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www.paecon.net Student Essays on Post-Autistic Economics from post-autistic economics review : issue no. 19, April 2, 2003 Form and Content in Neoclassical Theory Asatar Bair (Doctoral Candidate, University of Massachusetts at Amherst, USA) I find it fascinating that those of us who are critical, in one way or another, of neoclassical economics would accept uncritically a defense of the theory offered by one of its most famous modern proponents. I refer to Milton Friedman’s essay on methodology, where he basically argues that the theory should not be judged on the basis of whether or not its assumptions are realistic, but whether it is practical. This is sort of like saying, since supply and demand analysis explains prices, we can forget about the excesses that are so easy to find in the stringent assumptions necessary to obtain perfect competition and general equilibrium. For example, the omniscient Auctioneer who oversees the exchange of commodities in the general equilibrium model of Arrow and Debreu. If we accept the terms of this argument, it becomes very simple for the proponents of neoclassical theory to defend it, such as Deirdre McCloskey’s defense of the criticisms of Bernard Guerrien in Post-Autistic Economics Review, Issue No. 15: It just won't do, therefore, to say as Guerrien does that price theory (as we Chicago types prefer to call it) "obviously contradicts almost everything that we observe around us."  Huh?  When OPEC (viz., Saudi Arabia) cut the supply of oil in 1973, didn't the relative price of oil rise, just as a simple supply-and-demand model would suggest? Isn’t this is a bit like saying “Supply and demand works, so the theory must be correct”? (By the way, I am not attributing this position to McCloskey, a sophisticated and original thinker, who, although committed to the small-s science of microeconomics, is also in her own way one of its most ardent critics. This is evinced by her writing not just in the PAE Review, but many other places, including the recent volume Postmodernism, Economics & Knowledge, edited by Cullenberg, Amariglio, and Ruccio. It is not against the McCloskeys of the world that we must primarily debate, for I believe that if she had her way, the terms of the debate would in fact be much more open.) The point is, there are so many ways to criticize neoclassical theory – why use the criticisms that are the easiest to brush off, simply by reference to already existing arguments? The issue is not whether supply and demand analysis can be used to explain the movement of prices. Even Marx uses supply and demand analysis to make certain points about the movement of prices. (See, for example his 1865 work Value, Price and Profit). The issue is, what are the assumptions that form the basis of the theory and what are its conclusions? This is deeper than merely criticizing the form of the theory, for neoclassical theory can be formulated without math – see The Economist or The Wall Street Journal – or with a lot of math – see any graduate program in economics or The American Economic Review. To me, the debate in these pages and elsewhere about formalism only scratches the surface. Sure, it’s a problem that neoclassical economics tends to be dry as dust because it relies on abstract, formal mathematical proofs, and indeed, sometimes the emphasis on technical minutiae means that even its advanced practitioners can’t communicate (or maybe even don’t fully grasp themselves) the big philosophical ideas of neoclassical economics. These are the ideas that have been around for a long time. Such as, how can a society maximize its wealth? What is the relationship between economic categories of production, consumption and distribution and the fulfillment of human happiness and human potential? How should we produce things? Does capitalism involve exploitation? And perhaps, the newer question: is there only one correct answer to each of these questions? I will go out on a limb and label these as interesting questions. Unfortunately, they are not often discussed in economics, despite the appearance of some of them on page 2 of most introductory textbooks. Could this absence have something to do with many students’ hatred of economics? The proofs and formulae of modern neoclassical theory have not made the questions go away, merely elaborated one position out of many that are possible. What about pluralism? Is neoclassical economics the truth, and the other theories false? This would be the only position that justifies the exclusion of other theories from economic discourse, but as so many have pointed out, including McCloskey in The Rhetoric of Economics or Wolff and Resnick in Economics: Marxian versus Neoclassical, such a position is untenable. There simply is no external standard by which to judge the veracity of contending theories. Instead of looking at the form of the theory, we should look at its content. Any theory can be formalized. Take for example, one of my favorites: Marxian theory. This approach to economics is sometimes formulated in terms of proofs and theorems. What is produced is merely a mathematized version of Marxism. Of course there are many kinds of Marxism, sharing some points of agreement and differing on other points. But despite being formal in the mathematical sense (which may make it rather dry, for those not mathematically inclined), it will still be quite different in its content from neoclassical theory. My sense is that debates over form and content have been collapsed because many students find both the form and content of neoclassical economics to be objectionable. For example, let’s consider one of the central assumptions of the theory: human beings behave in their own narrow self interest. Many of my own students find this idea repellant as a separate matter from their dislike of indifference curves. I happen to agree. There is no reason to assume that there is such a thing as human nature that exists independently of one’s culture, language, politics, economic circumstances, etc. Is it not remotely possible that if people seem to often act selfishly it is at least partly due to our societal elevation of greed to a virtue? Isn’t it a kind of debasement of human beings to assume the worst of ourselves – indeed, to argue that whenever a human being seems to be acting unselfishly, sacrificing herself for the sake of another, this is really just the same old greed in disguise, charmingly called by microeconomists ‘warm-glow altruism’? Of course, the amusing thing about this assumption – if we accept Friedman’s formulation that we should overlook the realism and look at its predictive value – is that it turns out to have very limited