The Role of Microeconomics in Heterodox Economics Professor - PowerPoint PPT Presentation

The Role of Microeconomics in Heterodox Economics Professor Frederic S. Lee University of Missouri—Kanas City

Introduction

Micro-foundations of Macroeconomics Debate ¤ The debate revolves around three arguments: 1. microeconomics is mainstream microeconomics and hence the question is whether heterodox macroeconomics is compatible with it; or 2. heterodox macroeconomics is completely separate from any type of microeconomics and hence has no need of micro-foundations; and/or 3. there is no such thing as heterodox microeconomics and heterodox economics, especially its Post Keynesian variant, consists only of macroeconomics.

Micro-foundations of Macroeconomics Debate ¤ None of the arguments are valid because 1. heterodox “macroeconomics” is completely distinct from mainstream macroeconomics and hence cannot be reduced to mainstream microeconomics; 2. mainstream microeconomics is completely theoretically incoherent and hence does not constitute any knowledge whatsoever; 3. there is a heterodox ‘microeconomics” which is theoretically coherent (more or less) which is completely distinct from mainstream microeconomics; and 4. the economy is an interdependent disaggregated whole which means that the separation between “micro” and “macro” has no validity, no meaning.

The Economy as Whole: Conceptual and Theoretical Foundation

Production, Social Surplus, and Social Provisioning ¤ Production Schema ¤ Circular Production ¤ Circular Production, Non-Produced Inputs, and Scarcity ¤ Fixed Investment Goods, Resource Reserves, and the Surplus

Figure 1 Stock-Flow, Social Accounting Schema of the Productive Structure of the Social Provisioning Process

Social Surplus and Income ¤ Classes, State, and State Money ¤ Government Expenditures, State Money, and the Financial Sector ¤ Profits and the Social Surplus ¤ Wages and the Social Surplus

Figure 2 Monetary Structure of the Social Provisioning Process

Agency, Organizations, and Institutions ¤ Acting Person ¤ Business Enterprise ¤ State ¤ Household ¤ Market Governance ¤ Trade Unions

Figure 3 Agency and Core Decisions

Figure 4 Economic Model of the Social Provisioning Process

Figure 5 Model of the Economy as a Whole

Effective Demand and Production Constraints? ¤ Production of the Surplus: Is there an input constraint? ¤ Savings, Profits, and Investment ¤ Government Expenditures, Savings, and Profits ¤ Wage Rates, Wages, Consumption Goods, and Profits Output-Employment Model of the Economy Output-Basic Goods Sector Q 1 = [I – A 11 T ] -1 A 21 T S Output-Surplus Goods Sector S = Q 2 = Q 2I + Q 2C + Q 2G Total Employment L* = l T 1 [I – A 11 T ] -1 A 21 T S + l T 2 S + L 31 T

Organizing Economic Activity and the Social Provisioning Process: Price Mechanism? ¤ Price Mechanism: Exchange, Prices, and Production ¤ Prices and Quantities: Are they connected? ¤ Wage Rates and Employment: Are they connected? ¤ Interest Rates, Savings, and Investment: Are they connected?

Organizing Economic Activity and the Social Provisioning Process: Effective Demand ¤ Effective Demand qua the Social Surplus Organizing Economic Activity Output-Employment Model of the Economy Output-Basic Goods Sector Q 1 = [I – A 11 T ] -1 A 21 T S Output-Surplus Goods Sector S = Q 2 = Q 2I + Q 2C + Q 2G Total Employment L* = l T 1 [I – A 11 T ] -1 A 21 T S + l T 2 S + L 31 T

Organizing Economic Activity and the Social Provisioning Process: Effective Demand ¤ Social Surplus, Social Provisioning, and the Creation of Prices ¤ Possibility of Prices qua Distributional Variable (Wage Rates, Profit Mark-up, Interest Rates) Directed Economic Activity? Price Model of the Economy Prices-Basic Goods Sector p 1 = [I – R d1 Z d1 M 11 ] -1 R d1 Z d1 [ l * 1 w + d 1 ] Prices-Surplus Goods Sector p 2 = [R d2 Z d2 M 21 ][I – R d1 Z d1 M 11 ] -1 R d1 Z d1 [ l * 1 w + d 1 ] + R d2 Z d2 [ l * 2 w + d 2 ] ¤ Enterprises, Prices, and the Going Concern ¤ Inflation, Economic Activity, and Financial Assets

Heterodox Microeconomics

Heterodox Microeconomics and the Economy as a Whole ¤ What is meant by Heterodox Microeconomics in the Context of the Economy as a Whole? ¤ What is not meant is Micro vs. Macro.

