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Teaching Heterodox Microeconomics Frederic S. Lee (University of Missouri-Kansas
City, USA) ©
Copyright: Frederic S. Lee 2005 Microeconomics is an important, though not
a very popular, field of research in heterodox economics. This is due, in part, to the underlaboring role of micro-entities, such as the
business enterprises, costs, pricing, profit mark ups, wage rates, markets,
and investment, in most of the research conducted by heterodox economists in
macroeconomic theory, monetary theory, and economic policy. Given its theoretical importance, it is
surprising that the number monographs devoted largely to delineating a heterodox
microeconomic theory are so few.1
One reason for this is that some heterodox economists believe that it
is necessary for all economic students to learn neoclassical microeconomic
theory; and the learning of heterodox microeconomics is of second-order importance. The unintended consequence of this attitude
is that there is little interest among heterodox economists to delineate a
comprehensive microeconomic theory. A
second reason has to do with the role of microeconomic theory in heterodox
economics. In particular,
microeconomic theory is correctly viewed by most heterodox economists as
providing a non-reductionist foundation to
macroeconomic and monetary theory. And
it is these theoretic areas that contribute most to macroeconomic policy
issues in which they are interested.
Given this macro-policy concern, there is little interest among
heterodox economists to engage in the near thankless and largely obscure task
of foundation building. But there is more than just macroeconomic
policy issues that heterodox economists should be engaged with. Antitrust, public utility regulations,
workers rights, environment regulation, discrimination, environmental issues,
and economic penetration of the social-political spheres are all “micro”
issues and deserve as much if not more attention than macro policy issues
because they actually affect the lives of individuals in an intimate way that
the latter does not. However, many
heterodox economists have typically considered these policy areas as of
second-order importance. Consequently,
this division of labor has resulted in an
undeveloped microeconomic theory. To redress this state of affairs is the
intent of this article. It will be
done by first arguing that heterodox economists must promote the teaching of
microeconomic theory and followed by delineating the framework for the
teaching of it. The third section of
the paper will outline the subject matter of heterodox microeconomic
theory. Then there will be the
conclusion. To
Teach or not to Teach Heterodox Microeconomic Theory, That is the Question The immediate response by most economists,
including heterodox economists, to the suggestion that heterodox
microeconomics should be taught to all students is that the advocate is
against the teaching of neoclassical microeconomic theory altogether. This knee-jerk response is designed to
silence the advocate by implying that his/her real aim is to impose a single
micro theory on students. The
appropriate response to this is that it depends on the students being
taught. With regard to undergraduate
teaching, the heterodox professor should take the position that all social
knowledge is contestable and that this view must be conveyed to students. Hence, all undergraduate economic students
should be introduced to a variety of different microeconomic theories: neoclassical vs. heterodox in various
forms. Teaching different
microeconomic theories to undergraduates provides them (in principle) with
the capability of understanding the different theories as well as with the
capability of evaluating them and choosing the one they think is the best for
understanding and explaining the capitalist economy in which they live.2 The teaching of graduate students is
different since it is presumed that the applicants to a graduate program are
adults capable of making an informed choice of the kind of microeconomic
theory which they would want to study.3 Hence the core theory courses of graduate
programs can be restricted to a specific theoretical approach, be it neoclassical or heterodox. The programs may still provide their
graduate students through elective or optional courses alternatives to the
core microeconomic theory of the program.
However, a heterodox graduate program should ensure that its students
are familiar with neoclassical theory.4 What does this imply about the teaching of
microeconomic theory in a heterodox graduate program? First, 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. The
theory should also be taught in a way as to provide students with a critical
awareness of how heterodox microeconomic theory is organized, structured, and
different. So the teaching of
neoclassical microeconomic theory is a way of preparing students for studying
heterodox microeconomic theory.5
Secondly, since the core microeconomic theory taught in the graduate
program is heterodox, it must predominate overall in the teaching of
microeconomic theory; thus, graduate students are expected to know it
thoroughly. The second response to the advocate for
the teaching heterodox microeconomic theory is ‘Why’? Clearly, 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.6 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.7 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 there from 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.8 Given the above theoretical and
methodology criticisms of neoclassical theory, it is not unreasonable to
advocate the teaching of heterodox microeconomics. But even if the criticisms were less severe
than they are, it is still possible to advocate the teaching of heterodox
microeconomics. In the domain of
contestable social knowledge, it is in principle possible to articulate an
alternative account of how capitalism works that does not utilize any
components of neoclassical theory.9 The alternative account, heterodox
microeconomic theory, is in fact superior to neoclassical microeconomics in
terms of coherence, explanation, empirical groundness,
and predicting future events even though it is incomplete. Introduction
to Heterodox Microeconomic Theory At the undergraduate level, most students
enter their introductory microeconomic (or macroeconomic) course with little
or no knowledge of economics, economic theory, or awareness that there are
different ways of doing economic theory.
