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“Is there anything worth keeping in standard microeconomics?”

from Edward Fullbrook

For me three economists stand out historically as having been the most effective at building resistance to the dominance of scientism in economics.  Keynes of course is one, and the other two are Bernard Guerrien and Tony Lawson, Guerrien because he was the intellectual and moral force behind Autisme Economie which, among other things, gave rise to the RWER; and Lawson because his papers, books and seminars have inspired, joined and intellectually fortified thousands.

It is notable that all three of these economists were or were on their way to becoming professional mathematicians before switching to economics.  When still in his twenties, Keynes’ mathematical genius was already publicly celebrated, most notably by Whitehead and Russell, and he had already published what was to become for his first discipline a classic work.  Guerrien’s first PhD was in mathematics, and Lawson was doing a PhD in mathematics at Cambridge when its economics department lured him over in an attempt to boost its mathematical competence.

The significance for me of Keynes, Guerrien and Lawson being mathematicians first and economists second is that it meant that they were not even for an hour taken in or intimidated by the aggressive scientism of neoclassical economists, and this has enabled them to write analytically about the dominant scientism with a quiet straightforwardness that is beyond the reach of most of us.

An example of this kind of writing that I am talking about is the short essay below that in 2002 Guerrien published in what is now the Real-World Economics Review

Is There Anything Worth Keeping in Standard Microeconomics?
Bernard Guerrien  (Université Paris I, France)

The French students’ movement against autism in economics started with a revolt against  the disproportionate importance of microeconomics in economic teaching. The students complained that nobody had really proved to them that microeconomics was of any use; what is the interest of going through “micro1”, “micro2”, “micro3”, etc., using lots of mathematics to speak of fictitious households, fictitious enterprises and fictitious markets?

Actually, when one thinks about it, it turns out that microeconomics is simply “neoclassical theory”.  Realizing this, I agree with the French students when they say that :

  1. In a course on economic theories, neoclassical theory should be taught alongside other economic theories (classical political economy, marxist theory, keynesian theory, etc.) showing that it is just one among several other approaches;
  2. The principal elements and assumptions of neoclassical theory (consumer and producer choice, general equilibrium existence theorems, and so on) should be taught with very little mathematics (or with none at all). The main reason being that it is essential for students to understand the economic meaning of assumptions made in mathematical language. As they study economics, and not mathematics, students must decide if these assumptions are relevant, or meaningful. But, for that, assumptions must be expressed in clear English and not in abstruse formulas. Only if assumptions, and models, are relevant, can it be of any interest to try to see what “results” or “theorems” can be deduced from them.

I am convinced that assumptions of standard microeconomics are not at all relevant. And I think that it is nonsense to say – as some people do (using the “ as if ” argument) – that relevant results can be deduced from assumptions that obviously contradict almost everything that we observe around us.

The main reason why the teaching of microeconomics (or of “ micro foundations” of macroeconomics) has been called “autistic” is because it is increasingly impossible to discuss real-world economic questions with microeconomists – and with almost all neoclassical theorists.  They are trapped in their system, and don’t in fact care about the outside world any more. If you consult any microeconomic textbook,  it is full of maths (e.g. Kreps or Mas-Colell, Whinston and Green) or of “tales” (e.g. Varian or Schotter), without real data (occasionally you find “examples”, or “applications”, with numerical examples – but they are purely fictitious, invented by the authors).

At first, French students got quite a lot of support from teachers and professors: hundreds of teachers signed petitions backing their movement – specially pleading for “pluralism” in teaching the different ways of approaching economics.  But when the students proposed a precise program of studies, without “micro 1”,  “micro 2”, “micro 3” … , without macroeconomics “with microfoundations” or with a “ representative agent ” -, almost all teachers refused, considering that is was “too much” because  “students must learn all these things, even with some mathematical details”.  When you ask them “why?”, the answer usually goes something like this: “Well, even if we, personally, never use the kind of ‘theory’ or ‘tools’ taught in micoreconomics courses (since we are regulationist, evolutionist, institutionalist, conventionalist, etc.) -, surely there are people who do ‘use’ and  ‘apply’ them, even if it is in an ‘unrealistic’, or ‘excessive’ way”.

