Microeconomic Theory

A Heterodox Approach

Frederic S. Lee, Tae-Hee Jo

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351265263
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Microeconomic Theory: A Heterodox Approach develops a heterodox economic theory that explains the economy as the social provisioning process at the micro level. Heterodox microeconomics explores the economy with a focus on its constituent parts and their reproduction and recurrence, their integration qua interdependency by non-market and market arrangements and institutions, and how the system works as a whole.

This book deals with three theoretical concerns. Due to the significance of the price mechanism to mainstream economics, a theoretical concern of the book is the business enterprise, markets, demand, and pricing. Also, since heterodox economists see private investment, consumption and government expenditures as the principal directors and drivers of economic activity, a second theoretical concern is business decision-making processes regarding investment and production, government expenditure decisions, the financing of investment, the profit mark-up and the wage rate, and taxes. Finally, the third theoretical concern of the book is the delineation of a non-equilibrium disaggregated price-output model of the social provisioning process.

This book explores the integration of these various theories with a theoretical model of the economy and how this forms a theory that can be identified as heterodox microeconomics. It will be of interest to both postgraduates and researchers.

1 The making of heterodox microeconomics

Economics is the science of the social provisioning process

Economics as a discipline is a specialized, scientific, factual body of knowledge that endeavors to develop theoretical explanations of real economic activities that connect acting persons qua households with the flow of goods and services needed to sustain their existence and promote their well-being over time. Thus economic activities are enmeshed with others to form an interdependent, intertwined system of production and consumption. Similarly, acting persons are not isolated, but are enmeshed in various social relationships that cannot be stripped away. Together they imply that the economy is an emergent system of social-economic activities that generate an array of surplus goods and services (over what is used up in production) needed to sustain households and their social relationships, and thus society as a whole – in short, the economy is about social provisioning. Consequently, economics is about developing theoretical explanations of the process by which the economy provides social provisioning – that is, economics is defined as the science of the social provisioning process. For any factual field of inquiry or scientific research field to exist, it must have a research community whose members exist in a society that at least tolerates, if not supports, their research activities. Moreover, its object of study must be real (as opposed to fictitious or non-existent) and relate to the problems and issues that are the focus of the research community. Finally, the methods used by the researchers to study the objects and address the problems and issues need to be grounded in the real world. Economics as a research field has a research community, albeit one divided between mainstream and heterodox economists, that is located within a society that supports it more (for mainstream economics) or less (for heterodox economics). The two sub-fields of economics, mainstream and heterodox economics, have some overlapping objects of study and problems and issues to address, but much less overlapping of research approaches and methods used to study the objects and issues, which ultimately generate quite distinct theoretical and hence rival explanations of the social provisioning process. What makes mainstream and heterodox economics distinctly different is that the former, at a fundamental level, is not capable of developing coherent theoretical explanations of the social provisioning process that are grounded in the real world.¹

This claim merits further but brief discussion. First, the objects of study of mainstream economics, such as preferences-utility, marginal products, demand curves, rationality, relative scarcity, and homogeneous agents, are ill-defined, have no real world existence, and, where relevant, are non-quantifiable and non-measurable.² Consequently, the issues and problems for which the objects are relevant, such as competitive markets, efficiency, and constrained optimality, are either fictitious in that they are unrelated to the real world or, if the issues and problems are clearly located in the real world, such as prices and unemployment, the objects have no bearing on their existence. Secondly, the methods used by mainstream economists to develop theoretical explanations addressing the issues and problems, such as deductive methodology and ontological and methodological individualism, generally include fictitious objects and utilize concepts that have no grounding and hence no meaning in the real world. Together, they clearly suggest that it is not possible for mainstream economists to conjure up any theoretical explanations relevant to the provisioning process that takes place in the real world. In addition, the mainstream theory of the provisioning process that is the core area of study of mainstream economics (Hirshleifer 1985, 53) and is itself also quite problematical. The core propositions of the theory, such as scarcity, preferences and utility functions, technology and production functions, rationality, maximization/optimization, market clearing, equilibrium, ontological and methodological individualism, heterogeneous agents, and positivist and deductivist methodology, have all been subject to intensive heterodox critiques; and in many cases there are multiple, overlapping heterodox critiques of core propositions.³ But even if these critiques are ignored, it is well-known that it is not possible to generate internally coherent explanations or stories or parables of market activity (such as the pervasive urban legend of the market as a self-adjusting mechanism) at either the micro or macro level; even if particular stories (represented in terms of models) of market activities are accepted, such as general equilibrium, game theory, or IS-LM, they have been shown, on their own terms, to be theoretically incoherent and empirically unsupported. The combination of critiques and incoherence means that none of the mainstream theoretical concepts or, more generally, its theoretical language and narrative story can be transferred to heterodox economics (Rizvi 1994; Lawson 1997a; Keen 2001; Ackerman and Nadal 2004; Lee and Keen 2004; Petri 2004; White 2004; Palacio-Vera 2005).

