FWers,
Was the debate 2 or 3 principles? The following trigger
memory of that thread.
Superior Analysis Requires
Recognition of Complexity
Anne Mayhew (University
of Tennessee, USA)
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.
SUGGESTED CITATION:
Anne Mayhew, "Superior Analysis Requires Recognition of Complexity", post-autistic
economics review,
issue no. 14, June 21, 2002, article 7. http://www.btinternet.com/~pae_news/review/issue14.htm
Bruce Leier