But when you ask those scholars who do “use these tools”, especially those who do a lot of econometrics with “representative agent” models, they answer (if you insist quite a bit): “OK,  I agree with you that it is nonsense to represent the whole economy by the (intertemporal) choice of one agent – consumer and producer – or by a unique household that owns a unique firm; but if you don’t do that, you don’t do anything !”.

There are also, some microeconomists who try to prove, by experiments or by some kind of econometrics, that people act rationally.  But, to do that you don’t need to know envelope theorems, compensated (Hicksian) demand or Slutsky matrix! Indeed, “experimental economics” has a very  tenuous relation with “theory”: it tests very elementary ideas (about rational choice or about markets) in very simple situations – even if, in general, people don’t act as theory predicts, but that is another question.

Microeconomics: “unrealistic ” or  “irrelevant” ?

Most of the time microeconomics is criticized because of it’s “lack of realism”.  But “ lack of realism” doesn’t necessarily mean irrelevance ; the expression is usually understood as  meaning that the theory in question is “more or less distant from reality”, or as giving a more or less acceptable proxy of reality (people differing about the quality of the approximation).  The idea is implicitly this: “if we work hard, relaxing some assumptions and using more powerful mathematical theorems, microeconomics will progressively became more and more realistic. There are then – at least – some interesting  concepts and results in microeconomics, that a healthy, post-autistic, economic theory should incorporate”.

That’s what Geff Harcourt implicitly says in the post-autistic economics review, no.11, when he writes:

Against this macroeconomic background, modern microeconomics has a bias towards examining the behaviour of competitive markets (as set out most fully and rigorously in the Arrow-Debreu model of general equilibrium), not as reference points but as approximations to what is actually going on.  Of course, departures from them are taught, increasingly by the clever application of game theory.  Moreover, the  deficiencies of real markets of all sorts are examined in the light of the implications, for example, of the findings of the asymmetric information theorists (three of whom – George Akerlof, Michael Spence, and Joe Stiglitz – have just (10/10/01) been awarded this year’s Nobel Prize.  From Amartya Sen on, the Nobel Prize electors seem to be back on track).

 What is Harcourt saying?  He is telling us that the Arrow-Debreu model has something to do with “ the behaviour of competitive markets ”; he is saying that  game theory can be cleverly “applied ”;  he says that there are “ findings ” made by Akerlof, Spence and Stiglitz.  If all this is true, then students have to learn general equilibrium theory (as giving “ approximations to what is actually going on”), game theory, asymmetric information theory, and so on.  That means that they need micro 1, micro 2, micro 3… courses (consumer and producer choice, perfect and imperfect competition, game theory, “ market failures ”, etc.).

I don’t agree at all with Geff Harcourt because:

  1. The Arrow-Debreu model has nothing to do with competition and markets: it is a model of a “highly centralised” economy, with a benevolent auctioneer doing a lot of things, and with stupid price-taker agents;
  2. Game theory cannot be “ applied ”: it only tells little “ stories ” about the possible consequences of rational individuals’ choices made once and for all and simultaneously by all of them.
  3. Akerlof, Spence and Stiglitz have no new “findings”, they just present, in a mathematical form, some very old ideas – long known by insurance companies and by those who organize auctions and second hand markets .
  4. Amartya Sen, as an economist, is a standard microeconomist (that is what he was awarded the Nobel Prize for): only the vocabulary is different (“ capabilities ”, “ functionings ”, etc.).

But, perhaps, all “post autistic” economists won’t agree with me.

It would be good then that they give their opinion and, more generally, that we try to answer, in detail, the question: Is there anything worth keeping in microeconomics – and in neoclassical theory?  If there is, what?

______________________________

Bernard Guerrien is the author of  La Théorie des jeux (2002), Dictionnaire d’analyse économique (2002) and La théorie économique néoclassique. macroéconomie, théorie des jeux, tome 2 (1999).

