TY - JOUR
AU - Misina,, Miroslav
AB - The motivation behind the present work can be summarised by quoting the author: …while to some extent irrelevant, economics is not ‘mostly harmless’: (p. 311) The source of potential harmfulness of economics, according to the author, lies in the fact that policy recommendations of mainstream economists on questions such as privatisation, monopoly regulation, labour unions etc., are based on flawed models. The author's objective is to demonstrate that models typically used by mainstream (neo‐classical) economists are built on unsound foundations. Concepts as basic as supply and demand suffer from a number of internal inconsistencies and logical contradictions, which casts doubts on the professed scientific foundation of the recommendations and raises the possibility that the advice offered is ‘as likely to do general harm as it is to lead to the general good’ (p. 4). The author, however, does not put all the blame on the economists – the guilt lies to a large extent in the educational system by means of which the mainstream economists are ‘educated into ignorance’. They are not exposed to different views and not encouraged to critically examine the theories presented to them. One purpose of this work is to bring together various criticisms of the mainstream economics that the author thinks should form a part of advanced education in economics. The presentation is divided into 3 parts. In Part 1 the author deals with basic concepts of supply and demand and wishes to demonstrate that these basic concepts suffer from a number of inconsistencies, which makes them useless. In Part 2 the author deals with issues such as the problem of aggregation of capital (Chapter 6), problems with static analysis and treatment of time in economics (Chapter 8), and critique of Keynesian economics, as summarised by the IS/LM model. In Part 3 alternatives to mainstream economics are discussed. Chapter 12 offers a summary of the argument, especially as it pertains to fundamental problems discussed in Part 1. The claim that mainstream economics suffers from fundamental inconsistencies is a serious one. Successful demonstration of these claims would imply that the theory is flawed on logical grounds and that it cannot be used as a basis for coherent analysis of the policy issues mentioned above. In light of the importance of the issues, in this review we focus on chapters in which the inconsistency arguments are presented. The key question is, then, to what extent does the author succeed in identifying the alleged contradictions and inconsistencies? Unfortunately, to paraphrase the author, ‘the mathematical economists did their job properly’ (p. 48). What they showed is that most of the propositions criticised in the book do not hold generally but only under certain conditions. Arguing that these conditions are unrealistic or absurd (p. 27), does not amount to demonstrating that the theory is internally inconsistent. Indeed, behind the superficially objective analysis of logical problems in mainstream economics lies a strong commitment to methodological views that differ from the stated methodology of mainstream economics. If one summarises methodological commitments of mainstream economists as methodological individualism plus instrumentalism, the author's preferred methodology seems to be some version of holism plus scientific realism. Most of the arguments presented in the book are best understood as criticisms of some of the basic tenets of the neo‐classical research programme.1 The arguments presented can be broadly divided in two categories:2 • in the first category are the arguments in which the author correctly identifies some of the underlying assumptions necessary for a proposition in question to hold and then argues that the theory is invalid or should be abandoned since the assumptions are not realistic. in the second category are the arguments in which the author fails to identify some of the key conditions necessary for a proposition to hold and then rediscovers these. In these cases, contradictions are established by claiming that the rediscovered conditions establish that the theory does not hold. We will now provide illustrations of these arguments.3 Inconsistencies and Contradictions? Market Demand Curve(Chapter 2) The objective of this chapter is to invalidate methodological individualism by appealing to some of the issues that arise in aggregating individual demands into market demand. It is well known that only under certain conditions the market demand will possess the properties of individual demand. The main condition is that the utility functions have Gorman form, which author correctly identifies.4 Interpreted in behavioural terms, this functional form implies that agents are allowed to differ only to a limited extent. The author believes that the necessary assumptions are unrealistic (p. 27), and that this demonstrates that methodological individualism is flawed, since society is something more than a sum of its parts. Supply Curve (Chapter 3) The author identifies diminishing marginal product as the key condition needed in order to derive an upward‐sloping supply curve, and then proceeds to argue that constant returns are the norm, and that ‘since theory must be realistic, production model based on the unrealistic assumption of diminishing marginal product should not be used, (p. 65) Monopoly Vs. Competition (Chapter 4) While in the discussion of market demand the author appeals to more advanced material in order to establish aggregation conditions, there is no such appeal in this chapter. The author fails to mention that the competitive (price‐taking) argument is a limiting argument5 Rather, he sets up an example of non‐atomistic economy, and then discovers that changes in quantity by any one firm will, if not compensated by corresponding opposite changes in quantity by other firms, result in changes in equilibrium price. Since in competitive (price‐taking) markets it is assumed that one firm's output decision does not influence output decision of other firms, the compensating change in quantity will not occur, and thus the equilibrium price will be affected. The author could have argued, in line with his approach in Chapter 2, that one of the conditions necessary to reach competitive outcome is that the economy be atomistic, and that since this is clearly an unrealistic assumption the theory should be abandoned. On the contrary, the author decided that it is necessary at this point to provide a math primer for economists –‘infinitesimals ain't zero’ (p. 97). Critique of Walras’ Law (Chapter. 