Monday, April 29, 2019

Dirk Ehnts — The problem with the supply curve

Eiteman and Guthrie conclude their paper with this statement: “If the beliefs of businessmen in general coincide with those included in this sample, it is obvious that short-run marginal price theory should be revised in the light of reality.” That was in 1952….
Another thing conventional economics reverses and gets backwards. "Reality is a bitch."

econoblog 101
The problem with the supply curve
Dirk Ehnts | Lecturer at Bard College Berlin


AXEC / E.K-H said...

Econ 101: supply-demand-equilibrium is dead for 140+ years
Comment on Dirk Ehnts on ‘The problem with the supply curve’

Dirk Ehnts reports: “Steve Keen uses a 1952 paper to make a very important point about neoclassical economics: There is a problem with the supply curve.” and concludes: “Microeconomics, the behavior of firms and households, is very important. Starting the subject by repeating theories that should have long been discarded blocks more relevant approaches from being taught. These new approaches could provide proper foundations of the behavior of firms and households if they are not based on ‘economic laws’ that are refuted by reality.”

All this is true, of course, but ultimately not very helpful: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)

Because traditional Heterodoxy consistently failed at this methodological barrier economics students are still taught the ‘Totem of the Micro’, i.e. supply-demand-equilibrium.#1

The lethal blunder of microeconomics, though, does not start with the supply curve but with the neo-Walrasian axiom set: “HC1 There exist economic agents. HC2 Agents have preferences over outcomes. HC3 Agents independently optimize subject to constraints. HC4 Choices are made in interrelated markets. HC5 Agents have full relevant knowledge. HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985)

The pivotal propositions are HC3 and HC6. Methodologically, they are NONENTITIES like the Easter Bunny and Spiderman. The behavioral axiom HC3 makes economics marginalistic.#2, #3 In order to make constrained optimization work, a well-behaved production function is required. The production function is NOT the result of real-world observations but implicated by HC3.#4, #5, #6 The supply curve, in turn, follows from the assumed production function. So HC3 is the ultimate reason why there “is a problem with the supply curve”.

From this follows that the microfoundations HC1/HC6 have to be discarded. And this is the end of Econ 101 as we know it. Economics textbooks are worthless since Samuelson’s firstling of 1948.#7

The end of proto-scientific economics, though, is the beginning of scientific economics which is no longer based on false microfoundations but on true macrofoundations.#8, #9, #10

From the devastating critique of supply-demand-equilibrium follows the necessity of a Paradigm Shift. Traditional Heterodoxy never performed the Paradigm Shift but was content with the endless repetition of how “unrealistic” Orthodoxy is.

Because of this, both Orthodoxy and traditional Heterodoxy go down the scientific drain.

Egmont Kakarot-Handtke


Carlitos said...