Friday, March 30, 2018

Exemplars of Neoclassical Economics

1.0 Preamble

Some mainstream economists defend themselves from criticisms of neoclassical economics by asserting that the mainstream is not neoclassical. They have all these recent innovations, distinguishing modern economics from archaic neoclassical economics. I judge some of these putting these claims forward to be dishonest, ignorant of the history of economics.

Anyways, I consider the following books, not all of which I have read, to be important developments of neoclassical economics:

  • William Stanley Jevons (1871) The Theory of Political Economy
  • Carl Menger (1871) Principles of Political Economy
  • Leon Walras (1874, 1877) Elements of Pure Economics
  • Alfred Marshall (1890) Principles of Economics
  • Philip Wicksteed (1910) The Common Sense of Political Economy
  • A. C. Pigou (1920) The Economics of Welfare
  • Lionel Robinson (1932) An Essay on the Nature and Significance of Economic Science
  • Edward Chamberlin (1933) Theory of Monopolistic Competition
  • Joan Robinson (1933) The Economics of Imperfect Competition
  • J. R. Hicks (1939, 1946) Value and Capital
  • Paul A. Samuelson (1947) Foundations of Economic Analysis
  • Gerard Debreu (1959) Theory of Value

I rely on English translations, with a bias towards books originally written in English. I also am going to be Whiggish in trying to briefly summarize some elements in these books. The level of mathematical abstraction and formalism increased during this time.

2.0 Selected Neoclassical Doctrines

Walras presents a sequence of models of static equilibrium. He worries about the existence and uniqueness of equilibria, as well as their optimality properties. One can read him as not attempting to abstractly describe existing capitalist economies, but an impossible utopia. He tries to understand how an economy can approach equilibrium, but his solution prohibits false trading and cannot be set in historical time.

Menger does not set out his theory with the differential calculus. It can be read as much more like an attempt to set out a Linear Programming approach in words. I have never absorbed his approach to utility theory, but it seems to postulate a structure to preferences more than that given by a continuous total order. I do not think the latter is considered essential to the Austrian school. The former was not seen so at the time. Wicksteed's emphasis on opportunity cost is seen as Austrian, even though he sets out, in words, epsilon-delta arguments for applications of the calculus to economics.

Marshall is not what I expected. He has a big picture view of economic development. Maybe his theory, when formalized, does not support an analysis of growth and development. I can see supply and demand arguments in various runs and other elements of the microeconomic textbook partial equilibrium models. But I see the textbook treatment much clearer in Chamberlin and Robinson's books. I gather they had to argue that marginal revenue curve was not an innovation of theirs. But the theory of market forms was codified by them.

Robbins is widely cited for the definition of (neoclassical) economics as the study of choices that allocate scare resources among alternative ends. These are not his exact words, and you can find similar definitions going back to, for example, Jevons. I guess it is an irony of history that Robbins set out his definition during the Great Depression, when neither labor nor capital equipment was scarce.

The books I list by Hicks and Samuelson are widely considered foundational for post-war mainstream economics. Hicks was introducing many elements of continental economics, particularly from Pareto, into Anglo-American circles. (Maybe my list above should include Knut Wicksell.) For example, consider the insistence that utility must be ordinal. He also justified Walras' law with an approach based on counting equations. Hicks also presents a model of temporary equilibrium. Here we see another kind of dynamics, which cannot be set in historical time. Spot markets clear, based on agents expectations and plans. Hicks talks about the elasticity of expectations, but does not formally model either adaptive or rational expectations. As I understand it, Samuelson has an approach to dynamics more like the Walrasian tatonnement, which still cannot be set in historical time.

I end my list with Debreu, just to emphasize that topological arguments imported from Bourbaki can still be neoclassical economics. Also, part of my point is that much of mainstream economics is not of recent origin. So I do not want to go on.

3.0 Mainstream Non-Neoclassical Doctrines

I guess I might mention some approaches in mainstream economics that one could argue are not neoclassical. Game theory; behavioral economics, including prospect theory; models of asymmetric information; and the supposed recent empirical revolution spring to mind.

I seem to recall critiques of game theory and behavioral economics as sharing the neoclassical defect of focusing on monads, not considering fully socialized individuals. This may have something to do with how their introduction into economics was accommodated to existing doctrine. In game theory, one can make such an argument, I guess, by contrasting von Neumann and Morgenstern's emphasis on social norms in their model of cooperative equilibria with (refinements of) Nash equilibria. Is not this a major point of Mirowski's Machine Dreams?

As I recall, Stiglitz, in his Nobel acceptance speech, explicitly contrasts asymmetric information with neoclassical economics. But do not information problems go along, to some extent, with the analysis of externalities and the explanation, by the Chicago-school economist Ronald Coase, of the existence of firms in problems of transaction costs? Somewhere (in G. M. Hodgson's work), I have seen it asserted that neoclassical economics is consistent with information problems, as long as they are not too severe.

Work by economists on, say, natural experiments or big data just seems mostly orthogonal to the questions touched on in this post. An examination of Google searches for evidence of racism in the 2008 United States presidential election does not seem to be about the validity of neoclassical economics.

Anyways, the compatibility of the supposed pluralism of existing mainstream economists with their shunning of traditional heterodox schools is too much to go into at the end of a post.

4.0 Conclusion

Clearly, neoclassical economics includes "dynamics", less than perfect competition, and externalities, for example. I can take seriously some of those who struggle to put more up-front emphasis on these elements in introductory teaching (for example, David Colander). I can see why some might want to take a pragmatic approach to argue for less market fundamentalist policy, taking mainstream economics as given. I do not take issue with those, like Franklin Fisher, who have tried to address fundamental flaws in neoclassical economics like its inability to allow for false (out-of-equilibrium) trading. On the other hand, I can see the desirability of starting from heterodox approaches in trying to explore actually existing capitalist economies and their problems.

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