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 – A11

T]-1A21T S

Output-Surplus Goods Sector S = Q2 = Q2I + Q2C + Q2G Total Employment L* = lT

1[I – A11T]-1A21

T S + lT2S + L31

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 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.