Teaching heterodox microeconomics

19 May, 2019 at 17:15 | Posted in Economics | 18 Comments

freddyClearly, 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. 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. 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 therefrom​ 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.

Fred Lee

Fred was together with Nai Pew Ong, Bob Pollin and Axel Leijonhufvud one of those who made a visit to University of California such a great experience back at​ the beginning of the 1980s for yours truly. I especially remember our long and intense discussions on Sraffa and Neo-Ricardianism. It is now almost five years since Fred passed away. I truly miss this open-minded and good-hearted heterodox economist.

18 Comments

  1. Dear Lars,
    If it is true that many self-declared heterodox economists believe in neoclassical microeconomic theory, why they view themselves as heterodox economists?

  2. . . . 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.
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    I would say the only solid foundation is critical understanding. Full Stop.
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    The principle “shortcomings” of neoclassical economics are a series of points in the pedagogy where the student has to yield her critical faculty in order grasp some concept well enough to regurgitate it on the exam. It begins with the insistence on analysing exchange relationships as if they take place in a (metaphoric?) market, whether they in fact do, or not. Of course, a discipline cannot be “empirically grounded” if you must talk all day long about “markets” when actual markets are exceptional institutions in the organization of the economy.
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    Microeconomics is rife with nonsense at the most elementary, fundamental, foundational level. The production function: is output a function of inputs? A moment’s critical thought says, “no”. So the student getting a solid foundation has to stop thinking. Monopoly: is it rational for the profit-seeking firm to restrict output to raise its price? Again, critical thought says, “no” and the textbook probably insists otherwise.
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    Neoclassical economics goes on and on like that introducing more fantastical math, but never, never critical thought.
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    Neoclassical economics is a fantastic rhetorical machine: able to instantly churn out pseudo-analytic rubbish in response to any policy question. It is a lot to give up for what would be in many cases, a humble admission of ignorance and doubt. But, that’s critical thought for ya.

    • Bruce,

      How would you teach microeconomics in a beginning course?

      • I have never taught college economics, but I have taught in business schools. The students are interested in thinking thru the public policy questions to a limited extent — many are idealistic enough for that — but what they really want to do is think thru strategies for making money, running a large organization (from the top, natch), and so on. So, those are the questions we explore. It is pretty easy actually, because business schools use case studies more than textbooks, so a measure of “empirical grounding” is built into the expected pedagogy. Plus they read the Wall St Journal or the Financial Times (much better!) like fanatics.
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        It is still economics That is, I make them read a few more or less scholarly papers. Akerlof’s Lemons was always a mainstay for me. More obscure things if they relate to a case study they work thru. Coase comes in for his analysis of monopoly in durable goods. Lester Telser can be very readable (and he explains quite plainly why there are so few markets — hint, because the cost structure of typical firms in most industries are incompatible with “market equilibrium” in market-bid price) — movie tickets and airline tickets are good examples, even without the formality of a business case, though there are some good cases available.
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        What is profoundly different from textbook college microeconomics like Mankiw’s doorstop — and it affects everything — is that I make them analyze the economics of bureaucratic hierarchy under uncertainty (because what else is there but uncertainty?): what is the hierarchy doing? What is it that bosses do? I lead them thru a simple cybernetic model drawn from Ross Ashby’s 1956 book — it is at an elementary, analytic level that fits neatly into the frameworks of microeconomics. Ashby takes uncertainty as a given. I have no patience with wearing out anyone’s brain with an analysis of perfect competition under an assumption of complete information. If there are students with a good knowledge of statistical quality control or value-engineering, I ask them to give a talk or lead a discussion. It is necessarily a whirlwind tour, but with no stopover for most of the topics of the college textbooks, which are often tedious and silly (the Law of Demand? don’t make me laugh.) One thing I do not do is to talk about production functions without energy or control or without acknowledging the sunk-cost nature of “capital”.
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        I do take financial economics seriously, including the concept of (informationally) efficient markets, because some of the students are steeped in such topics and colleagues must be respected, but also because there is some genuinely sophisticated thinking at work in the various null results of financial economics.
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        The idea is to introduce them to thinking about incentives as the structured distribution of risk and reward in the face of uncertainty (Knight!) and then build from there to thinking about the firm and the industrial sector as arenas for strategic conflict in shaping institutions. I have tried to discuss the place of economic rents in stabilizing the firm and why and how the “business model” they are always seeking relates to that, not always successfully. Business school is leading students thru to a capstone course on business strategy, which is drawn primarily from the economics (and sociology and psychology) of industrial organization. If they are taking microeconomics, it is because they need it to get anything out of that capstone course. Not because they need indoctrination in a libertarian civic ideology, the vocabulary of which many already know by heart.

        • That’s interesting. It’s quite an agenda and it seems entirely appropriate to the course you were teaching.
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          Do you think someone wanting to take economics per se in a professional direction can do without a firm grounding in a study of the basic formal general equilibrium model?
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          Personally, I can’t see that it would be possible. The basic microeconomic model underlies many fields.
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          Of course, it is the beginning of learning not the end. The end goal should be learning how the real world actually works .
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          • When I hear someone affirming the necessity of conventional neoclassical economics with phrases like “firm grounding” or “solid foundation”, I am instantly suspicious. ymmv

            • Why?
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              Suspicious of what?

