Undergraduate Economist

Perspectives of an economics student

The Politics of Microeconomics

Posted by Alex M Thomas on November 5th, 2011

Recently, some students walked-out from the lecture of the exceedingly famous economist, Greg Mankiw, who teaches EC10, Introduction to (neoclassical!) Economics at Harvard University. He is, perhaps, more known for his best-selling textbooks. This post was drafted for a different purpose almost a year ago. However, given the relevance of the essay/post, I decided to publish it here.

***

“Students, economics is divided into microeconomics and macroeconomics,” says the professor. This classification dominates economics teaching at all levels – from schools to post graduate studies. What is not mentioned is that, this classification is a characteristic of a particular kind of economics – neoclassical economics. The introductory chapters of microeconomics textbooks teach us that there are two kinds of economics, namely, positive economics and normative economics. With this distinction students are led to believe that microeconomics is objective, scientific and apolitical. Such arbitrary and artificial characterization, I argue, is an important way in which neoclassical economics perpetuates its dominance both in academia and in the arena of policy making. However, the “politics” of microeconomics comes to the fore when one closely examines its history. This essay will closely examine the concepts of factors of production and marginal product.

The so-called objective and scientific microeconomics treats all factors of production (land, labour and capital) on an equal footing. In particular, the roles of labour and capital are depicted as symmetrical. No mention is made of their particular social and historical characteristics. Land, as we know, cannot be treated on par with labour in any unique way. At this juncture, let us recall the objective of economic theory and policy – to improve the conditions of human life. However, such a human-centric objective must not be taken to imply complete disregard for animals or for the environment. Given this, what is the rationale for employing the concept of factors of production in economic analysis? One wonders whether it is to depoliticize economic theory. The earlier economists (classical economists and Marx) had employed the concept of social classes to understand the working of the economy. In their analysis, society was divided into landowners, workers and entrepreneurs. This division was necessary to develop a theory of income distribution. That is, it is the division of the society into ‘social classes’ or ‘factors’ which provides the foundation on which the theory of income distribution is erected. In the former structure, landowners received rents, workers earned wages which were often at subsistence level and entrepreneurs received profits. Whereas, according to microeconomic theory, the rewards accruing to the factors of production are as follows: land earns rents; labour earns wages; capital earns interest and entrepreneur/organization earns profits.  In the latter case, one notices that a distinction has been made between the “agent” and the “factor” of production. Notwithstanding this, the apparent objectivity of microeconomic theory crumbles and arbitrariness enters once we ask: what are the units for measuring capital? Land, as we know, can be measured in hectares, acres, square feet, etc. Similarly, labour can be measured in head count, man hours, man days, etc. But, how is capital measured? In fact, even before posing this question, we need to ask: what is capital? Why is capital, which is produced by labour acting on raw materials, considered a a factor of production? There appears to be no clear reason or rationale behind this. It seems that such an arbitrary concept was introduced to remove “politics” and “conflicts” from economic theory. Even the nomenclature “factors of production” appear significantly distanced from society vis-a-vis that of social classes, which was conceptualised taking into account the conflicts, especially over the means of production, prevalent in the society. Employment of “factors of production” in economic analysis presented a harmonious view of the society as opposed to the conflicts in income distribution which was pointed out by the classical economists.

Next, we briefly discuss the role of the concept of marginal product in microeconomics. In simple language, marginal product measures the contribution of one unit of the factor of production to the production process. Marginal productivity theory is a widely taught concept in graduate programs in economics and business. It is this concept which links factors of production to a theory of income distribution in neoclassical economics. Clearly distinguished “factors” of production is a prerequisite for the theory of marginal productivity. As pointed out in the previous paragraph, the owners of means of production do not find any explicit mention. Microeconomics teaches us that, in conditions of perfect competition, labour and capital get (monetary) rewards in proportion to their contribution to the production process. In other words, wages paid to labour equals marginal product of labour and interest paid to capital equals marginal product of capital. But, note that marginal product can only be computed by considering ‘potential change’, which is computed with the aid of differential calculus. What we do not pay adequate attention to, is that the origins of marginal analysis are to be found in the differential rent theory of Ricardo. Land, owing to technological constraints generated output at a diminishing rate as more and more labour and machinery were applied. This was because of the characteristics particular to land. Neoclassical economists extended this notion of diminishing marginal returns in land to other “factors of production” such as labour and capital. Such a generalisation has been shown to be inadequate on logical and historical grounds. Today, microeconomics textbooks and microeconomics professors hardly mention the historical origins of marginal productivity theory.