value when it comes to actually predicting human behavior. It seems that people are actually quite concerned with the welfare of others, even when it conflicts with their own pecuniary interest, as experimental results have demonstrated. By now these results are well known - perhaps the simplest evidence comes from the Ultimatum Game, in which one experimental subject is given a sum of money, to be divided between himself and the other player, who has the ability to veto the division, in which case both get nothing. Self interest would dictate that the second player accept any offer, because something is better than nothing, and you don’t care what the other player gets, because his utility has no effect on your own. Would you pick up a dollar on the street? Then you also wouldn’t turn down an offer of a dollar, even if it meant the other player got $999. Well, it turns out people do care, and are willing to give up substantial sums of money to punish the other player’s greed. This experiment is very simple. For God’s sake, why wasn’t it done in the 1880’s instead of the 1980’s? Could it be that the assumption of self interest was adopted in part to obtain the grand conclusion of neoclassical economics, elaborated by Adam Smith? Namely: if individuals are free to act in their own self interest and society has established private property and competitive markets, then that society will be guided as if by an invisible hand, to the maximum wealth it can attain. Forget whether or not this is true or realistic: this is a powerful idea. We want this idea to be true. We want it to be okay to be selfish, to pursue our own goals, and to have it work out that instead of this being inimical to the social good, it ends up being the very same thing as working for the good of society. So this is my first suggestion: in teaching economics, we should really discuss the meaning of the assumption of self-interest, including its appeal and its limitations, rather than merely adopting it unquestioningly. My second suggestion is that we should think about and talk about theories of distribution. The neoclassical theory of distribution says that each productive input, for example, labor, land and capital, receives a reward that is equal to its marginal productivity: wages, rent and profits respectively. We should discuss this with our students in a serious way. What does it mean? The implications are clear: provided that markets are competitive, workers, landlords, and capitalists deserve exactly what they get. Each receives a reward perfectly commensurate with his or her contribution to production. You can’t get anything more fair than this. Any suggestion that capitalists or landlords exploit or somehow take unfair advantage of their workers or tenants is expunged. It sure looks good on paper. But it seems to go wrong somehow when applied. Say we are considering the situation of the landholders of European descent in Zimbabwe. They represent 10% of the population, and they own 90% of the land. Do they deserve the rents and profits they obtain, which in neoclassical theory came from the land and capital they contributed to production? How did they come to own this land anyway? Pretty much the same way property rights in land were established everywhere at various times in history: theft accompanied by force. What about the capitalists? Do they deserve to live off the profits, as my conservative students sometimes tell me, because they take risks, are responsible for workers, work hard themselves, and contribute to the economy? Or more in line with neoclassical economics, because they make the capital that they own available for production, and thus the capital receives a reward equal to its marginal product of capital? This makes sense. I guess the machines, tools, and raw materials that make up the capital really should get a reward. Throw some cash on the lumber pile! Open up the back of the machine and throw in a handful of coins! There you go – and thanks! Or do capitalists receive profits not from the productivity of the capital they own, but because of the unpaid surplus labor they unjustly steal from their workers? This brings me to my third suggestion, that we discuss and take seriously theories of class. I admit that I am particularly interested in the Marxian notion of class defined as an individual’s relationship to the surplus labor performed at a given productive site. This is fertile ground for exploring how production and the class processes therein affect individual development, social and political dynamics, economic fluctuations, and so forth – and how each of these realms in turn shapes the class processes. Not only can class help to illuminate society and the economy in new ways, most of these insights have been excluded from mainstream economics. The issue – as McCloskey and others have pointed out – is not whether or not the theory is true, so much as does it persuade. Neoclassical economics prefers to hide its excesses in math, where people are less likely to understand the role of the assumptions being used. Is it embarrassment? The dull, stifling formalism of neoclassical economics persuaded many people in its heyday, when more people believed that math equals truth. People are less apt to believe that now, so there can be no more retreating into the safety of proofs with unquestioned assumptions. Perhaps this means we will go back to debating substantive ideas rather than muddling through endless comparative statics. I hope so. If we want economics to fulfill its promise, to be a serious scholarly field of inquiry that considers all points of view rather than excluding certain theories and approaches on ideological grounds, we must begin in the classroom, at the introductory level. To me, the post-autistic economics movement has made this clear in the most basic way: students have dramatically shown that they are not persuaded by mainstream economics. References Cullenberg, Stephen, Jack Amariglio, and David Ruccio (2001) Postmodernism, Economics, and Knowledge. New York: Routledge. McCloskey, Deirdre. (2002) "Yes, There is Something Worth Keeping in Microeconomics", post-autistic economics review, issue no. 15, September 4, 2002, article 1. http://www.btinternet.com/~pae_news/review/issue15.htm McCloskey, Deirdre. (1985) The Rhetoric of Economics. Madison: University of Wisconsin Press. Wolff, Richard D. and Stephen A. Resnick. (1986) Economics: Marxian versus Neoclassical. Baltimore: Johns Hopkins Press. ______________________________ SUGGESTED CITATION: Asatar Bair, “Form and Content in Neoclassical Theory“, post-autistic economics review, issue no. 2 April 2003, article 2, http://www.btinternet.com/~pae_news/review/issue19.htm