I don’t really understand Nick Rowe’s suggestion that heterodox critics read a first year textbook, considering economists generally like to respond to criticisms by asserting that economics goes well beyond what is taught early on. A commenter on his post agrees. In any case, let’s take him up on his offer.
Here are some examples of how undergraduate economics is taught from two textbooks, this one and this one. The worrying thing is that these textbooks are more reasonable than average, and give the time of day to a lot of substantive criticism (although they do ignore them in the main analysis).
Economics textbook in ‘reality doesn’t matter’ shocker
…[the student] rightly assumes that few firms can have any detailed knowledge of marginal revenue or marginal cost. However, it should be remembered that marginal analysis does not pretend to describe how firms maximise profits or revenue. It simply tells us what the output and price must be if they do succeed in maximising these items, whether by luck or judgement.
Where to start?
(1) Why not get access to data and just tell students how firms actually price?
(2) A big problem with this is that it implicitly assumes a static state where firms push to capacity to maximise short term profit. But any firm that did this would be vulnerable to changing conditions – the reality is that firms generally hold a degree of excess capacity to change their level of output in response to market conditions.
(3) Firms do not experience diminishing marginal returns! This means using MC as a constraint is completely bunk. Firms are constrained, primarily, by financing and marketing considerations.
The lesson here is that, even if you think your logic for how a firm should maximise profit is sound, the evidence has the final say – it might take you an a direction you couldn’t have predicted within the confines of your own theory.
Workers are selfish and lazy, no evidence required
In many jobs it is difficult to monitor the effort individuals put into their work. Workers may thus get away with shirking or careless behaviour…the business could attempt to reduce shirking by imposing a series of sanctions, the most serious of which would be dismissal. The greater the wage rate currently received the greater will be the cost to the individual of dismissal…the business will benefit from the additional output.
What? Oh, no, there’s no evidence to support this. Aside from the fact that workers might actually want to work a decent amount, modern workplaces are tailored such that shirking isn’t really possible (Harry Braverman presented evidence for this, I cannot find it online).
Yes, neoclassical economics does teach exogenous money. Why do you ask?
Contrary to what many keep saying, economics textbooks do teach the money multiplier:
Models of the money supply multiplier link the money supply to the monetary base in a relationship of the following form:
M = mB
M = the money supply;
m = the money supply multiplier;
B = the monetary base.
In models such as this, m tells us how many times the money supply will rise following an increase in the monetary base.
They go on to assert that it is more complicated than a simple stable relationship. But the basic message is that, dependent on m, B will translate into a certain level of M. Banks still need deposits before they can lend out. Again, this is an inaccurate description of a credit economy, where the causation goes in the other direction.
Economists seem to have a hard time grasping that saying ‘m isn’t stable’ isn’t the same as endogenous money theory.
Inconsistency in labour supply curves
This textbook (and most ones) assert the standard labour supply story: workers trade off work and leisure up to the point where more leisure is better than more money. The two conflicting income and substitution effects mean that higher wages can either decrease or increase the hours worked, depending on how much money the worker wants. This can create a ‘backward bending labour supply curve,’ where higher wages increase hours worked up until a point, then start to reduce them (yes, economists do enjoy putting the dependent variable on the x-axis, god knows why):
The problem is that the textbook says that the market supply of labour “will typically be upward sloping” because “the higher the wage rate offered…the more people will want to do [the] job.” But if you add up many individual backward bending supply curves, you will not get an upward sloping line.
We’ve taken a bit of a leap here. Before we were talking about hours, now we are just talking about a job. The jump from hours to job requires that hours are assumed fixed – that’s fine, and actually a realistic assumption (the laws of probability suggest they had to hit one eventually), but it contradicts the earlier hypothesis that workers smoothly trade off work and leisure.
As far as I’m concerned textbooks are littered with these problems, and it seems to get worse, rather than better, as the theory gets more advanced. So, economists: your turn. Read this. Varoufakis and his coauthors are sophisticated critics of neoclassicism so you won’t find the traits you so loathe among heterodox economists. It will also give you a good idea of where your critics are coming from, when to be honest it’s increasingly clear that you don’t really know much about heterodox economics. In any case, you seem confident your ideas are strong, and if so they will be strengthened by criticism. If not, then they will need rethinking.