- We tend to conflate the terms economics and finance, which has broad implications. The student of economics is offered coursework in microeconomics unaware of this condition. There is no real economics in microeconomics. The term “microeconomics” is a misnomer.
How many times have you heard someone claim to do something for economic reasons? The intent is generally understood, but as is well known, people do things for financial reasons. Corporations, also, do things for financial reasons. Few, if any, can affect an economy with their actions. Our words betray us.
Suggesting one’s financial interest to be economic in nature may add a sense of resolve to the situation at hand but at what expense? Where does this misdirection matter? Consider how the discipline of economics is taught.
The student of economics may start with a desire to understand how economies work. Knowledge of this sort can be useful in many fields. To be taught at the undergraduate level, as mainstream economics holds, that markets are efficient, self-correcting, and lead toward a type of overall equilibrium that benefits all, sets the student of economics off onto a problem-solving exercise financial in nature. Imagining an economic solution is arrived at once the financial needs of markets are met, disempowers the student. The goal becomes one of market viability and not one of economic vitality. The presumption of market supremacy leads toward an intellectual vacuum. The full scope of economic mastery is neutered at inception.
Economic mastery involves managing economic performance at the level of aggregates. Aggregate supply and aggregate demand set the stage for good economic policy. A consideration of individual markets or even a consideration of markets as a whole is misleading. The discipline of economics operates outside of market activity.
For the student to be taught that markets are integral to economic policy has the student believe the market is also the intelligence of an economy, which it is not. Markets provide no intelligence to an economy. Markets are self-contained and work to establish price and quantity for a given commodity. Markets are to economies as pixels are to portraits.
Neither the interlaced networks of markets nor the economy itself provide intelligence necessary to sustain its participants. The intelligence of an economy must be super imposed. That was the contribution John Maynard Keynes made to the discipline in the 1930s with his doctrine of “effective demand”. A faltering economy cannot reestablish the incentive to invest short of the passage of time. Left to its own device an economy will operate at a level established by the more competitive actors leaving the needs of society in its wake. A million Irish gave their lives for this principle in the 19th Century. History is replete with such examples.
The discipline of economics, in part, suffers from a problem of its own making. Requiring the student to have a substantial background in calculus and higher math sends the wrong message. It puts the discipline at risk by enforcing a type of self-selection and predisposition toward a mathematical solution. Requiring a background in history, the humanities or philosophy would serve the discipline better. When the problem solver has only a mathematical hammer, every problem becomes a numerical nail.
Rarely is economics taught as a social science, in which it is. Usurping the authority of social interaction in terms of market forces is disquieting and sinister. Teaching economics from the business college by business professors suggests finding the right model for market forces is the only thing standing between what we have now and nirvana.
Mainstream economists like to talk about market failures. This notion is misguided. Economists should be concerned with policy failures. Failure to pull the plug on an overheated economy is one obvious example of policy failure. Failure to provide an adequate stimulus in times of reduced demand is another. Failure to recognize how current tax policy requires the wealthy to hoard their wealth for lack of a good investment is a policy failure. Market failures themselves are peripheral to sound economic policy.
Ludwig von Mises and Friedrich A. Hayek, both contemporaries of Keynes, seemed willing to consider the nature of markets by recognizing the importance of terminology. They agreed that the term “economics”, originating from the Greek word for household management, did not properly identify the true mission that markets embrace. They individually supported a derivative of the term “Catallaxy” first proposed by Richard Whately in his 1931 Introductory Lecture on Political Economy to properly identify the position markets enjoy. Derived from the Greek word “to describe the order brought about by the mutual adjustment of many individual economies in a market”, the word catallaxy better described what Hayek viewed as an “interlaced network of economies” (which might be better identified as an interlaced network of markets so as to not foul the very concept he is trying to clarify!). Mises anglicized the word to “catallactics” and adopted its meaning as “the science of exchange” or as the order brought about by the mutual adjustment of individual actors upon a market. Mises saw “catallactics” as the discipline of market behavior.
Unfortunately for us all, the term catallactics was not carried forward. Unfortunate in the sense that markets became irrefutably linked with the discipline of economics when the term “microeconomics” was born in the 1940s. From that point forward, markets and the law of supply and demand muddied the water for almost all subsequent economists up to the present time. An economy of markets became a market economy.
The field of study labeled as microeconomics does not represent the discipline of economics. The label is a misnomer, and its subject matter would better be identified within the disciplines of finance or market science where the investor or the business interest is the driving force. The label “microeconomics” is a mischievous and destructive term, and its use needs to be abandoned.