This problem is common to the teaching of neoclassical and heterodox
microeconomics. It is a problem that
cannot be solved here, but rather avoided by assuming that students have had
an introductory, intermediate, and (perhaps) a graduate course in neoclassical
microeconomics (and also the same courses in macroeconomics). Given this background, what other courses
should a student take before enrolling in a graduate course in heterodox
microeconomic theory? The Prerequisites The student should have one course in the
history of economic thought and another course in the theoretical and social
history of a specific heterodox approach, such as radical, Marxian,
Institutional, or social economics.
The rationale is that heterodox microeconomics is part of a historical
discourse that starts with classical political economy and includes Marxism,
the historical school, Veblen and Institutionalism,
and Keynes. Familiarity with the older
arguments and arguments from the different heterodox approaches will help the
student to understand the structure and organization of heterodox
microeconomic theory as well as the theoretical, empirical, and policy issues
that it addresses. In addition, the
student should have three courses in 19th and 20th
century economic and social history of the United States, of the United
Kingdom and the rest of Europe, and of the history of business
enterprises. The rationale for these
courses is that they provide the student to some degree with empirical qua historical
knowledge of the social provisioning process in capitalist economies. A third set of three courses a student
should have covers philosophy and methodology. In particular, a student should have two
courses on 18th and 19th century philosophy, on pragmatism,
on modernism and post-modernism, on philosophy of science, on social
philosophy and theory; and a course on qualitative and historical
methodology. The rationale for the
‘philosophical’ courses is that they introduce the student to ways of thinking
that have an impact on how heterodox theory is articulated but which are not
discussed in detail in the theory itself.
The latter course on methodology, which is a complement to the
undergraduate econometric course taken by the student, shows that there are
ways other than econometrics to undertake economic research and that
empirical evidence consists of something more than numbers and
statistics. Finally, a student should
have at the minimum two courses in calculus and more importantly a course in
linear algebra, but an additional course in linear algebra or numerical
analysis would also be highly desirable.
The reason for taking the latter two mathematics courses is that they
deal with the mathematics and models that underpins the input-output production
and price models that constitute the framework of heterodox economics.10 The Introduction The course starts with a four-part
introduction to heterodox microeconomic theory that consists of history of
heterodox economics, the scope and methodology of heterodox
microeconomics, and the structural organization of economic activity. This block of material is designed to
introduce the student to the foundational material upon which the
microeconomic theory is established.11 It also has the purpose of making it very
clear to the student the extent to which heterodox microeconomics is
different from neoclassical microeconomics.
Not only does heterodox microeconomic theory have a different history,
scope, definition, aim, and methodology, it explicitly repudiates fundamental
aspects of neoclassical economics, such as the concepts of equilibrium,
relative scarcity, neoclassical rationality, optimalization
and with it maximizing and minimizing, and methodological individualism. In short, heterodox microeconomic theory
rejects the basis of neoclassical microeconomic theory and sets out to
provide a complete alternative. 1.
History of Heterodox Economics Since the student has taken prerequisite
courses in the intellectual history of heterodox economics, the history of
heterodox economics in this section deals with the social, organizational,
and political history of heterodox economics in the 20th
century. One reason for including this
particular material is to make the student aware that what currently constitutes
heterodox economics and heterodox economic theory has a history that was
formed in the heated crucible of contestability. For the American student, the material
covered in this synoptic history can have the following topics: 1. The Contested Landscape of American
Economics, 1900 – 1970s; 2. Radical
Economics in Post-War America Emergence of the Union for Radical
Political Economics, 1945 – 1970; 3. Institutionalism and the Emergence of
the Association for Evolutionary Economics, 1945 – 1970; and 4. Heterodox Economics in the United States, 1970 – present.12 And indicative readings associated with
the topics include: 1. Rutherford, M. 2000.
“Institutionalism Between the Wars.”
Journal of Economics Issues
34.2 (June): 291 – 303. 2. O’Boyle, E. J. 1994.
“Homo Socio-Economicus: Foundational to Social Economics and the
Social Economy.” Review of Social
Economy 52.3 (Fall): 286 – 313. 3. Lee, F. S. 2000.
