Een studie economie is voor menig student een vervreemdende ervaring. Zo was het ook voor mij. Dit gevoel van vervreemding is nooit helemaal weggenomen. In deze column formuleer ik enkele vragen die mij nog steeds dwarszitten.
I would like to start this series of columns with a brutal display of intellectual honesty: despite my PhD in Economics, I do not understand many fundamental features of the economy and the way economic science tends to handle it.
First up: I do not understand how economics gets away with ignoring marketing and advertising. When studying economics you are taught that preferences are given and stable, so that prices and income are the only variables affecting changes in consumer choices. But if this is so, marketeers are wasting huge sums of money in a doomed quest to change what we end up buying. (Big Pharma for instance spends more on this than on the research and development activities they usually justify their premium prices with). So either consumers are not as rational as the theory purports them to be, or marketeers and companies hiring them are a particularly dumb brand of stupid.
The best mainstream response to this apparent disconnect between theory and reality I have heard of, is that although advertising does not change our preferences, it changes the information we act upon. So, if certain individuals have a preference for – say – fat-free foods, the ad informing them that a particular brand of lollipops is indeed fat-free, will entice them to make different choices (provided the consumer is unaware that all lollipops are in fact fat-free), without however changing the individual’s underlying preferences. This argument however, fails to explain the particularly low information-density of much advertising or the millions spend by many companies on things like celebrity endorsements. Moreover, when we see changes in consumer choices without corresponding changes in incomes or prices, it is impossible to tell whether this is caused by changing information or changing preferences. So this escape route is not very illuminating to say the least.
Do neoclassical economists want an Orwellian thought police?
Secondly, Sonnenschein (1972), Mantel (1974) and Debreu (1974) have all proven mathematically that even if individual preferences are indeed stable over time, this in itself is insufficient for the models to generate (predict) a unique market outcome (equilibrium) in terms of traded volume and price. Such models could only do so if two additional conditions (known as the SMD conditions) hold: (1) all individuals have the same tastes (i.e. identical preferences), that, (2), do not change with income (Keen, 2011, p. 57; cf. Sonnenschein, 1972). Thus, in contrast to what economists tell you, stable market equilibria can only be attained when a brutal Orwellian thought police sees to it that our desires are fully equalized. This implies that stability in market economies is incompatible with individual freedom. So now you know why the term representative consumer is so often invoked in economic textbooks. Yet, I have still to find a technique that allows heterogeneous preferences to be summarised into a single consumer or, alternatively, a comprehensive rebuttal of Sonnenschein’s (1972), Mantel’s (1974) and Debreu’s (1974) argument. As long as neither this technique nor the required rebuttal exists, I do not understand how the continual teaching and development of theories invoking individual rationality can be defended.
Does the supply curve really have a rising shape?
Thirdly, economists’ continued usage of the theories underpinning the rising shape of the supply curve, is no less puzzling. A survey conducted in 1982 among ‘200 medium-to-large US firms, which collectively accounted for 7,6 percent of America’s GDP’ (Keen, 2011), found that ‘only 11 percent of GDP is produced under conditions of rising marginal cost’ (Blinder 1998). There is no reason to believe that this number will be substantially higher today. In fact, there is evidence to the contrary as companies have increased in size. This would be untenable if their marginal costs are rising, but is totally understandable if marginal costs generally keep falling indefinitely. If the latter is true, markets tend towards oligopoly, as Robinson already argued a long time ago (1969). The upshot of all this is, that markets that are left unchecked are unlikely to be stable or welfare-enhancing. Or have I misunderstood the theory? I am open to rebuttals.
Economic ignoramus or mathematized nonsense?
All in all then, much economic theory seems to be theoretically unjustifiable and empirically falsified. Of course a theory can never be comprehensively dismissed by a falsifying instance as it is always possible to blame extraneous factors. But if we blame extraneous factors for much of our economic experience since the early 80s, the theory, if not wrong, in the very least has proven to be a very poor guide to understanding practical affairs and shaping economic policies. But perhaps all the people I referenced, as well as yours truly, have misunderstood the data, the theory or both. Please enlighten me if we did.
I feel that all the questions above are important and must be asked and, if possible, answered. But I do not feel that exposing my ignorance on them disqualifies me as an economic scientist. On the contrary, there is almost universal agreement within the scientific community that any scientific investigation must start with asking the right questions, that all answers are fallible and that their weaknesses must be ruthlessly exposed. So ignoring those questions in both research and education, is much less scientific than the brutal honesty displayed here. I sure hope the comment section will be flooded with arguments showing the questions above have actually been answered a long time ago. I’d much rather be publicly crucified as an economic ignoramus than live with the nagging feeling that I am wasting my life (and the lives of the students I teach) peddling mathematized nonsense.
Dr. Dirk Damsma is docent wetenschapsleer aan de faculteit economie en bedrijfskunde van de UvA. Hieronder zijn beweegredenen om in de columnistenpen te klimmen. Zijn columns (die voorlopig elke twee weken op deze blog worden gepubliceerd) zijn eerder verschenen in Rostra Economica.
De neoklassieke theorie, al enige decennia de mainstream in de economische wetenschap, is gebaseerd op uitgangspunten die verre van evident zijn en die bij nadere beschouwing vaak een ideologisch doel dienen. De wiskundige modellen waarvan deze theorie zich vooral bedient, kunnen bijzonder complex worden. Het gevolg is dat studenten, docenten en onderzoekers vooral worden beoordeeld naar de mate waarin ze met complexe wiskundige technieken overweg kunnen. Zij die op zoek zijn naar economische analyses en oplossingen die kunnen bijdragen aan een betere wereld, hebben het moeilijk onder zo’n academisch regiem. Want kritisch denken en een wetenschappelijke nieuwsgierigheid zijn onder deze omstandigheden eerder een belemmering dan een stimulans voor een academische carrière in de economie. Met mijn columns wil ik een tegenwicht bieden aan deze kwalijke situatie.