  1. April 14, 2015 at 8:06 am

    As Kuhn has said, paradigm shifts occur when a new paradigm emerges. The burning question is: WHAT should we be teaching as an alternative? If we can come up with a better mousetrap, then at least some people will come to our door.
    There are two important insights, also from Kuhn — there is no point in trying to convert the old school — they have too much invested in the old methods. One can make headway with the new generation by offering them new and exciting research problems, and new and exciting ways of looking at the world.

    Here I feel that educators in the west are severely handicapped — there is massive opposition to new ideas, and the orthodoxy is entrenched in powerful positions. Well known heterodox economists advise their students against doing theses in these areas for the fear of doing poorly on the job market. Areas such as “Development Studies” have emerged

    Here in the third world we do not have such problems. We are free to create new approaches without much resistance. I am actively engaged in efforts to develop new curricula for micro and macro economics, based on ideas outlines in my post on the WEA Pedagogy Blog: Three Goals for Pedagogical Change. One MUST teach enough conventional micro and macro to enable comprehension of what orthodoxy is saying, and to enable dialog. However, this level of competence can be developed without the intensive training required to do further research in this field. This frees up time to look at more real world issues. For instance, I have prepared some online lectures on Macro-Economics, which provide historical background and context (in violation of standard practice of treating macro as time and space invariant scientific theories). These are available from my website asadzaman.net

    One very important advantage we have today is the possibility of Online Courses — This means that we can leverage meager resources — If a few accumulators would collect lectures which are best practice at present time, and keep track of improvements, one standard online heterodox course which attracts consensus could be used all over the world. This is a new tool of tremendous value — previously, everyone was confined to working in his own corner, with very limited effects. I think the commentaries project of Stuart Birks is of great value, but we need to progress beyond this. Start by developing ONLINE lectures which could be incorporated into a standard micro course. Later develop short modules. Eventually the whole courses. This must be done with consensus so that it can be broadly adopted.

  2. blocke
    April 14, 2015 at 9:23 am

    Asad makes valid points. But I don’t agree with his characterization of neo-classical economics as the economics of the West. It is an English speaking, i.e, American invention imposed after WWII. I had the good fortune of learning about economics through a study of 19th century Germany. There I found intellectual traditions extant in Middle Europe that were quite distinct from English-American neo-classical economics. I wish Asad new more about the Middle European Tradition. It was not only strong in the 19th century, but in mid20th century, US drew on it in it for operational and decision sciences (Cowles Commission (Marschak, Koopman, Wald, Morgenstern, Neumann. With all due respect to the mathemathical prowess of Keynes, the Central European intellectuals who fled central Europe in the 1930s and the 1940s led the intellectual revolution in higher education, including economics. Arrow, Samuelson, etc. only learned from them, but the tools they borrowed from them, turned out to be a mistaken application in neoclassical economics. I learned this through the studies I did in the 1980s. Asad does not have to look for the 3rd World to find the correctives to neo-classical economics, the antedotes are already in the “West” in Central European traditions in economics and decision theory.

  3. Paul Schächterle
    April 14, 2015 at 9:59 am

    Guerrien: “I am convinced that assumptions of standard microeconomics are not at all relevant.”

    Exactly. I would call those assumptions “false” because they do not apply at all to reality.
    I.e. there is not a single situation in the real world that can be comprehended using those assumptions.

    To teach something definitely wrong just because you don’t know what else to teach is almost comical. We all know the joke about the drunk looking for his key under a lantern. A passer-by asks him if he is sure that he hast lost the key near the lantern. And the drunk responds: “No. I know I lost the key at the parking lot but there there is no light.”

    What should be taught in economics departments is
    –history of economic thought,
    –neoclassical economics as far as is needed to understand why it is a wrong theory,
    –alternative approaches with their pros and cons,
    –the system of national accounts and all the problems related to measuring economic activity (money as measurement unit, price level [“inflation”], classification of goods etc.)
    –the nature of money and credit
    and as a foundation
    –a certain level of epistemology,
    –a certain level of law necessary to understand basic economic movements,
    –a certain level of mathematics and
    –a certain level of computer science to be able to understand and develop models and simulations.

