15/1/2018 Why neoliberalism is harmful (2)

Neoclassical economics has firms and households but does not consider their efficiency. Its object of analysis is market efficiency only. What a narrow worldview it is! Relying on neoliberalism, therefore, implies regarding the world as made up of only markets.
Our society is made up not only of markets but also of households, firms (organizations), schools, hospitals, governments, communities, social & natural environments, and so forth. Neoclassical economics, however, has a systematic theory only about markets. It can teach in its own way how one should behave in markets but it cannot do so for households, firms (organizations), schools, hospitals, governments, communities, or environments since it has no theories about these.
Therefore, neoclassical economics considers only partial efficiency, i.e. the efficiency of the markets only. We need to consider, however, total efficiency, i.e. the efficiency of whole society including households, firms (organizations), schools, hospitals, governments, communities, social & natural environments, and so on, because our welfare depends on all of these.
One might think that the efficiency of different parts of society is analyzed in different academic fields, but we need to consider all parts simultaneously, since a factor that makes one part efficient might make another inefficient. When maximizing the sum of two functions, one should not maximize each function separately. Separate maximizations would generally lead to contradictory solutions.
Since neoclassical economics considers market efficiency only, policies based on neoliberalism tend to generate inefficient households, firms (organizations), communities, or environments. Such policies are often pathological. For example, high flexibility of labor markets is likely to destroy organization efficiency because of insufficiency of intra-firm training, cooperation among employees, or knowledge of stakeholders.
No less important is the fact that even the markets in the real economy are unlikely to be efficient. The market efficiency in neoclassical economics is proved under the assumption of contract completeness. In other words, neoclassical economics assumes that all transactions are carried out with sufficiently detailed contracts that ferment no disputes between sellers and buyers. In many transactions in the real economy, such contracts are impossible because of astronomically high transaction costs.


Comments and questions are welcome.
Kazuhiro Arai’s English twitter:        https://twitter.com/araikazuhiroe88
Kazuhiro Arai’s Japanese blog:         https://araikazuhiro.blogspot.jp/
Kazuhiro Arai’s Japanese twitter:      https://twitter.com/araikazuhiro88
Kazuhiro Arai’s Japanese home page:   http://araikazuhiro.world.coocan.jp/




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