“The Organizational History of Post Keynesian Economics in America, 1971 – 1995.” Journal
of Post Keynesian Economics 23.1 (Fall): 141 – 162. 4. Lee,
F. S. 2004. “History and Identity: The Case of Radical Economics and Radical Economists, 1945-70.”
Review of Radical Political
Economics 36.2 (Spring): 177 –
195. 5. Lee,
F. S. 2004. “To Be a Heterodox Economist: The Contested Landscape of American Economics, 1960s and 1970s.” Journal
of Economic Issues 38.3 (September):
747 – 763. A
second reason for the history is to make the student aware of the different
approaches to heterodox economics and therefore the need to keep an open and
inquisitive mind as they learn about them in the context of heterodox
microeconomic theory. This can be
reinforced by providing the student with a list of heterodox economic web
sites (see below for an indicative list) and a list of heterodox economic
journals, such as found in Lee, Cohn, Schneider, and Quick (2005).
Association for Evolutionary Economics http://www.orgs.bucknell.edu/afee
Association for Heterodox Economics http://www.hetecon.com
Association for Institutional Thought http://www.afit.cba.nau.edu/
Association for Social Economics http://www.socialeconomics.org
Cambridge Social Ontology Group http://www.csog.group.cam.ac.uk/index.htm
Conference of Socialist Economists http://www.cse.web.org.uk/
European Association for Evolutionary Political Economy http://ww.eaepe.org
Heterodox Economics Web http://www.orgs.bucknell.edu/afee/hetecon.htm
International Association for Feminist Economics http://www.facstaff.bucknell.edu/jshackel/iaffe
International Confederation of Associations for Pluralism in Economics http://ww.econ.tcu.edu/econ/icare/main.html
International Society for Ecological Economic http://ww.ecologicaleconomics.org/
Post-Autistic Economics Network http://ww.paecon.net/
Society for the Advancement of Socio- Economics http://www.sase.org/homepage.html
Union for Radical Political Economics http://www.urpe.org 2. Scope of Heterodox Microeconomics Given
the general historical background, the next step is to introduce the student to
heterodox economic theory itself, then delineate the nature and scope of
heterodox microeconomic theory, and conclude with a brief historical sketch
of its antecedents. The discipline of
economics as concerned with explaining and proposing and advocating changes to the
process that provides the flow of goods and services required by society to
meet the needs of those who participate in its activities, that is, economics
is the science of social provisioning. Thus,
economics has two interdependent parts: theory and policy.13 Heterodox economic theory is a theoretical explanation of the
historical process of social provisioning within the context of a capitalist
economy. Therefore it is 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, structure of production and the reproduction of the
business enterprise and other relevant institutions, and distribution. Because the social provisioning process
involves issues of ethical values and social philosophy and the historical
aspects of human existence, heterodox economists feel that it is also their
duty to make 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 disadvantage members.
Moreover, they adopt the view that 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, and social-economic discontent. The scope
and objective of heterodox microeconomic theory is to identify, describe, and
develop a narrative--that is a theoretical explanation--utilizing structures
and causal mechanisms of the “micro-events” that contribute to the overall
social provisioning process in a capitalist economy. Because of the significance of the price
mechanism to neoclassical economics, one theoretical concern of heterodox
microeconomic theory is the business enterprise, markets, demand, and
pricing. Also, since heterodox
economists see investment as the principle director and driver of economic activity,
a second theoretical concern is investment decisions, the financing of
investment, and the profit mark up.
Finally, the third theoretical concern of heterodox microeconomic
theory is the delineation of a non-equilibrium disaggregated price-output model
of a monetary economy. The integration
of the theories of the business enterprise, markets, demand, investment, and
finance with a theoretical model of the economy forms a nexus of theory that
can be identified as heterodox microeconomics.14 To ensure that the student does not, like most neoclassical students, take the theory at face value and without a past, a brief historical overview of the various heterodox microeconomic approaches that contributed to the intellectual and theoretical background of heterodox microeconomic theory should be offered. Consequently, the student is introduced, for example, to the administered prices doctrine, normal cost doctrine, and the mark up price doctrine, to the marginalist and administered prices controversy, and to Institutionalist, feminists, and social economics contributions. Indicative readings associated with the topics covered in this section include: 1.
Bortis, H. 1997.
Institutions, Behaviour and
Economic Theory: A Contribution to Classical-Keynesian
Political Economy. Cambridge:
Cambridge University Press. 2. Dugger, W.
M. 1996. “Redefining Economics: From Market Allocation to
Social Provisioning.” In Political Economy for the 21st
Century, pp. 31 – 43.
Edited by C. Whalen. Armonk: M. E. Sharpe, Inc. 3. Lee, F. S. 1998.
Post Keynesian Price Theory. Cambridge:
Cambridge University Press. 4. Fullbrook, E. (ed.)
2003. The Crisis in Economics: The
Post-Autistic Economics Movement: The First 600 Days.
London: Routledge.
5.
Ferber, M. A. and Nelson, J. A. (eds.)
2003. Feminist Economics
Today: Beyond
Economic Man. Chicago: The Chicago University Press. 3.
