My major point in this post is to draw attention to the existence of Kapeller and Pühringer (2010).
Steve Keen's book, Debunking Economics, is mainly a compilation of well-established criticisms of textbook economics. He attempts as popular a presentation as the material will permit. These criticisms, in my opinion, leave textbook economics, both microeconomics and macroeconomics, in tatters1.
Keen, in the first edition, also offered his own original criticism of the textbook theory of the firm under perfect competition. You can find various brouhahas on the internet over Keen's remarks. Between editions of his book, Keen has published, with others, a series of papers developing his criticism2.
Some have asserted theories of perfect competition in models with a continuum of agents provide a defense of the textbook theory. As Kapeller and Pühringer point out, this is a change of subject. A non sequitur should not be a considered an adequate defense of the textbook model. Furthermore, the primary developer of models with a continuum of agents presents his approach as inconsistent with the textbook theory:
"Though writers on economic equilibrium have traditionally assumed perfect competition, they have, paradoxically, adopted a mathematical model that does not fit this assumption. Indeed, the influence of an individual participant on the economy cannot be mathematically negligible, as long as there are only finitely many participants. Thus, a mathematically model appropriate to the intuitive notion of perfect competition must contain infinitely many participants. We submit that the most natural model for this purpose contains a continuum of participants." -- Robert Aumann (1964).
It seems to me only four possibilities are open here:
- Aumann is not talking, in his critical remarks, about the model of perfect competition taught in almost any intermediate microeconomics textbook.
- Aumann is mistaken.
- The economists who write and teach the self-contradictory textbook model are deliberately teaching self-contradictory models to their students.
- The economists who write and teach the self-contradictory textbook model are ignorant.
I think only the third and fourth options are credible3. I can understand the difficulty of writing and teaching in an intellectually bankrupt discipline.
Update: Nick Rowe illustrates the willingness of some economists to teach nonsense to students: "To the individual farmer, who sees only a tiny slice of the whole demand curve, because even a 100% change in his output will cause only a tiny percentage change in total output, it will look perfectly flat." Note that in his post, even when considering the limiting case, he never considers the existence of a continuum of producers.
Update 2: Steve Keen, in the Business Spectator, re-iterates his critique of the incorrect neoclassical textbook theory of perfect competition. Tim Worstall lies to readers of Forbes. It is not true that "everyone subscribes" to the "usual basics of economics" that Keen debunks. It is not true that the bulk of Keen's book is about his "breakthroughs in showing us all the errors of our ways." One can accept almost all of Keen's demonstration of the mendacity of neoclassical textbooks without accepting any claim that Keen says is original with him. In fact, Keen notes that Stigler showed that perfectly competitive firms that are not systematically mistaken, if they produce a positive, non-infinitesimal quantity in equilibrium, will not produce at a level of output where the market price, Marginal Revenue, and Marginal Cost are all equated.
- Some areas of economics, such as game theory or the recent popularity of instrumental variables and experiments (natural and otherwise), remain unaddressed by Keen.
- Kapeller and Pühringer point to a 2008 paper published by Anglin in Physica A as a peer-reviewed response.
- The existence of the downward-sloping part of the U-shaped average cost curve for the textbook firm hardly seems compatible with the existence of an infinite number of firms, each producing a quantity of zero units of an homogeneous good.
- Aumann, Robert J. (1964). Markets with a Continuum of Traders, Econometrica, V. 32, No. 1-2.
- Kapeller, Jacob and Stephan Pühringer (2010). The Internal Consistency of Perfect Competition, The Journal of Philosophical Economics, V. III, No. 2: pp. 134-152.