Book review – Real-world economics for whom and for what?

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from Yoshinori Shiozawa

Review of John Komlos, Foundations of Real-World Economics / What Every Economic Student Needs to Know, Third Edition, 2023

1. Introduction

This review article must not be too long. Readers of this Real-World Economics Blog are accustomed to read posts less than one thousand words. I want to limit it within three thousand words. In view of the objective of the new book review series (to create a forum to inform each other), this must be too short. No detailed account is possible. Instead, the readers and the authors can pose questions, add supplementary comments, and raise new arguments. If our aim of book (or paper) review series is to make an interactive forum, full explanations would not be necessary. The role of the reviewer must be triggering animated discussions.

Komlos’s book is written as Economics 101 textbook. As such, it has already achieved a great success. In ten years, it arrived at the third edition. A new edition is published in every four years. I celebrate this success. This is a book that must be widely read by as many Economics 101 students as possible. In the United States about forty percent of undergraduate students take Economics 101. The contents taught there are very important for a democratic society because they become voters in the future. The aim of writing and teaching Economics 101 is very different from research in economics or doing economics as profession. This fact gives us a special occasion to think about the true significance of doing economics.

My review became harshly critical to Komlos’s book. Many of readers of RWER blog would support Komlos much ardently than me. Discussing Economics 101 is a rare occasion to think about the role of economics in the society in a deep level. Why do we study economics? What should it be? The review gave us a rare occasion to argue these very basic problems.

2. Moral science versus economic science 

The book advocates “a new paradigm: Capitalism with a Human Face.” (p.5, Emphasis by Komlos) At the political or ethical level, I support his program. The problem is how to implement it. “Our starting point,” he declares, “should not be Adam Smith’s Wealth of Nations (1776), but his Theory of Moral Sentiments (1759).” (p.3) What he aims in Economics 101 is a reconstruction of moral science. On this point, I cannot agree with him. This is to deny the proper role of economics.

If Smith did not write the Wealth of Nations, did he become a father of economics? He must have written it because he felt something was lacking in Moral Sentiments. According to Meir Kohn (2004), Adam Smith posed three basic questions: How are relative prices determined? How is economic activity coordinated? What are the causes of economic growth? (p.314) Kohn thinks that Smith was only successful with regards to the first question. As for other two questions, Kohn considers that we should change our paradigm from value paradigm to exchange one. I do not agree with him on this point, but this is not the place to argue it. In Komlos (2022), there is no enquiry into the last two questions. The unique comments I could find was two comments on “conventional supply and demand model.” One in p.81. The other in p.114. The first tells that the conventional model is suitable in most retail markets, but not for asset market (Komlos 2022, p.81). The second comment is more doubtful on the model, but Komlos gives no explanations why the conventional model works even for retail markets. The question of coordination for the economy as a whole is totally ignored. This absence of coordination question is typical in Komlos (2022). It seems that in Komlos’ eyes, there is no economic phenomenon that surpasses human dimension. I will come back to this point soon.

It is true that to realize capitalism with a human face requires various activities: politics, ethics, laws, social institutions, solidarity, compassion, fairness, justice, and many others. Many of these virtues are already known at the age of Socrates (c. 470-399BCE) and Confucious (c. 551-478 BCE). These are wisdom people obtained when they came to live in a large society. Moral science is more sophisticated, but still wisdom rather than sciences. Social sciences started to grow since these three centuries. Each of them tries to understand a very narrow aspect of human life. In the case of economics, it is to understand how the economy works. Komlos’s book is rather a moral science textbook in the age of neoclassical economics. It is a good book as compensation to mainstream teaching. Perhaps a must for citizens education and as a book for consumers’ education (OECD 2009, 2010). As far as Economics 101 is a part of general education for those students who will not necessarily be economists or policy makers, his textbook has many points superior to mainstream economics, e.g., Mankiw’s Principles. However, as an economics book, which may lead to a more specialized work in economics, it is, in my opinion, defective with several reasons.

Almost everywhere Komlos comments how and why markets often fail. There is no clear explanation how the economy works. Komlos praises behavioral economics and claims that prospect theory is the future foundation of economics (title of §4.10). It is more realistic, and in this sense, more scientific than the common theory of utility maximization. However, it is psychology adapted in economic situations. As the economy is composed of individuals’ interactions, it helps economics to become more refined, but it cannot be the core framework of economics. A national or world economy is a system of productions connected by a network of exchange of products. The essential part of an economy often transcends human dimension (too big to experience or feel). Economics gives knowledge on how the economy works (including knowledge on when it fails to work). This is the raison-d’être of economics as science. There is no problem in using behavioral economics as auxiliary part of economics, but it cannot be the core of economics.

Economics is a narrow science. It is not almighty. Economists are not almighty nor omniscient. They may not be as wise as savant philosophers. But, as a science, it has a moment of development. Normally the knowledge accumulates. While actual economics is in a cul-de-sac, it has a possibility of scientific revolution. What I want is this revolution in economics, and not a revolution in moral science. To seek a unified social science does not seem to be the way to renovate any of social sciences.