Methodology of Heterodox Microeconomics Heterodox microeconomic
theory is not an already made doctrine to be applied to an invariant economic
reality. Rather it is still in the
process of being created and developed because for some micro phenomena there
are no existing heterodox theoretical explanations, because some existing
heterodox theoretical arguments are insufficient and hence have to be redone,
and because some aspects of economic reality have changed hence requiring the
creation of a new heterodox theory.
Therefore this section sets out for the student how heterodox
economists understand the economic reality to be examined, the method of
creating theory to explain that reality, and an overview and evaluation of
the various qualitative and quantitative methods used to create theory. Thus the student is first introduced to the
philosophical foundation of social theorizing and then to critical realism
and the role of open systems theorizing (which embraces non-equilibrium and
rejects optimalization), causal mechanisms, and
structures in the context of what constitutes a theory of economic activity.15 Following this, the student is introduced
to the method of grounded theory as the way of creating and developing theory. This method of theory creation rejects the
neoclassical approach of deductivism; on the other
hand, it argues that theory must be constructed from empirical evidence. And the heterodox theories (which are
non-equilibrium theories) that emerge from this method are historically
grounded and historical analytical explanations of economic reality. Finally, there is a discussion about
evaluating empirically grounded theories that revolves around explanation,
new data, and scholarly community engagement in the evaluation process. The issue of prediction as the sole method
of evaluating a theory is rejected. In
addition to being introduced to the method that heterodox economists use to
construct theory, the student is also introduced to a number of
methodological issues, such as the role of assumptions and logical coherence
in theory creation, the importance of both qualitative data and quantitative
data, the use of multiple research strategies--surveys, interviews/oral
statements, ethnographic studies, participant-observation, questionnaires,
fieldwork, and statistical/quantitative work, the importance of case studies,
the use of mathematics and economic models, and the possible usefulness of
econometrics. Thus, the student
emerges with the view that quantitative-econometrics approaches are only one
of many ways to construct and evaluating heterodox economic theories. In fact, the student is confronted with the
argument that causal mechanisms and the role of agency can only really be
captured by qualitative data gathered by “qualitative” research methods.16 Indicative readings for methodology include
the following: 1. Downward,
P. (ed.) 2003. Applied
Economics and the Critical Realist Critique.
London: Routledge. 2. Finch,
J. H. 2002. “The Role of Grounded Theory in Developing Economic
Theory.” Journal of Economic Methodology 9.2:
213 – 234. 3. Locke,
K. 2001. Grounded
Theory in Management Research.
London: SAGE Publications. 4.
Lawson,
T. 1997. Economics & Reality. London:
Routledge. 5.
Denzin, N. K.
and Lincoln, Y. S. (eds.) 1998. Strategies of Qualitative Inquiry. Thousand Oaks: SAGE Publications. 4.
Structural Organization of Economic Activity The aim of the
final section of the Introduction is to present to the student a theoretical
picture of a capitalist economy that will serve as the foundation for developing
an empirically grounded microeconomic theory of the social provisioning
process as well as an empirically grounded model of the economy. This involves delineating the core
structures of a capitalist economy relevant to the social provisioning process
and locating within them the organizations, institutions, and agency that
direct, engage in, or facilitate the economic events that result in social
provisioning. And the economic events
of specific interest are those that affect the production, pricing, demand,
and distribution of goods and services.
The structures help shape and govern economic events while the
organizations and social institutions (that are located in the structures)
house the causal mechanisms in which agency is embedded. What these structures are will in part
determine the kind of heterodox microeconomic theory that is developed. The core structures include the
input-output schema of circular production (which is incompatible with the
neoclassical concept of relative scarcity), income flows relative to goods
and services for social provisioning, and the flow of funds that ensure that
monetary production and monetary social provisioning are taking place; the
core organizations, social institutions, and core agencies relevant to the social
provisioning process and embedded in the structures include the business
enterprise, market organizations such as cartels, family, government, and the
social individual that makes decisions and choices in a non-neoclassical
optimizing manner. Indicative readings
for the section include: 1. Okubo,
S. O., Lawson, A. M., and Planting, M. A.
2000. “Annual Input- Output Accounts of the U.S. Economy, 1996.” Survey
of Current Business 80.1 (January):
37 – 86. 2. Bortis, H.
2003. “Keynes and the Classics: Notes on the Monetary Theory of
Production.” In Modern Theories of Money, 411 – 474. Edited by L.-P. Rochon and S. Rossi.
Cheltenham: Edward Elgar. 3. Davis, J. B. 2003.
The Theory of the Individual in
Economics: Identity and
Value. London:
Routledge. 4. Potts,
J. 2000. The
New Evolutionary Microeconomics:
Complexity, Competence and Adaptive
Behaviour. Cheltenham:
Edward Elgar. 5. Fullbrook, E. (ed.)