The Economy as a Whole is an Interdependent, Disaggregated, Agent-Causal Economy ¤ Agency Specific Analysis Acting Organizations Core Decision Variables Business Enterprise Q 2I , Q 2C , Q 3L , LB 1,2 , L 11 , L 21 , L 31 , p , w , pmu, Π GRE , Π GD , i B , i D , t p State Q 2G , L 41 , w , i G , i B , GP 4 , t i , t p Household Q 2C , LB 5 , w, L 11 , L 21 , L 31 , L 41 Market Governance p , w , pmu, i B , i D Trade Union L 11 , L 21 , L 31 , L 41 , w , GP d ¤ Market, Industry, Sector, and Location Specific Analysis ¤ Each Specific Analysis is Interdependent with other Specific Analysis: ¤ Examples—market governance, enterprises, and trade unions: cartels and employer associations

Specific Analysis ¤ Specific Analysis must be consistent-integrated with the Model of the Economy as a Whole ¤ Example: state and state created money, classes and class-based access to social provisioning, state- dependent financial sector, and social accounting relationships ¤ Absence of the Fallacy of Composition: Emergent Interdependent Specific Analysis

Output-Employment, Price Model of the Economy Output-Employment Model of the Economy Output-Basic Goods Sector Q 1 = [I – A 11 T ] -1 A 21 T S Output-Surplus Goods Sector S = Q 2 = Q 2I + Q 2C + Q 2G Total Employment L* = l T 1 [I – A 11 T ] -1 A 21 T S + l T 2 S + L 31 T Price Model of the Economy Prices-Basic Goods Sector p 1 = [I – R d1 Z d1 M 11 ] -1 R d1 Z d1 [ l * 1 w + d 1 ] Prices-Surplus Goods Sector p 2 = [R d2 Z d2 M 21 ] [I – R d1 Z d1 M 11 ] -1 R d1 Z d1 [ l * 1 w + d 1 ] + R d2 Z d2 [ l * 2 w + d 2 ]

Conclusion: Core Theoretical Research for the Future

Truism: Develop Heterodox Economic Theory ¤ Not just one heterodox approach to the exclusion of others, but integrate. ¤ Look for other possible theoretical contributions beyond the usual heterodox approaches.

Specific Theoretical Topics—Just a Few ¤ Concept of the Going Concern as applied to the Economy as a Whole and its various Acting Persons- Organizations-Institutions and Core Decisions ¤ Labor and Resources as Socially Constructed Inputs ¤ Integration of Ecology into the Economy as a Whole without bringing ¤ along scarcity and other mainstream concepts ¤ How Ideology (mainstream economic theory) affects how Agency is conducted

Most Important Theoretical Research ¤ Developing Heterodox Theory in the context of Engaging with the Mainstream Price Mechanism and Refuting It ¤ Example: Pricing, Administered Prices, and Price Stability ¤ Example: Wage Rate Determination, Wage Rate Stability, and Employment ¤ Example: Interest Rates/Rates of Return and Investment ¤ Example: Heterodox Production Theory and Relative Scarcity

Final Remarks ¤ Only by Attacking and Refuting the Price Mechanism Combined with the Alternative Class-based Effective Demand/Social Surplus Approach to Organizing and Directing Economic Activity and to Access to the Social Provisioning Process can Mainstream Economic Theory be Theoretically Dismissed. ¤ Dealing with the Social, Organizational, and Institutional Existence of Mainstream Economics/Theory Requires a different set of activities which Heterodox Economics have Historically Decline to Pursue (which has contributed significantly to its precarious state that it finds itself in today)—but that is a different story for another time.