  4. April 14, 2015 at 10:40 am

    It is a good step to demonstrate the fallacies of micro. There is need to explain those with respect to the real happenings. It is better to take one by one the misconstructions of micro theory and relatively provide a strong base real alternative.

  5. April 14, 2015 at 11:41 am

    The intelligent student’s predicament
    Comment on ‘Is there anything worth keeping in standard microeconomics?’

    The student of economics either understands in his first course of econ101 that neoclassical economics is unrealistic, irrelevant, absurd, consumptive of time, senseless, dilettantish, logically defective, methodologically unacceptable, useless, etcetera etcetera, or he self-selects out of science.

    By default, all heterodox economists are one decisive step ahead of orthodox economists, albeit in widely different ways. The French anti-autistic students were in any case more intelligent and consequent than their peers in other parts of the world. But they did not go far enough because after rigorous debunking you face the real problem.

    “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)

    Clearly, at the moment there is no convincing new heterodox approach and because of this the professors cannot do anything other than to fall back on neoclassics-plus-1000-caveats or pluralistic wish-wash.

    There is only one way forward and this is called in science a paradigm shift. This is the task of Constructive Heterodoxy.*

    Indeed, there is absolutely nothing worth keeping of standard microeconomics. Economics is a failed science. From this, Joan Robinson already drew the correct conclusions: Scrap the lot and start again!

    Egmont Kakarot-Handtke

    References
    Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University
    Press, 5th edition.

    * For the new curriculum see
    http://axecorg.blogspot.de/2015/02/essentials-cross-references.html

  6. Rhonda Kovac
    April 14, 2015 at 1:11 pm

    This post rightly confronts the deficiencies of neoclassical microeconomics. But there are other possibilities for doing microeconomics, and it would be throwing out the baby with the bath water to cast microeconomics out altogether. Macroeconomics, with its of necessity aggregate and summary metrics, does not address the challenge of ensuring economic success at the individual level. The neoclassical version of microeconomics is grounded in claimed general behavioral rules, rather than in an analysis of human needs and of how they can be met. This is because neoclassicism PRESUMES individual needs are automatically taken care of–through market mechanisms, driven by preferences, purchasing decisions, and so on. If, however, economics is to truly secure need–and of us all, not merely of a ‘percentage’ of us–then it must include microeconomics, although of a different sort–one that actually understands people’s needs and how they are addressed at the individual level.

  7. April 14, 2015 at 2:04 pm

    Reblogged this on Gabriel Rega and commented:
    Concordo com os comentários. Não seria tão radical quanto o autor, de jogar tudo fora. Primeiro, é possível desenvolver uma outra abordagem, com outras premissas, outra metodologia. Temos que fazê-lo e ensiná-lo. Mas não posso eliminar essa parte tradicional do currículo se meu objetivo é ser pluralista. Mudar a forma de apresentação, reduzir espaço e profundidade OK, mas criando a possibilidade de aprofundamento para quem quer seguir esse caminho (eletivamente).

  8. April 16, 2015 at 4:12 am

    The answer to question ‘Is there anything worth keeping in standard microeconomics?’ is straightforward.

    Is there anything in standard microeconomics which is true and proven to be true? Truth is not based on persuasive story-telling (even with mathematics and diagrams) but based on objective evidence. Equilibrium? Define it and measure it to show that it exists in any approximate sense.

    Rationality? Utility?… Whatever is the foundation of theory, show that there are sufficient factual support. So far, there is no concept which is solidly grounded on facts, sufficient to build deductive theories. Microeconomics based on optimization is a fallacy.

    According to Herbert Simon people do not optimize, but statisfice. Optimization requires resources: time, knowledge, effort etc. of which people normally do not have enough. Under constraints, people make decisions which satisfy certain criteria based on “good enough” outcomes for meeting their needs.