2002. Intersubjectivity in Economics: Agents and Structures.
London: Routledge. 5. Mathematics and Modeling: A Digression The
representing of the structures, organizations, institutions, and agencies to
create an integrative picture of the foundations of heterodox microeconomic
theory can be assisted by mathematics and economic models. Their uses are, however, restricted since
the tenets of realism, critical realism, and the method of grounded theory
prescribe that the type of mathematics used and economic models constructed
are derived from (as opposed to being imposed upon via analogy or metaphor)
the empirically grounded theories being developed. Consequently, the economic model reflects
the narrative of the theory from which it is derived. To translate a grounded
theory into an economic model, its structures and causal mechanisms (which
embody accurate measurements and observations) have to be converted, as far
as possible, into mathematical language where each mathematical entity and
concept is in principle unambiguously empirically grounded, meaning in part
they also have to be measurable and observable. As a result, the mathematical form of the
model is determined and constrained by the empirically grounded structures
and causal mechanisms, and hence is isomorphic with the theory and its
empirical data. This relationship
between mathematics and empirically grounded theory is similar to the late 19th
century view in which mathematical rigor was established by basing the
mathematics on physical reasoning resulting in physical models. However, the difference here is that rigor
results when the mathematical model is based on social reasoning represented
by empirically grounded theory. In
this manner, mathematical model-based analysis remains subjugated to the
study of economic activity. Thus,
while mathematics helps illuminate aspects of the grounded theory and making
clear what might be obscure, it does not add anything new to the theory, that
is, it does not by itself produce new scientific knowledge. As suggested above, the structure of the
economy is pictured in terms of an input-output matrix; hence the mathematics
of input-output models is what students studying heterodox microeconomic
theory need to know. The
“mathematical-methodological” reason for working with input-output models is
that they are inherently measurable; that is, input-output models and the
mathematics of the models are empirically grounded. A secondary benefit of input-output models
is that they permit the exploration of various theoretical themes in classical
political economy, Marxism, and the capital controversies as they relate to
heterodox microeconomics. Useful
introductions to input-output models and their mathematics are L. L. Pasinetti’s, Lectures
on the Theory of Production (1977) and H. Kurz
and N. Salvadori’s, Theory of Production (1995). Heterodox
Microeconomic Theory: The Core Content Because of the
grounded theory approach to theory creation, the core of heterodox
microeconomics consists of a series of substantive theories that are empirically
grounded and are part of an overall formal microeconomic theory. However, since the empirical groundness of the substantive theories is uneven and far
from complete, development of the overall theory is still incomplete. The requirement that all theories must be
empirically grounded means that, in a discipline which traditionally does not
empirically ground theories, this process is quite slow. The core can be divided into four
components: three substantive
areas--the business enterprise, the market and the business enterprise, and
market governance; and a formal area which deals with the three substantive
areas together. More specifically, the
three substantive areas concentrate on delineating ‘micro’ structures and
causal mechanisms and developing substantive theories of the business
enterprise, of market demand, and of market governance. With the structures, causal mechanisms, and
substantive theories in place, the final step is to develop a holistic
heterodox microeconomic theory and with it the microfoundations
of heterodox macroeconomics. Thus, in
the formal area a disaggregated price-output model of a monetary economy will
be developed and then utilized to delineate the impact of the micro—that is
prices, profit mark ups, finance, and investment--on the overall level of
economic activity. The
Business Enterprise The business
enterprise is conceived as a non-static, historically changing going concern,
that is, as an entity that has an indefinite life span and which undertakes
production, employment, pricing and investment activities in this
context. Thus the enterprise is more
than simply a collection of productive resources, that is, physical resources
(such as plant, equipment, stocks of various material inputs and outputs and
ownership of 'land') and human resources, that is, workers and
management. It is also an organization
that is structured and contains causal mechanisms that direct its
activities. It is within these
structures and causal mechanisms (which change over time) that these
resources are utilized in various activities in a changing economic
environment. The business enterprise
comprises of three structures: legal and organizational structure,
decision-making structure, and production and cost structure. The causal mechanisms, on the other hand,
concern pricing, prices, investment, wages, employment, and production and
reflect the motivation of the management of the enterprise involved in making
the decisions. From the structures and
causal mechanism a series of empirically grounded theories on pricing and
prices, on investment, and on wages, employment, and production are
delineated; and these theories integrated together constitute the theory of
the business enterprise.17
Indicative readings for the section include: 1. Earl, P. E. 2002.
Information, Opprtunism
and Economic Coordination. Cheltenham: Edward Elgar. 2. Lee, F. S. 1998.