Neoclassical economics, as we have seen, misguides economic policy making by projecting a harmonious view of the society, comprising financiers, rentiers, entrepreneurs, wage labourers, salaried workers, etc. This is mainly done through the conceptual apparatus of “factors of production”. The idea of symmetry is introduced through this manoeuvre. Neoclassical economics also teaches students that a state of perfect competition is desirable because each “factor of production” will get what they deserve (their marginal product) as incomes. This, as indicated above, is a misinformed generalization of the rent theory of Ricardo. In fact, through the theoretical apparatuses of factors of production and marginal productivity theory, neoclassical economics tries to be objective, scientific and apolitical. However, as this essay has shown, most concepts of neoclassical economics have been devised in order to mask the conflicts and politics involved in economic phenomena.

17 Responses to “The Politics of Microeconomics”

  1. DharmaBum Says:

    So tell us then Alex, what is the alternative to Neoclassical Economics?

  2. Alex M Thomas Says:

    Classical economics is one alternative.

  3. Gopi Krishnan Says:

    Ask him why he doesn’t even mention Austrian economics supported by Carl Menger, Ludwig von Mises, Henry Hazzlitt, Murray Rothbard and the rest.

  4. Alex M Thomas Says:

    Gopi,
    Certainly, Austrian economics, Marxian economics, Post-Keyensian economics, etc are also alternatives.

  5. Norbert Says:

    I don’t get it. Why did the students walk out?

    Neo-classical professor is giving Microeconomics an earful, why does it bother people?

    And can you help me by telling me what is fucking up the micro-financing schemes for farmers? Pretty plsss… ;p

  6. Norbert Says:

    err..wrong URL in previous post.

  7. Kush Says:

    Quote from Varian, Intermediate Microeconomics, p271 “However, it is sometimes convenient to think of the aggregate demand as the demand of some “representative” consumer who has an income that is just the sum of all individual incomes. The conditions under which this can be done are rather restrictive, and a complete discussion of this issue is beyond the scope of this book.”

    If the conditions are so restrictive then why are students taught this? If this is admittedly so far from reality why do we learn this? “Beyond the scope of this book” is a cop out. Maybe you’re right Alex.

    Another one – we learn that under perfect competition long term equilibrium occurs when profits are zero and no new firms enter the market and none leave. So I ask why do firms not just shut down if profits are zero rather than not leave the market in the long term? No shareholder will allow that. Even if profits do not hit a certain target management will strip and sell or shutdown. Have I misunderstood?

  8. Alex M Thomas Says:

    Nobert,
    It is true that Mankiw is a neo-classical economist (who are also knows as New Keynesians); the reason why students protested is because they were being taught neoclassical economics in their ‘introductory’ course. Often, the introductory course can have long-lasting effects on a student’s perception of what economics is.

  9. Alex M Thomas Says:

    Kush,
    The idea of the ‘representative agent’ underlies not only microeconomics but also macroeconomics. New keynesian macroeconomics (informs a lot of contemporary monetary policy) assumes a representative household which is rational and is forward looking. There are two issues here: (1) use of representative agent; if not, how do we aggregate individual demand curves (Kenneth Arrow has done extensive work on aggregation issues) and (2) it is possible to add other characteristics for the representative individual which are relatively less restrictive.

    In any case, majority of economists (post-utilitarianism or marginal revolution in 1970s) believe that ‘micro’ or the study of individuals is prior to ‘macro’ or the study of aggregates. However, some others, such as classical economists do not base their analysis on individual agents.