The above arguments suggest that mainstream theory lacks truth and value and contributes nothing (not even terms such as equilibrium, demand curve, or short period) to explaining the social provisioning process in a capitalist economy. Hence, it is not surprising that mainstream theory has become increasingly separated from its subject matter and progressively engaged in articulating properties of worlds within the model that have no connection to the real world. Nor is it surprising that its method of evaluating its fictional theories is to compare the projected fictional outcomes of a fictional model to actual data as if this had any meaning. Finally, it is not surprising that mainstream economists are increasingly defining economics as a particular method of inquiry without factual content. Given the fictitious nature of mainstream theory, it arguably represents bogus, false, or pseudo-knowledge because “it refers to non-existents or because it represents existents in an utterly false manner” (Bunge 1983, 195). Thus, mainstream theory is not a rival scientific theory to heterodox theory because it is not ‘scientific,’ although it remains a non-scientific rival much like Creationism is a non-scientific rival of the theory of evolution.⁴ The fact that it is considered part of the research field of economics indicates the extent to which economics is a highly contested discipline where non-scientific aims and attitudes still play a significant role. Therefore, economics is perhaps a proto-science or semi-science with heterodox economics representing pockets of an almost mature science (Bunge 1983; 1985; 1998; Mahner 2007; Lee 2013a).

Heterodox economics

As stated above, economics is the science of the social provisioning process, and that scientific endeavor is best carried out by heterodox economists. Heterodox economics refers to a specific group of theories aimed at explaining it, to economic policy recommendations predicated on the theories, and to a community of economists engaged in this theoretical and applied scientific activity. Heterodox economic theory specifically focuses on human agency in a cultural context and social processes in historical time affecting and directing resources and their usage, consumption patterns, production and reproduction, and the meaning (or ideology) of economic activities engaged in social provisioning utilizing empirically grounded concepts and a critical realist-grounded theory methodology. However, for the occurrence of such scientific activity, there must exist a research community of heterodox economists and its existence must be, to some degree, supported by society at large.

Community of heterodox economists

The scientific research community of heterodox economists is grounded in a social system of work that produces scientific or economic knowledge that contributes to the understanding of the economy as the social provisioning process. Moreover, this system of work is largely embedded in educational systems and their employment markets. So, although economic research and employment can be found in a variety of non-educational institutions, such as governments, private or public research institutes, trade unions, and advocacy organizations, the reproduction and expansion of the community is primarily tied to the academy. This means that the social system of work for heterodox economists is (as for mainstream economists) located in university economics departments. In particular, the department is the local employment market, establishes the career structure, is the organizational locale for teaching students and training future heterodox economists, and is the site for the production of heterodox scientific knowledge that must be publishable in referred journals, books, and other reputable outlets.⁵ In addition to university departments, there are other organizations that support and compliment the social system of work and support and promote the development of heterodox economic theory, including journals, book publishers, professional associations, and informal groups. Their importance is that they help sustain through their material property, financial support, and organizational activities the various heterodox departments within the heterodox community. In turn, the departments, connected by various social networks, provide the positive critical rivalry necessary for intellectual creativity within the community.

The social network of heterodox economists consists of direct and indirect social relationships between heterodox economists. The relationships or social ties include correspondence; intellectual and social interactions at conferences, in seminars, or with students, such as teacher-student relationship; and belonging to the same mailing lists, subscribing to and publishing in the same journals, attending the same conferences and seminars, and supporting a common course of action. Thus, a social network produces a connected and integrated body of specialized individuals who develop a common set of arguments, are concerned with a common set of questions and topics, and develop common standards for judging the arguments, answers, and discourse. In other words, the network acts as a chain of intellectual discourses where intellectual interaction through face-to-face situations at seminars, in conferences, or over dinner brings together the intellectual community; focuses members’ attention on and builds up vested interest in their own theoretical, historical, applied, and empirical topics and problems; and ties together written texts and lectures that are the long-term life of the community and gives it distinctiveness. The concatenated discourse that emerges from the face-to-face interaction keeps up the consciousness of the community’s agenda and purpose by transcending all particular occasions of the interactions – that is, the discourse that emerges ensures that the community’s purpose and agenda continue to be advocated independently of any individual member of the community or any specific face-to-face interaction. The discourse also has another impact in that it is the communicative process that creates thinkers within the community (Lee 2009a).

Heterodox economic theory

The intellectual and theoretical roots of heterodox economics are located in heterodox traditions of Post Keynesian-Sraffian, Marxist-radical, Institutional-evolutionary, social, feminist, and ecological economics, all of which emphasize the social surplus; accumulation; justice; social relationships in terms of class, gender, and race; full employment; and economic and social reproduction.⁶ Hence, as a scientific research field, heterodox economics is concerned with explaining, proposing, and advocating changes in the historical provisioning process of producing the social surplus that provides the flow of goods and services required by society to meet the reoccurring needs and promote the well-being of those who participate in its activities. That is, heterodox economics is a historical science of the social provisioning process, and this is the general research agenda of heterodox economists. Drawing from all heterodox approaches, its explanation involves human agency qua acting persons embedded in a transmutable and, hence, inherently uncertain world with fallible knowledge and expectations and in a cultural context, as well as social processes in historical time affecting resources, consumption patterns, production and reproduction, and the meaning (or ideology) of market, state, and non-market/state activities engaged in social provisioning. This implies that agency can only take place in an interdependent social context which emphasizes the social and deemphasizes the isolated nature of individual decision-making; and that the organization of social provisioning is determined outside of markets, although the provisioning process itself in part takes place through capitalist markets. Thus, heterodox economic theory is a theoretical explanation of the historical process of social provisioning within the context of a capitalist economy; hence, it is also a historically contextualized explanation. It is, therefore, concerned with explaining those factors that are part of the process of social provisioning, including the structure and use of resources; the structure and change of social wants and corresponding consumption patterns; the structure of production and the reproduction of the business enterprise, household, state, and other relevant institutions and organizations; and the distribution of income among households. In addition, heterodox economists extend their theory to examining issues associated with the process of social provisioning, such as racism, gender, ideologies, and myths.