Post Keynesian Price Theory. Cambridge:
Cambridge University
press. 3. Downward,
P. 1999. Pricing
Theory in Post Keynesian Economics: A Realist Approach,
Cheltenham: Edward Elgar. 4. Bewley, T. F.
1999. Why Wages Don’t Fall During a Recession. Cambridge: Harvard University Press. 5.
Champlin, D. P.
and Knoedler, J. T. (eds.) 2004.
The Institutionalist
Tradition in Labor Economics. Armonk: M. E. Sharpe, Inc. The Market
and the Business Enterprise The business
enterprise decisions concerning production and investment determine its
demand for industrial goods while those same decisions and the decisions
about pricing are based on views about the demand for the goods produced by
the enterprise. A central feature to
these double-edge decisions is the structure of market demand; and central to
market demand is concept of market.18 These two issues are addressed in this
section as a prerequisite to dealing with competition and the theory of
market governance in the following section.
The concept of market is an empirically grounded in terms of standard
industrial classification and followed by its delineation as a social
structure that has a legal component, a set of institutional practices and
rules of exchange, and involves issues of market control. Turning to the structure of market demand,
the analysis focuses on the demand-for-goods decisions by households,
enterprises, and non-market organizations, especially with regard to price.19 Finally, the structure of market demand and
the market price is related to the enterprise as a going concern represented
in terms of the Marxian schema M-C-M’.
It is argued that, since price and sales are unconnected, a decline in
the enterprise’s price reduces its propensity to be a going concern by
affecting M’ relative to M. Indicative
readings for this section include: 1. Nightingale,
J. 1978. "On the Definition of 'Industry' and
'Market'," Journal of Industrial
Economics 27
(September): 31 - 40. 2. Granovetter,
M. 1985. "Economic Action and Social
Structure: The Problem of Embeddedness," American Journal of Sociology 91
(November): 481 - 510. 3. Fligstein, N.
2001. The Architecture of Markets:
An Economic Sociology of Twenty-First-Century
Capitalist Societies. Princeton:
Princeton University Press. 4. Lavoie, M.
1994. "A Post Keynesian
Approach to Consumer Choice." Journal of Post Keynesian
Economics 16
(Summer): 539 - 562. 5.
Robinson,
R. 1961. “The Economics of Disequilibrium
Price.” Quarterly Journal of Economics 75 (May):
199 – 233. Market
Governance All
enterprises have some market power, that is, the ability to inflict
unacceptable consequences upon competitors.
This is manifested in terms of setting and changing prices, thereby
affecting the cash flows (that is M’) of competitors, especially in markets
where market price and sales are unconnected.
Thus, any propensity towards price wars and other factors (such as
business cycles or secular changes in demand) generating fluctuating prices
among competitors inhibits the enterprise as a going concern. This section develops a theory of market
governance to explain why and how business enterprises utilize social,
economic, and political processes to co-operatively establish institutions
and organizations that regulate horizontal market transactions among
themselves. The particular forms of
market governance embodied in the theory include social networks, bilateral
agreements, trade associations, cartels, price leadership, and government
regulation. Indicative readings for
this section include: 1. Richardson,
G. B. 1965. "The Theory of Restrictive Trade Practices,"
Oxford Economic Papers 17 (November): 432 - 449. 2.
Campbell,
J., Hollingsworth, J., and Lindberg, L.
(eds.) 1991. Governance of the American
Economy. Cambridge:
Cambridge University Press. 3.
Fligstein,
N. 1990. The Transformation
of Corporate Control.
Cambridge: Harvard University
Press. 4.
Colombo,
M. G. (ed.) 1998. The
Changing Boundaries of the Firm: Explaining Evolving Inter-Firm Relations.
London: Routledge. 5.
Mizruchi, M. S.
and Schwartz, M. (eds.) 1992.
Intercorporate Relations: The Structural Analysis of Business.
Cambridge: Cambridge University
Press. Microfoundations of Heterodox Macroeconomics With the
structures, causal mechanisms, and substantive theories in place, the final step
is to develop a holistic heterodox microeconomic theory and with it the microfoundations of heterodox macroeconomics. Thus, a disaggregated price-output model of
a monetary economy is developed based on the foregoing theories of the
business enterprise and market governance and the arguments of about the
structure of market demand and the non-relationship between market price and
sales. It is then utilized to
delineate the impact of the micro—that is prices, profit mark ups, finance,
and investment--on the overall level of economic activity. In particular, the disaggregated price
model resembles a Sraffian price model based on
normal output or capacity utilization; while the disaggregated quantity model
is derived from a Leontief quantity model. The connection between the two via the
profit mark-up qua prices and enterprise investment decisions and government
expenditures or effective demand is examined, especially with regard to
issues of prices and the going concern and co-ordination of economic activity,
aggregate economic activity, and disaggregated effective demand. Finally, the impact of micro pricing,
investment, production and employment decisions on distribution and social
welfare under capitalisms is examined.
