2/4/2018 Intermission




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The Nature of Economics (3)

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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
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The Nature of Economics (5)

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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
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The Nature of Economics (2)

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The Nature of Economics (2) When a contract is incomplete as in the real world, the agents have discretion and face interdependence or a game situation. Each can influence the welfare of the other. Pursuit of self-interest in this situation is generally inefficient. This discretion includes many commonplace behaviors such as providing wrong information, doing shoddy work, and working slowly. They will surely decrease the welfare of the partners such as employers, employees, and consumers. The game situation can be described as the prisoner's dilemma game. It shows that pursuit of self-interest under contract incompleteness with discretion leads to inefficiency. For example, telling a lie is a strictly dominating strategy* in it but both players being honest is more efficient than both telling a lie. The above story suggests that individualism or unrestrained pursuit of self-interest cannot be justified in general. It may be loosely justified only in organized markets, suc
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