9) In the spirit of discussion of competition, the author fails to identify the conditions under which Walras Law is assumed to hold, the essential condition here being non‐satiation.6 Rather than stating that Walras Law is a property that is assumed to hold under certain conditions the author starts the discussion by claiming that economists regard Walras’ Law irrefutable (p. 192) and then proceeds to show that under some circumstances Walras’ Law does not hold. The circumstances discovered here are precisely those where non‐satiation property does not hold. Realism Vs. Instrumentalism We have seen above that in most of the cases where the conditions under which particular propositions or properties are supposed to hold are correctly identified, the main objection is the lack of realism. The author is aware that this criticism is easily dismissed by appeal to some version of Friedman's methodological views. Consequently, in Ch. 7 he proposes to dispose of this methodology, and to show Friedman's methodological views are simply ‘bad philosophy’ (p. 149). The author proposes to deal with the issue in a straightforward manner. Based on the classification of assumptions into negligibility, domain, and heuristic assumptions, the author argues that the types of assumptions usually made in economics are the domain assumptions specifying the conditions under which a particular theory will apply. If these conditions (for example, diminishing marginal product) are not present, the theory is inapplicable.7 This would not convince proponents of instrumentalism, since this is reduced to the argument that the realism of assumptions (in some form) does matter, whereas they argue that it is the predictive power that matters. And we are back where we started. Interestingly, the author claims that ‘economists genuinely believe that their theories describe reality’ (p. 149). One way to interpret the whole argument then would be to say that economists are, in spite of their professed adherence to instrumentalism, in fact proponents of scientific realism, who simply fail to see how unrealistic their assumptions are. Conclusion Methodological debates in economics are certainly not new, and we believe that any contributions in this area would be welcome. What we find problematic with the present work is that a methodological debate is presented as ‘right versus wrong’ (p. 14) argument, which claims to deal with the logic of economic theory. This presentation in effect obscures the fundamental issues and makes the book largely unsuitable for at least one segment of its intended audience, viz. current students of economics. Much better understanding of issues in this debate can be acquired by consulting the literature dealing explicitly with methodological issues; Blaug (1980) is a good place to start. The situation with other segments of the intended audience is, we are afraid, not much better. Readers with knowledge of advanced economics but without exposure to methodological issues raised in this book will most likely dismiss it after having discovered problems with the argument. The rest will probably use it to support their preconceptions about the state of economics and/or its critics. This would be unfortunate since the author's concerns seem genuine. Footnotes 1 " For a discussion of scientific research programmes in economics, see Latsis (1976). Sawyer (1989) provides a discussion of macroeconomics in terms of scientific research programmes. 2 " One could possibly include another category, ‘Miscellaneous’. In this category we would include aruments such as ‘profits and time’ in Ch. 3, which we invite the reader to examine. 3 " In our illustrations we will use MasColell et al. (1995) as the reference point for advanced topics in mainstream economics. This book will be referred to as MWG. 4 " This turns out to be the key condition only if we limit ourselves to the consideration of aggregate demand as a function of the mean level of wealth. Weaker conditions can be imposed if aggregate demand is allowed to depend on some other aggregates. None of these issues are mentioned by the author. See MWG, Proposition 4.B.1 and the discussion that follows it. Incidentally, the author mislabels the aggregation conditions as Sonnenschein‐Mantel‐Debreu conditions. This is rather curious, given that the author provides Shafer and Sonnenschein (1982) as a reference. For a discussion of Sonnenschein‐Mantel‐Debreu theorem, see MWG, Sec. 17.E. 5 " This is easily seen in a typical Cournot oligopoly game‐in the limit the outcome converges to the ‘competitive’ case. See MWG, Example 12.C.I. 6 " See MWG, Proposition 17.B. 1. 7 " The author fails to mention that there are other possible classifications of assumptions. For a good discussion of these issues, see Blaug (1980) References Blaug , Mark ( 1980 ). The Methodology of Economics, or How Economists Explain , Cambridge: Cambridge University Press . Google Scholar Google Preview OpenURL Placeholder Text WorldCat COPAC Latsis , Spiro (ed.) ( 1976 ). Method and Appraisal in Economics , Cambridge: Cambridge University Press . Google Scholar Google Preview OpenURL Placeholder Text WorldCat COPAC MasColell , Andrew , Winston , Michael, and Green Jerry ( 1995 ). Microeconomic Theory , New York: Oxford University Press . Google Scholar Google Preview OpenURL Placeholder Text WorldCat COPAC Sawyer , John ( 1989 ). Macroeconomics Theory: Keynesian and Neo‐Walrasian Models , London: Harvester Wheatsheaf . Google Scholar Google Preview OpenURL Placeholder Text WorldCat COPAC Shafer , W. , and Hugo Sonnenschein ( 1982 ). ‘Market demand and excess demand functions’, Chapter 14 in ( Kenneth Arrow and Michael. D. Intrigillator, eds.) Handbook of Mathematical Economics, Vol. 2 , Amsterdam: North‐Holland . Google Scholar Google Preview OpenURL Placeholder Text WorldCat COPAC © Royal Economic Society 2005.
TI - Debunking Economics, The Naked Emperor of the Social Sciences
JF - The Economic Journal
DO - 10.1111/j.1468-0297.2005.01043_4.x
DA - 2005-11-01
UR - https://www.deepdyve.com/lp/oxford-university-press/debunking-economics-the-naked-emperor-of-the-social-sciences-d9iVEm2bcp
SP - F419
VL - 115
IS - 507
DP - DeepDyve
ER -