Indicative readings for this section include: 1. Lee,
F. S. 1998. Post
Keynesian Price Theory.
Cambridge: Cambridge University Press. 2. Milberg,
W. (eds.) 1992. The Megacorp and Macrodynamics: Essays in Memory of Alfred Eichner.
Armonk: M. E. Sharpe, Inc. 3. Eichner, A.
S. 1987. The Macrodynamics of Advanced Market Economies.
Armonk: M. E. Sharpe, Inc. 4. Lutz,
M. A. 1999. Economics for the Common Good: Two Centuries of Social Economic Thought in the Humanistic Tradition. London:
Routledge. 5. O’Boyle,
E. J. 1996. Social
Economics: Premises, Findings and
Policies. London: Routledge. Conclusion In contrast to the commonly held view,
this article shows that there is a heterodox microeconomics that is teachable
to students. Clearly it is not as well
developed as mainstream microeconomics, but then in the 1880s or even in the
1920s neoclassical microeconomic theory was not well developed and yet it was
taught. Teaching an incomplete theory
is not a problem if the professor believes that the central components of
what is being taught are empirically and theoretically sound and help provide
a better understanding of the phenomena under examination. The early neoclassical economists held this
position and then spent two, three, five and more generations developing and
extending their theory. What is
presented above as heterodox microeconomics and its theoretical core is, like
neoclassical microeconomics in the 1880s, quite incomplete—but it is not
non-existent! Further developments are
needed and in fact demanded; and it is not improbable that over the next
couple of generations of heterodox economists it could be greatly
transformed. All that is needed is for
heterodox economics to overcome one major obstacle: the propensity of most heterodox economists
to dismiss and ignore heterodox microeconomics and to direct their graduate
students to pursue research agendas that do not engage with heterodox
microeconomic theory. But whether this
is possible is an open question! Notes 1.
Some of the monographs delineating to some degree heterodox microeconomics
theory include Eichner (1987), Kregel
(1975), Robinson and Eatwell (1973), Lavoie
(1992), Wolff and Resnick
(1987), and Earl (1995). 2.
The contrast with neoclassical professors is striking. For much on the 20th century
only neoclassical microeconomic theory has been taught to
undergraduates. The exclusion of
alternative microeconomic theories was deliberate and through. Illustrative of the exclusive teaching of
neoclassical microeconomic theory to students is found in the United Kingdom
where in 2003-04 some 45% of undergraduates in economics get no introduction
to heterodox microeconomic theories with another 27% have a minimal to
approaching zero introduction. Thus
72% of all undergraduates in economics are really not introduced to
alternative approaches in microeconomic theory. [Lee, 2004] 3.
In reality most applicants to graduate programs have not been introduced to
heterodox theoretical approaches and hence are not really capable of making
informed choices. This issue cannot be
resolved in this paper. 4. As a
result graduate students from such a program will have a sufficient command
of neoclassical microeconomic theory to teach it at the undergraduate level
and even at the M.A. and Ph.D. level at many universities. In fact, their knowledge of neoclassical
theory is better than students coming out of strictly neoclassical programs,
although their technical skills may not be at the same level. In short, they are competent to teach
neoclassical microeconomics, but their real expertise and hence capabilities
for doctoral teaching are in heterodox microeconomic theory. 5.
For a more detail discussion of the teaching of neoclassical microeconomic theory
for heterodox graduate students, see Lee (2005). 6. In
addition, it is argued by many heterodox and neoclassical economists that
heterodox microeconomic theory either does not exist or it is in such a
confused, incoherent, contradictory state that it is not possible to teach
it. Since this article is based on the
premise that a coherent, teachable heterodox microeconomic theory exists, the
argument will be ignored. 7.
For a critique of deductivist methodology and its
use in neoclassical economics, see Lawson (1997 and 2003). Moreover, there are arguments to be made
that neoclassical economists misuse mathematics in their efforts to explain
the real world. 8.
It should be noted that the role of Friedman’s methodology position that
prediction is the goal of economic theory was really a clever way of
rejecting the emerging ‘realist’ criticism of marginalism
in the 1940s and 1950s. It made it
easier for neoclassical economists to develop a methodology that was
anti-empirical in terms of developing theory. 9.
Neoclassical economists are in general not open to considering alternatives
to their microeconomic theory. They
accept their theory as an uncontestable truth. This position turns neoclassical economic
theory into a matter of religious faith.
