presumes a separation between positive and normative theory, between what is and what ought to be, presuming that its principles are ethically neutral, or value-free, whether right or wrong.
This separation is acknowledged by some philosophers to be unobtainable, not least because how we express things inevitably incorporates some ethical content – compare the notion of production as a relationship between inputs and outputs with its being understood as a class relationship of exploitation. By the same token, the presumption that evidence can be given independently from theory as the basis on which to test theories is also false – we need at least a conceptual framework to determine how we construct evidence: what does or does not count as a component part of GDP or the unemployed for example.
Each of these issues around methodology is extremely controversial. Whilst it is possible to discuss each issue separately, it is not at all clear that they can be settled in isolation from one another, nor that everyone will agree on the nature of the methodology. Any methodology is almost certainly liable to incorporate a complex mix across these separate elements but not necessarily be defined by that mix, even with added ingredients. But what stands out about microeconomics is the extent to which it adopts an extreme position on each and every element. The point here is not so much to demonstrate that this is unacceptable (both in principle and in practice) from the perspectives of the study of methodology and of other social sciences (and, indeed, of the physical sciences with which economics often seeks to compare itself) – the market system cannot come from individuals, and nor can the language with which we engage in it, let alone discuss it; the market system cannot be isolated from society; it cannot be discussed with value-free concepts; it cannot be based on deductive principles alone (where do concepts such as the optimising individual come from in the first place?); and it cannot be assessed on the basis of externally given data. Rather, to reiterate, the point is to observe the extremes to which microeconomics has been driven methodologically and, subsequently, to reveal how this relates to the substantive content of the theory involved.
For, with the marginalist revolution based on the optimising individual (with utility or production function as consumer or producer, respectively), two important goals were established for what was to become designated as microeconomics. The first was to focus upon the economy as market relations, with the otherwise corresponding neglect of the social, the historical and the institutional. Thus, microeconomics became concentrated on supply and demand. This involved one sort of 'reductionism', a narrowing of the understanding of what is the economic and what factors comprise and determine it. The second goal involved a second type of reductionism, not only to the individual, as already indicated, but also to that individual as 'rational' in the sense of being committed – pure and simple – to the pursuit of self-interest. Homo economicus, or economic rationality, became identified even more narrowly with utility maximisation as the sole factor in individual motivation and behaviour.
(Continues…)
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