    There is virtually no evidence for optimizing and plenty of evidence for satisficing. If we throw out optimization in microeconomics what is left?

  9. April 24, 2015 at 4:17 pm

    Reblogged this on Explorations in Political Economy and commented:
    Don’t have anything to add to this. Reposting because I’m in agreement

  10. Ezra Davar
    April 26, 2015 at 8:23 am

    Benicourt and Guerrien state in their paper ‘Is Anything Worth Keeping in Microeconomics? (Review of Radical Political Economics, Volume 40, No. 3, Summer 2008, 317-323) that ‘We have concluded that microeconomics does not provide knowledge that could not be obtained otherwise and that, as it is usually taught (or presented in textbooks), it encourages an erroneous way of thinking’ and ‘In a word, to understand the real world, one has to forget microeconomics’ (p.317 and p. 322 respectively). This is relevant to the modern microeconomics, but not Walras’s own original theory. There are the erroneous method, namely, two different theories of microeconomics – post-Walras authors’ theory and Walras’s original theory – have been identified with each other.
    The theory of microeconomics, however, has not developed since Walras. The contrary is true. Here, the several crucial differences between Walras’s and post-Walras’s approaches to microeconomic theory are revealed:
    1) Walras’s economic theory is characterized by the evolutionary approach, as it is generally compatible to the human society’s development. Walras discussed micro model for four economies, and final economy’s – Circulation and Money – micro model, until today, in our opinion, is a peerless achievement in economic science. While, in the post-Walras’s economists’ approach if money is integrated, then it is done very artificially, namely, a money commodity is absent as a separate category, which is replaced by fiat and presented as money income or wealth.
    2) According to Walras’s approach, the demand and supply of goods and services are obtained directly from the solution of models. The offer quantity of a certain good (service) must be less or equal to its available quantity. In the post-Walras’s economists’ approach the final endowment is directly determined for all commodities and their sum is equal to the sum of their initial endowment; which prevent discussing employment-unemployment problem in the macro level.
    3) Walras’s economy is a decentralized economy, where individuals organize their economic life, which is opposite to the modern general equilibrium theory where the economy is a centralized; and in Walras’s approach each individual is “price maker”; whilst the post-Walrasian approach, especially the modern approach is “price taker”.
    4) According to Walras’s micro model for individuals, the budget constraint equation relates to the numéraire (the money commodity), which shows that either the offer or the demand of the money commodity (numéraire) depends on the balance between the total value of demand and the total value of offer of the commodities not used as the numéraire. By post-Walras’s economists’ approach, the budget constraint equation relates to the income (or wealth) which is generally vaguely determined and it is given; and the demand of money is equal to the total offer of all other commodities and its offer, is equal to the total demand of all other commodities.
    5) Walras, in his approach, used two types of demand functions: the first one is that where the demand quantity of a certain commodity depends only on its price and conversely; i.e., the original (ordinary) demand function (curve) – (di = fi(pi), and (pi = φi(di)); and second is the demand (offer) quantity of any commodity (service) depends on the prices of all commodities and it is obtained by the solution of the micro model; i.e., the derived (general) demand function – for an exchange economy – (di = fi(p2, p3, …, pm)). This is also the same for the supply of commodities (services). Post-Walras’s economists, unfortunately, either did not make such a differentiation of functions or if they did, then it is incomplete and only for the demand.
    6) Aaccording to Walras’s approach they are separable utility function, whilst model of the modern economy the utility function included all goods and services together in one function, which from the practical point of view is problematic, if not impossible.
    7) In the final money economy, Walras used two categories of money: first, the money commodity-numéraire (measure of value); and second, money (in circulation and for saving); and stressed that they have different roles and different prices. Post-Walras’s economists generally did not make such a differentiation of money and they considered only one category of money – fiat money.
    To sum up, there are significant differences between Walras’s and post-Walras authors’ approaches to the microeconomics, which illustrates that the micro theory has was insignificantly advanced and developed since Walras.

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