Because heterodox economics involves issues of ethical values, social philosophy, and the historical aspects of human existence, heterodox economists feel that it is also their duty to make heterodox economic policy recommendations to improve human dignity – that is, recommending ameliorative and/or radical social and economic policies to improve the social provisioning for all members of society and especially the disadvantaged members. Moreover, they adopt the view that their economic policy recommendations must be based on an accurate historical and theoretical picture of how the economy actually works – a picture that includes class and hierarchical domination, inequalities, social-economic discontent, and conflict. The distinction between theory and policy is not the same as the positive-normative distinction found in mainstream economics. Heterodox theory is an explanation of how the social provisioning process actually operates, not how it is supposed to operate under ‘ideal conditions’ while heterodox policy aims at altering the actual process to achieve a particular historically contingent outcome. Thus, the ethos embedded in heterodox economic theory is that the social provisioning process is to be accurately explained so that it can be changed – an accurate explanation is not the same thing as a value neutral explanation, which implies that derivative economic policy is not value or ethically neutral (Polanyi 1968; Foster 1981; Gruchy 1987; Stevenson 1987; Dugger 1996; Bortis 1997; Hodgson 2001; Power 2004).

Theoretical core

Since the economy is an emergent system with various sub-systems, the heterodox theory of the social provisioning process is also an emergent theoretical system with various theoretical sub-systems. This implies that it cannot be divided into disjointed sub-systems of microeconomics and macroeconomics, which in turn are based on quite different theoretical arguments. In particular, the core theoretical elements generate a three-component structure-organization-agency heterodox economic theory that culminates in an economic model of the economy as a whole and hence, the social provisioning process.⁷ The first component of the theory consists of the productive and monetary schemata of the social provisioning process, and together they are the schema of the structure of a real capitalist economy. The former represents the circuit of production as an inherent circular process in that the production of goods and services requires goods and services to be used as inputs. Hence, with regard to production, the overall economy (which includes both market and non-market production) is represented as an input-output schema of resources, material goods, and services combined with different types of labor skills to produce an array of resources, goods, and services as outputs. Many of the outputs replace the resources, goods, and services used up in production, and the rest constitute a surplus to be used for social provisioning – that is, for consumption, private investment, government usage, and exports. The latter is a schema of the structural relationships between the wages of workers, profits of enterprises, and taxes of government and expenditures on consumption, investment, and government goods as well as non-market social provisioning activities which are facilitated by a flow of funds or state money accompanying the production and exchange of the goods and services. Together the two schemas produce a monetary input-output model of the social provisioning process where transactions in each market are state-money transactions; where a change in the price of a good or in the method by which a good is produced in any one market will have an indirect or direct impact on many different markets throughout the economy; and where the amount of private investment, government expenditure on real goods and services, and the excess of exports over imports determines the amount of market and non-market economic activities, the level of market employment and non-market laboring activities, and consumer expenditures on market and non-market goods and services.

The second component of heterodox theory consists of three categories of acting organizations and institutions that are embedded in the monetary input-output structural model of the economy. The first category is particular to a set of markets and products and consists of the business enterprise, private and public market organizations (such as trade associations and government marketing boards) that manage competition in resource, good, and service markets; and the organizations (such as trade unions) and institutions (such as minimum wage laws) that regulate the wages of workers. The second category are organizations that are spread across markets and products or not particular to any market or product and includes the state and various subsidiary organizations as well as particular financial organizations – that is, those organizations (such as Congress and the central bank) which make decisions about government expenditures and taxation, and determine the interest rate. Finally, the third category consists of non-market organizations and institutions that promote social reproduction and includes households and the state.⁸ The significance of organizations is that they are where agency qua the acting person, the third component of heterodox theory, is located. That is, agency, which consists of decisions made by acti...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Preface
• Notations and abbreviations
• 1 The making of heterodox microeconomics
• 2 Structure, agency, and modeling the economy
• 3 The business enterprise: structures
• 4 The business enterprise: agency and causal mechanisms
• 5 Markets and demand for the social product
• 6 Competition, the market price, and market governance
• 7 Microeconomics and the social provisioning process
• 8 The role of microeconomics in heterodox economics: a view of a heterodox micro theorist
• Appendix 1 Heterodox microeconomics course syllabus
• Appendix 2 Narrative-qualitative-analytical problem sets
• Bibliography
• Index