3. From Neoliberalism to right-wing Trumpism

A characteristic chapter of Komlos (2022) is Chapter 15, which has a title Economists’ Mistakes Lead to Right-Wing Populism Plus an Insurrection. It is a history of the United States on how it became a dual economy, where some got rich and others suffered from decreasing real wage and the pressure of job loss. Although the chapter must be an accurate history of neoliberalism in the United States, I am rather skeptical if neoclassical economics was the prime mover of neoliberalism as Komlos seems to suggest.

Roughly stated, neoliberalism was a reaction to the failure of progressive ideas that became apparent in 1970’s (Harvey 2005). The political ideas that lead different activists were progressive, democratic, and humanitarian. Basic orientation was very close to Komlos’s idea of capitalism with a human face. Regaining humanitarian values in economic textbook is necessary, but I doubt if it is the main objective of Economics 101. My impression of Komlos’s book is that it is a good consumer education textbook but not a good introduction to economics.

As an account of how Donald Trump became the president of the United States, Komlos explains how a small number of majorities in three Rust Belt states brought him the victory. Is this a result of the lack of humanitarian teaching in Economics? Much simple explanation would be this: this district was industrially distressed for many years and some desperate voters voted for Trump. As Komlos admits, this is the problem of economic distress. The first question to be asked must be why it occurred. This is the question of economics. Of course, the causes and remedies are not simple. Economics is not powerful enough to redress the situation easily. Even though, this is the question of economics and not that of lack of humanitarian values in economics teaching.

Komlos blames Clinton for signing NAFTA and admitting China to be a full member of the WTO. It is true that they were two of many factors that invited hyper globalization. Komlos accuses economists to have willfully overlooked the outcome of the globalization. He is partly right. Economics framework for treating international economic relations was quite weak. Unemployment was excluded by assumption. This is not the defect of comparative advantage theory alone but the defect of microeconomics in general. Komlos’s whole system of economics is not easily seen from his textbook, but it seems he has a similar idea to Samuelson’s neoclassical synthesis (Except a few lines in p.201, there is no mention to this point). Macroeconomics admits unemployment, but microeconomics seems to remain unaffected by this fact. International trade theory is often called international micro. Even if the unemployment is one of most acute problems of international trade theory, international microeconomics continues to assume full employment. Komlos blames economists in thinking by the comparative advantage framework and does not notice the main defects of this theory (It is not the restrictedness of assumptions [See §13.1] that matters). The weakness of Komlos’s 101 is that the author has no (even embryonic) vision of the alternative economics.

While it is the problem of international trade, the Rust Belt is the problem of economic growth at the same time. Why can the area not produce new industries (instead of old industries that lost their competitiveness in the international competition)? Komlos is ecologist as well as humanitarian economist. He judges that “our civilization has reached a new stage of development when further growth is superfluous.” (§11.3) A simple consequence: no necessity of growth theory. However, I believe Komlos is mistaken on two points. First, even if he is right to claim it for the United States, there are many countries that require growth. Second, escaping from depression in the Rust Belt is still questions of economic growth. Being unable to think about it is a simple consequence of his knowledge of growth theories. Old and new growth theories (Solow and Romer) are based on full utilization of endowments. The latter implies full employment. What we need is a theory that can analyze technological change without full employment assumption.

Here again, what is needed is the true synthesis of micro and macro economics. We need microeconomics that can analyze unemployment situation and can be foundations of macroeconomics. Trouble with Komlos (2022) is that it seems to be based on a banal microeconomics combined with socially conscious Keynesian economics. Intentions are quite right. It may be sufficient for first-year students. I doubt if it can persuade advanced-course students or young professional economists.

4. The role of economics and strategies for further research

The biggest trouble with Komlos (2022) is that he sees economics as a part of moral science and does not admit the proper roles for economics. It is right that he aims a capitalism with a human face. To realize this purpose, all wisdom concerning society must be mobilized. However, this necessity does not imply that we have enough knowledge about society and the route to the target. In the case of economics, we still lack a good framework by which to understand how the capitalism or market economy works.

In the past, the strongest movement was communism. Helped by Marx’s analysis of capitalist economy, people believed they have enough knowledge to go to next stage of human economy, that of planned economy. It was a pure illusion as we all know it now. If we aim at capitalism with a human face, human values are important. Are they all we must know? As I have illustrated in Section 3, history is determined not by ideology alone. There are many economic troubles that we cannot solve. There will be many other problems: social, cultural, political (such as war), and ecological. We have little knowledge on each of those problems. Cooperation is necessary. It does not imply, however, that we can neglect obtaining a good knowledge on each aspect of human lives. Economics is one of them. Even if it has a face of being well developed, specialists know it is still a very fragile knowledge. Further investigation of economics is necessary. It includes the examination of present state of economics. Inevitably this examination includes how to estimate now-mainstream neoclassical economics. My judgment is that we need a total paradigm change. This paradigm change is not the same one that Komlos aims at: the paradigm change of values or human aims. A paradigm change I want is the one in economics as science.