    In long run, with perfect competition, there are normal profits. This is what all the firms earn. But, there are no super-normal profits. Basically, the marginal productivity operates.

  10. Daniel MacDonald Says:

    Just a small point — there is a difference between New Keynesianism and Neoclassical (, and in fact, that difference is the source of many headaches I have in debates with conservatives over Mankiw’s purported political bias.

    See, conservatives think that because Mankiw is a “New Keynesian” he incorporates the ideas of both the right and the left. New Keynesians admit of some short run rigidities (and thus the limited power of government to correct temporary market failures) but they believe that in the long run, the classical assumptions/predictions hold. But while that may be true, the market-centric assumptions are tenets of both schools of thought and this is the political bias of which I am usually speaking.

    And yes, there are many alternatives to neoclassical or New Keynesian theories. The point is to expose the student — yes, at the introductory level! — to those alternatives in order to get them thinking critically about the economy, instead of just thinking that economics can be learned and absorbed like any other science (like physics or chemistry).

  11. Daniel MacDonald Says:

    Alex,

    As I said over on my blog as well, I have found this essay to be very stimulating (and indeed, much of what you write on the blog).

    Are you interested in joining us on the anti-Mankiw blog? I advertise it here: http://imagininghistory.blogspot.com/2011/11/new-project-blog-anti-mankiw.html

    And we’re open to new members (it’s a collectively-run blog where we take turns replying to posts of Greg Mankiw’s. For every two posts he publishes, one of us gives a reply to one of them, and we take turns that way). Do let me know if you’re interested and we can talk more about it.

  12. Alex M Thomas Says:

    Daniel,
    Thanks for your comments. Good that you raise this point about New Keynesians. Although, my reading is limited in this area, from what I have understood, New Keynesianism is just an ‘imperfect’ version of neoclassical (IS-LM) macroeconomics. Short run rigidities in prices and wages are their favourites. Since, neoclassical economics and all their derivatives are ‘market-centric’ or perhaps, ‘exchange-based’, these assumptions are inevitable. Classical economics (that of Petty, Cantillon, Quesnay, Steuart, Smith, Ricardo, Malthus and Marx) as revived by Sraffa does not have exchange-based assumptions.

    And as you rightly point out, “The point is to expose the student — yes, at the introductory level! — to those alternatives in order to get them thinking critically about the economy, instead of just thinking that economics can be learned and absorbed like any other science (like physics or chemistry)”. This is THE issue. In fact, not just the introductory course, but the subsequent papers such as macro, growth theories, international trade, etc teach ‘neoclassical economics’ or its variants (by incorporating certain imperfections).

    Thank you for your kind offer. I will email you regarding that.

    Alex

  13. Kush Says:

    Alex

    So for an “introductory level” student such as myself would you be able to suggest a reading list to “expose” me to these alternatives? Sraffa as you mention and who appears on your blog in the books section is one I will look at.

    My current Microeconomic Theory course is exactly as Daniel MacDonald describes – questioning the lecturer does not go down well.

    Appreciate your suggestions.

    K

  14. Alex M Thomas Says:

    Kush,
    I have no reading list to share with you. But, reading about the history of economics is something I would recommend because you will be able to make your own reading list after that. Most economic theories were produced in a particular socio-historical context. This is hardly ever mentioned in textbooks today.

    I will share two blog posts. One is on prices, which I consider to be the source of all differences in economic paradigms. The other is about a favourite economist of mine, Krishna Bharadwaj. Joan Robinson is an economist I really enjoy reading.

  15. Kush Says:

    Thanks Alex.

    I have Heilbroners The Worldly Philosophers on my Xmas reading list.

  16. ravinder tulsiani digg Says:

    ravinder tulsiani digg…

    [...]Undergraduate Economist » Blog Archive » The Politics of Microeconomics[...]…

  17. Undergraduate Economist » Blog Archive » Wages in Economic Theory and Reality: Some Issues Says:

    [...] is present in the distribution of GDP between workers and capitalists. Neoclassical economics eliminates this conflict by recourse to marginal productivity theory. By employing logically fallacious concepts (especially [...]

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