The Nature of Economics (3)


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 and improve the quality of existing products. But neoclassical economics does not discuss these problems by assuming simply that the production functions are exogenously given.
Commonplace problems for organization members are how human relations should be, how leaders should behave, and so on. These are also technological problems and relate to productivity. But neoclassical economics does not consider them at all either.
The firm is different in nature from the market. It would be foolish to assume contract completeness to analyze human relations in it. It is impossible to write and enforce sufficiently detailed contracts among the members of the firm. Hence the importance of values such as trust, self-restraint, and organizational loyalty. These are ignored in neoclassical economics.
How can an individual behave efficiently in a firm? This is a fundamental question for the economy and for most people. But neoclassical economics avoids giving an answer. Is not this dishonest as an academic discipline? Neoclassical economics pretends to be a social philosophy, but it does not teach even how individuals should behave in organizations!
Ask anyone who studied economics in college how he was taught workers should behave in the firm. I guarantee he will be completely puzzled. This fact proves that neoclassical economics lacks a theory of the firm in the true sense of the word. Its theory of the firm that uses production functions is not a true theory and cheats people into the belief that they are completely free to pursue their own self-interest in any part of the economy including firms.
The theory of the firm of neoclassical economics is in stark contrast with its detailed theory of the market. The latter suggests how individuals should behave and what regulations are necessary for market efficiency. It recommends them to pursue self-interest observing the law. It asserts the necessity of antitrust laws. In contrast, it has actually no suggestions for organizational efficiency.
Production or the firm is more important than exchange or the market since agents have little to exchange without production. But neoclassical economics lacks a right theory of production. It fails to analyze a most important part of the economy.

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