The two changes are not contradictory in themselves. The difference between us is that Komlos seems to accept neoclassical economics as the core framework of microeconomics. It is nowhere stated as such. Komlos is very critical of the actual state of neoclassical economics. Almost everywhere in his book, Komlos accuses neoclassical economics. More precisely, he accuses mainstream interpretations of neoclassical economics. But it is done from an ethical point of view, not from a theoretical one. Komlos accepts demand and supply functions, determination of equilibrium price and quantities at the crossing point of them, marginal cost and revenue, wage and profit that are determined as returns to factors. They are all neoclassical economics. He remarks and contests that the economy is ordinarily out of equilibrium, markets are not perfectly competitive, usually inefficient, information is not perfect, it is asymmetric, etc. Despite all these remarks, warnings, and discontents, Komlos does not give his account on how market economy works ordinarily. His comments may be useful as complementary explanations to mainstream economists’ apologetic discourses. They are useful as long as neoclassical economics remains mainstream. Reading Komlos’s Economics 101 does not help readers to obtain even a bare notion on the working of the economy other than to think in vulgar demand and supply framework.

He may be thinking that there is no satisfactory economics theory. He is right on this point. Even if we have some fragments of satisfactory theories, they are not unified in a unique system. He may be thinking that we should apply a piece of explanation for each problem we face. This may even be wisdom of moral sciences. Even if he is thinking like this, is it honest not to explain this fact? Richard P. Feynman is Komlos’s favorite textbook writer. He claimed that introductory physics textbook should not give an introductory explanation that should be revised in the later stage of learning. Despite his own acknowledgement, it is difficult to see that Komlos’s textbook satisfies Feynman’s test of scientific integrity (§1.6).

Komlos complains that most mainstream textbooks ignore crucial concepts analyzed by Nobelists from Herbert Simon to Richard Thaler (in total ten names) (p.352). Incorporating new concepts proposed by these economists surely enriches economics, but it is an enrichment of neoclassical economics (although their research can enrich heterodox economics too). It is too narrow to consider that Mankiw, or Samuelson and Nordhaus, are only mainstream economists. But we should not imagine that we can get a paradigm change in economics by incorporating various concepts proposed by them. What is questioned is the core framework of economics. What we imagine by these terms may change by economists, but the common picture must be Arrow and Debreu’s general equilibrium theory. Neoclassical micro and macro economics all draws on it. Yet, Arrow and Debreu is completely ignored in Komlos’s textbook (Name of Arrow appears but that of Debreu nowhere).

General equilibrium theory, which originates from Walras, had a clear research program that consisted of three pillars: existence, uniqueness, and stability. Existence was proved by Arrow and Debreu (1954). In 1970’s, Sonnenschein, Mantel, and Debreu theorem showed that it is impossible to obtain uniqueness and stability in a general situation. The research program faced serious problem (Kirman 1989; 2016). But neoclassical economics was not dethroned, because no alternative emerged. Adding modifications is not sufficient for the paradigm change. Adding modifications by many able economists (like ten Nobelists cited above), changing interpretations as Komlos did in his textbook, and attacking neoclassical economics as Lars Syll repeats in this RWER Blog, are powerless unless an alternative is presented. This is my opinion. Some may support me, and some others may oppose me, but there is no other bet for this big stake.

5. Some points left undiscussed

There are many other related important points to be argued. Here are a few of them in bullet points.

-Unification of social sciences: is it possible? Is it desirable?

-How should collaborations be organized between different fields of economics, if we have no unified heterodox economics?

-How, what, and to what extent, can we learn from mainstream economics?

-Are philosophy and methodology of economics helpful in guiding economics to achieve a paradigm change?

[Acknowledgement]

In writing this book review, communication with Eiichi Sumitani, Hiroshi Osaka, and Larry Allen was helpful.

[References]

Arrow, Kenneth J., and Gerard Debreu (1954) The existence of an equilibrium for a competitive economy. Econometrica 22: 265-90.

Harvey, David (2005) A Brief History of Neoliberalism. Oxford University Press. Oxford.

Kirman, Alan (1989) the intrinsic limits of modern economic theory: the emperor has no clothes. Economic Journal 99(395): 126-139.

Kirman, Alan (2016) Complexity and economic Policy: A Paradigm Shift or a Change in Perspectives? Journal of Economic Perspective 54(2): 514-572.

Kohn, Meir (2004) Value and Exchange. Cato Journal 24(3): 303-338.

OECD (2009) Promoting Consumer Education: Trends, Policies and Good Practices. OECD Publishing_, Paris.

OECD (2010) Consumer Policy Toolkit. OECD Publishing, Paris.