23/1/2018 Why neoliberalism is harmful (3)

There is also a pathological aspect in the very concept of market efficiency in neoclassical economics. Consider an economy where all people are lazy. They are poor since their productivity is low. However, this economy is efficient in the sense of neoclassical economics if those people act from self-interest. The same is true of an economy where all people are untrustworthy and cooperation is hard to be achieved. These pathologies arise because efficiency is considered under the assumption that the production functions are exogenously given. However low the productivity is, the economy is efficient in neoclassical economics so far as each individual acts from self-interest!
As mentioned, market efficiency in neoclassical economics requires complete contracts, but they are impossible in almost all transactions in the real economy because of high transaction costs. For instance, complete contracts between employer and employee would entail astronomical costs and be virtually impossible to be made. What would be the complete contracts between teachers and pupils’ parents?
Hence, implicit contracts become essential to transactions in the real economy against the first proposition of welfare economics. In other words, cultural or ethical factors such as trust and self-restraint are very important for efficiency. The relative importance between explicit and implicit contracts depends on the type of transaction. For example, the former is more important in insurance markets, while the latter in education markets.
Neoliberalism has a belief that human beings can be completely controlled by the law and contracts. It claims that various cultures should be eliminated because they become obstacles to free trade. However, we need to rely on a culture of high quality for efficiency of our economy, since most contracts can never be complete. If neoliberalism dominates society, ethical behavior weakens and the markets become inefficient.
              The utility function of neoclassical economics is also pathological. Each individual becomes happier there only if she consumes more market goods. She does not feel happiness in her good human relations with others, her kindness to others, or the happiness of her descendants. It is obvious that this utility function does not describe happiness of real human beings.
              In relation to this theoretical problem, I would like to point out an important fact that neoclassical economics ignores. Many people especially older people in modern society are extremely lonely. Some are found dead after several weeks from their death. These lonely people must experience infinite pain, but neoclassical economics does not have a concept of disutility deriving from loneliness. This must be a result of the individualistic discipline.
              Neoclassical economics is an academic paradigm but neoliberalism is a political movement that forces freedom in every part of society by abusing neoclassical economics for the benefit of a few people. How harmful neoliberalism is!

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/






Comments

Post a Comment

Popular posts from this blog

The Nature of Economics (3)

Image
The Nature of Economics (3) A crucial defect of neoclassical economics related to the above discussion is that it analyzes seriously only markets, more specifically organized markets. It does not seriously analyze firms or households. It ignores government, the environment, and international relations. Although the real economy has a variety of market types, it treats all markets as the same type. Can the demand-supply analysis (with auctioneers) be applied to medical markets or education markets? This implies that neoclassical economics analyzes only a limited part of the economy. Although it deals with firms, it does not seriously analyze them in the sense that it fails to explain how a particular set of input levels achieves the level of output given by the production function. In other words, it does not describe the process of production or how production is carried out. Firms in the real economy try hard to improve their technologies. They also try to invent new products
Read more

The Nature of Economics (7)

Image
The Nature of Economics (7) Neoclassical economics does not consider efficiency of the whole economy because the production function and utility function are exogenously given. Since I do not think that this point is made clear in books or papers, I would like to discuss it in some detail. Consider two economies E1 and E2. The workers in E1 are more cooperative and hard-working. Those in E2 are selfish and lazy. Hence, the labor productivity in the firm in E1 is higher for equally given levels of physical inputs. However both economies are efficient in neoclassical economics! Both E1 and E2 are efficient as far as all firms maximize their profits subject to exogenously given (different) production functions! It is obvious that E1 is more affluent than E2. I would like to emphasize that efficiency differs from affluence in neoclassical economics. Next consider two economies E3 and E4. The people in E3 are more harmonious and other-regarding within the household. Those in E4 ar
Read more

The Nature of Economics (5)

Image
The Nature of Economics (5) We see here a good example for the fact that the values researchers possess affect their choice of the topic and method of research generating bias in ‘scientific works.’ 　 Researchers who want to support individualism do not analyze firms or households seriously. They simply introduce exogenously given production functions and utility functions. Economists tend to ignore or distort social aspects that are inconvenient to build models with conclusions they like. It is really hard to establish social sciences that are value-free. Researchers need to recognize this. On the other hand, a unified theoretical model may be formed to explain the cultural difference mentioned in the example given in the above third reason. It may be done by introducing a measure of the degree of cooperativeness as an exogenous variable. In such a model different types of equilibrium may arise for different values of the measure. If we can endogenize the variable for that m
Read more