For too long, a talented economist, or at least one who got tenure, spent his time constructing models that, starting with implausible assumptions (we are all omniscient rational agents with perfect information about all prices past and future), made elegant and logically consistent conclusions. (It doesn’t matter whether a company is financed through debt or equity.) Whether these theories have any connection to the real world has little relevance to an economist’s professional success. Before the crash, most macroeconomic models didn’t even include a banking sector. That is like physics without gravity.
This trust in theory gives neoclassical economics a distinctly Panglossian flavor. As long as markets are free, we live in the best of all possible worlds. According to the orthodox economics taught undergraduates, every one of us — you, me, the bum pushing a cart full of Coke cans, Lady Gaga, Donald Rumsfeld, Rupert Murdoch — all earn precisely what we deserve. The logic is impeccable. No one would pay a worker more than they contribute to the firm’s bottom line, and no worker would labor for less than he makes the firm. Thus, assuming, as neoclassical economic models do, perfect competition and everyone’s omniscience of all probabilities, present and future, we each earn exactly the marginal productivity of our labor. Even entrepreneurs, ultimately, will earn precisely what their labor is worth, what a worker hired to do their labor would get paid. That is because, in neoclassical economics, unlike real life, profits are merely a temporary phenomena. Any business making above average gains will draw in competitors, increasing supply and thus driving down the price until its profits reach the point of equilibrium, at which point its earnings are the same as those of every other businessman. This, I was told when I studied Econ 101 as a college freshman, was the justification of capitalism. No one gets to charge more than he deserves. Ultimately, all progress accrues to the consumer. full: http://lareviewofbooks.org/essay/schumpeter _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
