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 Q1 = [I – A11T]-1A21

T S

Output-Surplus Goods Sector S = Q2 = Q2I + Q2C + Q2G

Total Employment L* = lT1[I – A11

T]-1A21T S + lT

2S + L31T

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 Q1 = [I – A11T]-1A21

T S

Output-Surplus Goods Sector S = Q2 = Q2I + Q2C + Q2G

Total Employment L* = lT1[I – A11

T]-1A21T S + lT

2S + L31T

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 p1 = [I – Rd1Zd1M11]-1Rd1Zd1[l*1w + d1]

Prices-Surplus Goods Sector p2 = [Rd2Zd2M21][I – Rd1Zd1M11]-1Rd1Zd1[l*1w + d1]

+ Rd2Zd2[l*2w + d2]

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 Q2I, Q2C, Q3L, LB1,2, L11, L21, L31, p, w, pmu, ΠGRE, ΠGD, iB, iD, tp

State Q2G, L41, w, iG, iB, GP4, ti, tp

Household Q2C, LB5, w, L11, L21, L31, L41

Market Governance p, w, pmu, iB, iD

Trade Union L11, L21, L31, L41, w, GPd

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 Q1 = [I – A11T]-1A21

T S

Output-Surplus Goods Sector S = Q2 = Q2I + Q2C + Q2G

Total Employment L* = lT1[I – A11

T]-1A21T S + lT

2S + L31T

Price Model of the Economy

Prices-Basic Goods Sector p1 = [I – Rd1Zd1M11]-1Rd1Zd1[l*1w + d1]

Prices-Surplus Goods Sector p2 = [Rd2Zd2M21] [I – Rd1Zd1M11]-1Rd1Zd1[l*1w + d1] + Rd2Zd2[l*2w + d2]

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.