I LOVE JAPAN. Kazuhiro Arai

The Nature of Economics (6) The household is an equally important part of the economy as the firm. But neoclassical economics has similarly avoided serious economic analyses of this economic unit by assuming that the utility function is exogenously given. This has caused many serious problems. The household is important in the economy because it determines labor supply and labor quality. It also determines consumer demand. Indeed, a typical individual in the real world feels much of happiness in the household rather than in the firm or market. Nevertheless, neoclassical analyses of this problem is insufficient, biased, and harmful. G. Becker has done some detailed analyses of the household but we do not know how they are incorporated into general equilibrium theory or if such incorporation generates efficient equilibrium. The whole system of economics needs to be considered. As in the case of the firm, neoclassical economics lacks a theory of efficient human relations within

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

The Nature of Economics (4) Why does not neoclassical economics seriously analyze the firm? There are a few related reasons. First, as mentioned before, human behavior in the firm is different from that in the market. Individualism cannot be supported in the firm. Although one of the implicit ideological goals of neoclassical economics is to spread this Western ideology around the world, a fuller analysis of the firm would make it impossible because individualism can be supported loosely only in organized markets. A second reason is that human behavior in the firm is not simple. It cannot be described by a simple principle of price mechanism with pursuit of self-interest. In fact, a raison d'être of the firm is for the employees to refrain from pursuit of self-interest to some extent in order to have cooperation among employees. Thus analyzing both market and firm seriously would make the theory complex. Neoclassical economics avoids this difficulty by focusing only on the

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