Consequently microeconomic theory as taught by neoclassical economists
should be located in departments that teach about faith-based documents that
are outside the area of the social sciences and academic economic
departments. 10. A course
in mathematical economics is not recommended because the mathematics
generally taught and the textbooks used are directed towards neoclassical
microeconomic theory and hence are irrelevant for a heterodox microeconomic
course. For example Wade Hands’ Introductory Mathematical Economics,
Edward Dowling’s Introduction to
Mathematical Economics, Akira Takayama’s Analytical Methods in Economics,
Michael Klein’s Mathematical Methods
for Economics, Peter Hess’s Using
Mathematics in Economic Analysis, and Alpha Chiang’s Fundamental Methods of Mathematical Economics devote less than
15% of their content to linear and matrix algebra and to Leontief-Sraffian
input-output models. 11.
This block of material is similar to the block of material covered in the
preliminary chapters in introductory and intermediate neoclassical
microeconomic texts. These chapters
define economics and specify the contribution of microeconomic theory to
understanding the allocation of scarce resources among alternative uses to
human wants; provide a brief whiggish view of the
historical emergence of modern microeconomics; introduce fundamental concepts
such as wants, relative scarcity, production possibility frontier,
opportunity costs, supply and demand, methodological individualism, and
circular flow of economic activity; structural determinants of prices and
quantities; briefly delineate the positivist methodology and the equilibrium
qua marginalist method used by neoclassical
economists; and quickly covers the mathematics utilized in presenting the
theory in the rest of the book. 12. If a
heterodox microeconomic theory was taught in the United Kingdom a similar
history would cover the following topics: (1) The Contested
Landscape of British Economics, 1900 – 1970; (2) Heterodox
Economics in Britain: Conference of
Socialist Economists, 1970 – 1995; (3) Heterodox
Economics in Britain: Non-Marxist-Post
Keynesian Developments, 1970 – 1995; and (4) Research
Assessment Exercise and the Attack on Heterodox Economics in the United
Kingdom, 1992 – 2000. Other
countries will have their own heterodox histories. 13.
Neoclassical economics is also concerned with explaining the social
provisioning process, although it does not say it in this way. Their theoretical explanation centers on
the phrase “the allocation of scarce resources among competing ends;” and
their policy prescriptions follow from the theory. Thus the fundamental difference between
heterodox and neoclassical economics is in their theoretical explanation of
the social provisioning process and secondarily in what they advocate for
economic policy. 14.
Others heterodox economists would probably argue that I have drawn the core
boundaries too tightly; and they may be correct. Further argument, discussion, and different
heterodox views need to be brought to bear on what are the major theoretical
concerns of heterodox microeconomics.
This article is an invitation for such a debate. 15.
Social theory and the philosophy of the social sciences should be part of the
intellectual make-up of all economists and certainly of heterodox
economists. However, the principle
problem with this is that graduate programs in economics generally do not
make room for such courses and undergraduate economic majors are not encouraged
to take such courses. However, because
of the interdisciplinary nature of the Ph.D. program at the University of
Missouri-Kansas City, many of our economic students take a minor in social
theory. 16.
Graduate students at the University of Missouri-Kansas City do take graduate
courses in econometrics; but because of the interdisciplinary nature of the
doctoral program they are also encouraged to take method courses in sociology
(such as ‘qualitative methodology’) and historiography and method. 17.
Since the theory is historically grounded and a historical analytical
explanation of the activities of the business enterprise, it could be claimed
that it is a evolutionary theory of the business enterprise. However, ‘historical’ does not have the
same meaning as ‘evolutionary’, thus the reluctance to use the concept. 18.
Heterodox economists do not consider the demand for labor power the same as
the demand for goods; and do not accept the concept of labor market while
accepting the concept of goods market.
Hence neither of these issues are discussed in this section. 19.
This issue is from a mainstream perspective about whether market demand
curves exist and have a negative slope. References Earl, P. E. 1995.
Microeconomics for Business and Marketing. Cheltenham:
Edward Elgar. Eichner, A. S. 1987.
The Macrodynamics
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Sciences. New York City: St. Martin’s Press. Kregel, J. A. 1975.
The Reconstruction of Political
Economy: An Introduction to
Post-Keynesian Economics. 2nd
Edition. London: Macmillan. Kurz, H. D. and Salvadori,
N. 1995. Theory
of Production: A Long-Period Analysis. Cambridge:
Cambridge University Press. Lavoie, M. 1992.
Foundations of Post-Keynesian Economic Analysis. Aldershot:
Edward Elgar. Lawson, T. 1997.
Economics and Reality.
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Informational Directory for Heterodox Economists: Journals, Book Series, Websites, and
Graduate and Undergraduate Programs. Lee, F. S. and Keen, S.
2004. “The Incoherent
Emperor: A Heterodox Critique of
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The Johns Hopkins University Press. ___________________________ |