Blog-Reference and Blog-Reference
Blair Fix summarizes “… Jonathan Nitzan demolishes the neoclassical theory of prices. It’s a master lesson in how to deconstruct a theory.”
Mainstream economics, though, does not need another deconstruction. Mainstreamers have admitted failure long ago “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990)
Clearly, everybody knows by now for sure that supply-demand-equilibrium is proto-scientific garbage. Back in 1954, Schumpeter found it still necessary to diffuse doubts about the scientific status of the supply-demand-equilibrium approach “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.”
So, the right thing to do is to bury and forget the “Totem of the Micro”: “If neoclassical theory is bunk, then what explains prices? Jonathan Nitzan, together with Shimshon Bichler, argues that prices are inseparable from power.”#4
With this, though, everything remains in the old economics-is-a-social-science paradigm. The behavioral assumption of price-taking is replaced by the assumption of price-setting. To remain in the psycho-sociological sphere is the lethal blunder of the power approach because economics is a systems science.#5
Here are the basics of the macrofoundations approach. The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R (1a). The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This is the most elementary case, i.e. when the economy gets more complex the price equation becomes longer.*
The macroeconomic Law of Supply and Demand (1a) implies W/P=R (1b), i.e. the real wage is always equal to the productivity no matter how the wage rate W is set or how long the individual or aggregate working time L is. Full employment is possible, the workers always get the whole product O. The workers' living standard depends ultimately on productivity.
The logical next steps are (i) to skip the conditions of market-clearing and budget-balancing and to allow for price-setting, (ii) to differentiate the business sector into multiple firms and markets and to determine the price structure.#6
Egmont Kakarot-Handtke
#1 There is NO such thing as supply-demand-equilibrium
#2 How to Get Rid of Supply-Demand-Equilibrium
#3 The Law of Supply and Demand: Here It Is Finally
#4 This echoes Macht und ökonomisches Gesetz (Power and Economic Law), Schriften des Vereins für Socialpolitik, 1972.
#5 Your economics is refuted on all counts: here is the real thing
#6 See Ch. 3 Market interdependence in Sovereign Economics
Related 'Economists never understood how the price mechanism works' and '10 steps to leave cargo cult economics behind for good' and 'Primary and Secondary Markets' and 'Hayek and other informationally retarded proto-economists' and 'How to overcome the manifest silliness of Econ 101 and save the economy' and 'Why you should NEVER use supply-demand-equilibrium' and 'Traditional Heterodoxy’s paradigmatic impotence' and 'Essentials of Constructive Heterodoxy: The Market' and 'Understanding Profit and the Markets: The Canonical Model' and 'Major Defects of the Market Economy' and 'How to finally hammer down the nails in the coffin of Monty Python economics' and 'Get it econ suckers: behavioral microfoundations ⇒ false, systemic macrofoundations ⇒ true' and 'Econ 101: Economists flunk the intelligence test at the first hurdle' and 'The monstrous utility-supply-demand-equilibrium failure' and 'To this day, economists have produced NOT ONE textbook that satisfies scientific standards' and 'Ch. 9, Price mechanism vs quantity mechanism in Sovereign Economics, BoD'.
“Totem of the Micro” has been coined by Axel Leijonhufvud.
* E.g. Wikimedia AXEC64
