by From Peter Radford It is always interesting to read what people say in response to what you write. It is also always educational. I enjoy the learning. I recently wrote a short piece meant to be a little on the light side pondering the odd comparison of the use of the word essential in our vernacular understanding of it, and the way in which standard economic theory suggests we compute our various levels of worth. I quoted J.B. Clark with respect to this latter point. I made the point that Clark’s method is still the most well-worn within economic theory. And then I was criticized for not reading enough economics to understand that there is no such thing as “economic theory”; there are, I was admonished, a large number of such theories, and that we are all entitled to pick and
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from Peter Radford
It is always interesting to read what people say in response to what you write. It is also always educational. I enjoy the learning.
I recently wrote a short piece meant to be a little on the light side pondering the odd comparison of the use of the word essential in our vernacular understanding of it, and the way in which standard economic theory suggests we compute our various levels of worth. I quoted J.B. Clark with respect to this latter point. I made the point that Clark’s method is still the most well-worn within economic theory.
And then I was criticized for not reading enough economics to understand that there is no such thing as “economic theory”; there are, I was admonished, a large number of such theories, and that we are all entitled to pick and choose between them. There was then mention of a number of economists who all sit outside the framework of standard economics and have been critics to one degree or another of it. The implication was that I am unaware of these good folk otherwise I wouldn’t look at economics through the prism of having a central set of ideas that I , presumably erroneously, refer to as “standard economics”.
Well, allow me respectfully to re-assert my belief that there is, indeed, such a thing as standard economics.
It’s the kind of thing you will read in any well-selling textbook. I have never asserted, however, that standard economics is an impenetrable monolith. There are shades of grey within it sufficient to accommodate a great percentage of practicing economists. It was to help encourage the creation and spread of an even greater plurality of ideas that I re-engaged with economics a couple of decades ago.
I don’t think that the existence of a standard set of ideas is controversial. Why else would the literature be full of the arguments in the mid-twentieth century? Why else would there be bookshelves groaning under the weight of critiques of the “Chicago School” etc? That there was a decisive shift in the profession of economics away from one set of standard ideas and towards another is indisputable. So I take it, to borrow a vexed word from the subject itself, as axiomatic that there is such a thing as the standard set. That this set is the only one in existence is not the issue. No one would argue that. But it is the dominant set. It is the sharp end of economics as manifested in our cultural, social, and political discussions with respect to the economy, business, markets, regulation, and government policy. It has infested more distant terrain like the law. It has exported many of its methods and principles into common practice by ordinary people who have never studied economics, but accept its findings as “laws” or “scientific”. The everyday lingua franca of business is positively brimming over with references back to standard theory.
It is this expansive impression of the modern discipline of economics upon our society that I am most interested in.
I am well aware that, within the safety of their profession economists, are generally willing to discuss the variety of ideas that comprise standard theory. They are also usually careful to let everyone know that many — unfortunately too many — of the critical intellectual components of their overall edifice are somewhat frail when exposed to the rigors of reality. I happen to believe that marginal productivity is one of those frailties.
I don’t think it ideologically extreme to write about this.
So, allow me to press on with my enquiry of economics. The articulation of the web of ideas centered on marginal analysis, of which marginal productivity is a part, is very much alive and well in standard economics. It is rolled out, often in subliminal form, to justify the distribution of incomes in our modern economies. And it does appear to be an inversion of what most of the rest of society thinks as essential. Jeff Bezos earns far more than the average worker in an Amazon warehouse. Standard theory seeks to explain why. Yet it is the latter, not the former, deemed essential. The paradox exists.
None of this implies that someone like Simon hasn’t tried to describe the pay of CEOs. The literature relating the various theories of the firm, which is my particular interest ever since I read Coase decades ago, is full but mostly marginal. It is marginal because, as Coase pointed out, the very existence of something called the “firm” is a denial of the perfection of the markets that the more committed members of the standard theory favor. Since this contradiction is hard, if not impossible to resolve without re-inventing a century’s worth of theoretical structures, it has been ignored. This is despite the best efforts of Williamson, Winter et al. And, yes, we all know about the so-called “capital controversy”, and that the Robinson argument was victorious in the battle but defeated in the war.
Just for the record: I like the idea that an economy is dominated by rule-based decision making rather than by a more extreme form of rationality. Satisficing is a very comfortable concept. I happen to think that the ignorance revealed by total factor productivity could be reduced by the abandonment of both “capital” and “labor” from a production function and replaced by more accurate inputs such as energy, raw materials, skill, and information or knowledge. Heck, I would even find room for management in there. I don’t think it possible to “maximize” anything in an economy because of the irreducible uncertainty facing decision makers. Equilibrium is more an illusion than a fact because the system is bothy open and dynamic. It may be useful as an investigative tool, but as a description of reality? Oh, and I tend to see the world through the prism of evolution and complexity. Yes, I am aware those things exist.
Finally: I see economic activities as as inextricably intertwined with other social and political activities. They are not separable. So I would expect there to be as many forms of economics as there are of politics. I am encouraged that a number of economists are now being more empirically driven. It’s about time. Hopefully the days of grand and elaborate theories with intricate machinery that all has to fit neatly together are gone. Economics needs a more modest moment. Perhaps the pluralism that I and others have been encouraging for a while will help in both making economics more humble and more useful. Even so the residual effect on our culture of the ideas within standard theory, most notably the power of unfettered markets, will create a great deal of inertia that a modest economics might find difficult to overcome. But it’s worth trying.
Meanwhile I will continue to poke a little fun at the more odd aspects of standard theory. Even if it reveals a little of my own ignorance.
Odd things like marginal productivity. And don’t get me started on revealed preference.
Doh!
Did I just say that again?