              • bad faith of a sort with the imperatives of critical reason
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                conventional neoclassical economics in some of its fundamental doctrines is faulty — i gave the example of the production function above — and swallowing those doctrines as the pedagogy insists is to swallow a poison pill.
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                so, no, i find it impossible to understand the use of a term like “a solid foundation” in this context

                • I have to say I welcome the way I was given a good grounding in orthodox micro as an undergraduate. Because of this I understand its weaknesses and what the limitations are. A body of theory cannot be critiqued unless it is properly understood.

  3. If orthodox economics is wrong, prices cannot be proven efficient. If demand curves don’t slope down and supply curves often don’t slope up, prices are arbitrary. If prices are arbitrary, why set output, measured in prices, as a societal goal? If you are heterodox, you should not accept output as a goal for public policy.

    • One can doubt that price is a sufficient statistic or an accurate one without doubting the usefulness of a good. Indeed the goal of public policy encompasses the provision of public goods or goods with cost but distributed without price. All of this is as perfectly “orthodox” as it may be heterodox. Where utility and cost are both primarily private, price may serve to reveal or communicate as a public sufficient statistic some otherwise obscure essence of that private information about utility or cost: the public interest is in the accuracy of price as such a sufficient statistic, which concern may be indistinguishable from a dispute over the distribution of income.

      • If you are truly heterodox, you should probably doubt the usefulness of goods ranked by arbitrary prices. If preference relations can be intransitive, prices don’t signal anything except fickle, arbitrary taste by a certain privileged few. Public policy should stop pretending prices signal value, because such a posture leads to the conclusion that inflation means value is increasing. Instead of grappling with the arbitrary, fickle reasons why supply is being throttled, orthodox economists proscribe fiscal and/or monetary tightening to fight inflation. Orthodox economists labor under the delusion that inflation is a signal that public policy must respond to by tightening money. But if preferences aren’t transitive, supply curves don’t slope upwards, etc., then inflation is only a signal of arbitrary, fickle psychology, not an indication of value change.

        • s/proscribe/prescribe

        • inflation can still be annoying and not just annoying to the capitalist powers-that-be, but to everyone
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          orthodoxy, by the way is not that price signals value, but that price is a proxy for opportunity cost (for both buyer and seller), which is true regardless of actual resource cost or value-in-use

          • Hedging obviates opportunity cost. You can both buy and sell a derivative. You can choose A and not-A. Finance is not orthodox!
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            Inflation was not so annoying when there were Cost of Living Adjustments. But Volcker chose to target money supply growth and pinned rates to money growth statistics. But if you look at money growth after inflation came down in the 1980s, it grew even faster. So Volcker was wrong; money supply growth has little if anything to do with inflation since it grew faster as inflation eased. Yet orthodoxy still believes money supply growth causes inflation …

            • That Friedman’s Quantity Theory was proven wrong in the course of Volcker’s chairmanship is widely appreciated in the profession. Bernanke recast Friedman’s diagnosis of the Fed’s role in the deflation that created the Great Depression for a credit system where quantity measures make no sense and acted in that framework in 2006-9. Bernanke’s policy of flooding the markets with prophylactic liquidity in anticipation of the effects of the collapsing housing bubble set off a global spike in commodity prices in 2007-8 so inflation of a decidedly Keynesian type showed up in a way Keynes would have understood perfectly — oversupply the speculative demand for money and speculation presses effective demand against global capacity limits driving up prices dramatically. Bernanke had to rein in that speculative bubble that he had fueled and the collapse of commodity prices created the two or three months of deflation which in turn triggered the banking crisis and debt-deflation he had tried to prevent, requiring the more dramatic intervention that followed, with its payments on massively inflated banking reserves and direct asset purchases and, of course, the bailout/backstop of AIG’s derivatives business.
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              Finance is a business where it pays to lie, but orthodox economists pretend that “efficient” markets mean fraud is not a factor, not something policy must repress severely. All the blather back and forth about fear of inflation is just part of a smokescreen. The financial sector with massive banks at its center is a dangerous and costly parasite, but many economists get paid big bucks to pretend otherwise: hence the current orthodoxy.

              • “[…] a way Keynes would have understood perfectly — oversupply the speculative demand for money and speculation presses effective demand against global capacity limits driving up prices dramatically.”
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                I think the private sector was doing the oversupply on its own. There were no global capacity limits. There was a lot of selling going on, just for selling’s sake. House flippers weren’t short of houses. There was no real component to the last recession.
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                Thus your analysis is awfully orthodox. I would say housing demand was a small part of what was happening; derivatives based on housing multiplied the value of mortgages. And the derivatives were insured, so that investors were guaranteed to profit even if mortgages defaulted. AIG made a mistake by insuring Mortgage-Backed Securities with other (hi-tranche) MBS. Traders panicked on default rumors, devaluing all MBS, even those that never experienced defaults. The Fed recognized that panic, not “global capacity limits”, was the real problem.
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                “orthodox economists pretend that “efficient” markets mean fraud is not a factor, not something policy must repress severely.”
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                Fraud certainly occurs, and trader collusion on prices. But repressing it is repressing trader freedom. Rather than try to repress fraud and collusive price-setting, economists should just recognize that prices are arbitrary. Economists should understand that there are a lot of us microfoundations who don’t want to play in such an arbitrary price system. The price of labor is arbitrary; someone who does eye-work often sells themselves for a higher price, even though I am doing the work more efficiently.
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                Employment and output should not be the goals of public policy. Knowledge advance and individual self-realization should be the goals. That’s real heterodoxy!

  4. In a nutshell – Neoclassical economics conflates land and capital as indistinguishable factors, thus all resulting math becomes muddled.


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