The Nature of Economics (7)


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 are selfish and try to use other family members. Even under these conditions the two economies are efficient in neoclassical economics!
Both E3 and E4 are efficient as far as all consumers maximize exogenously given utility functions subject to their budget constraints! I guess the people in E3 are happier than those in E4. It should be emphasized again that efficiency differs from happiness in neoclassical economics.
Lack of robust theories of the firm and household has lead us to use the market logic in those fields of human activity. This is why excess freedom prevails there and generates chaos and miseries. A social science may make us unhappy through a distorted perception.

Comments and questions are welcome.
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