Comment on Bernard Guerrien’s Essay
Response to Guerrien’s Essay
For Guerrien… and beyond
Two Perspectives to Guerrien’s Question
Towards a New Economics
Yes, There is Something Worth Keeping in Microeconomics
Can we please move on? A note on the Guerrien debate
Once Again on Microeconomics
Neoclassical microeconomic theory is, both in its simple, and in its most rarefied forms, a theory of how a unit will respond when faced with the commercial logic that says buy cheap, sell dear, and if you don’t cover your costs over some reasonable period of time, you will cease to exist. It does not matter whether the prices to which the unit responds are changed through competitive or uncompetitive markets or by an auctioneer; the analysis is of response to price.
The question to ask, in answering Guerrien’s question, is whether or not the commercial logic is applicable to units whose behavior one wishes to analyze. The sleight of hand performed at the beginning of most introductory economic textbooks, and assumed thereafter in more advanced work, is that given conditions of unlimited wants and limited resources, the logic does apply widely. The wants can be wants for revenue for firms, utility for consumers, benefits for recipients of government services. If the wherewithal to get those wants (costs of inputs for firms, work or disutility for consumers, tax revenues for governments, resources for all of society) are limited then commercial rationality is assumed to be the only possible rationality; the alternative is assumed to be irrationality.
The power of economic analysis described by Bruce Caldwell (PAE Review no. 13) in his defense of the use of microeconomic theory is the power to explain the impact of price ceilings or floors, price supports, and the like given that the units involved react to price according to the commercial logic. I would agree with Caldwell that if this condition is met, then microeconomic theory does have wide applicability.
However, there is a large issue that requires further exploration, and it has nothing to do with the contestable assumption that wants are unlimited and resources finite. I am quite prepared to grant these assumptions for short-term analysis of many economic issues.
What I am not prepared to grant is that two additional conditions for application of the commercial logic are in fact met by most of the economic units with which economic analysis must deal if such analysis is to be useful in thinking about economic issues.
The first condition is that there must be a numeraire that can be used to perform the double-entry bookkeeping that is core to the commercial logic. A numeraire, or common measurement for otherwise diverse elements, is required to know if you are buying cheaply and selling dearly, and, in fact, is required if the commercial logic is to have any meaning at all.
From this observation follows the second condition that must be met if commercial logic is to apply: the goals of the units being analyzed must be the goal of having commonly measured inflows at least equal to or in excess of outflows. However, as is widely recognized the goals of many social units, such as families and even large commercial corporations, are multiple and cannot be toted up as a simple double-entry bookkeeping exercise. To take a simple example: children are not produced in accord with variation in the current, or even projected, price of labor, so that even if the amount of labor offered from an existing stock of people varies with price (a doubtful assumption), labor markets will also be rendered slightly odd by virtue of the failure of the model of commercial logic to capture the full array of relevant variables. For large firms with political, social and market power, long-term strategies of location, survival, and other goals are likely to outweigh and obscure the simple application of commercial logic.
Where both numeraire and the simple commercial goal exist, microeconomic theory can be a useful way of describing probable action and outcomes. Many of Bruce Caldwell’s examples of the power of economic reasoning probably meet these requirements. If new rental housing is added in response to expected revenues from rent, and if apartment rental rates weigh heavily in consumer demand, then rent control may reasonably be expected to result in shortages. If, however, as is apparently the case with minimum wages, there are other factors that weigh more heavily than price on behavior of units involved (relatively fixed staffing requirements, number of unskilled people in the labor force, and so on) then neoclassical price theory becomes less useful. It is certainly less useful in exploring the behavior of large, international corporations with multiple goals, and of families with a variety of lifestyle options, than it is in explaining the behavior of small firms that operate in markets consisting of other such firms.
The answer to Guerrien’s Essay is, therefore, it depends on what you are analyzing. There is certainly something worth keeping in standard microeconomics,but we should not be deluded by the fancier ways of articulating what remains a simple model, a model so simple that it cannot capture the complexity of interaction in economies. Superior analysis requires recognition of this greater complexity.