The forces of supply and demand reside outside of the economic profession.
Introducing the law of supply and demand to the new student of economics is harmful.
The discipline of economics must establish itself as a social science.
As was stated in Part One of this series, the profession of economics has long carried the label of ‘the dismal science’, perhaps due to a failure on the part of the discipline to properly conceptualize the nature of an economy. Part Two argues that the standard economic curriculum is intractably flawed perpetuating this unfortunate label. It is argued here that attempts to understand how an economy works by way of market forces misdirects the new student.
When passing knowledge from generation to generation, economists must prevent an intellectual fatality. Suggesting an economy can be understood in terms of the same forces that govern a market does a disservice to the profession. To avoid self-mutilation, the discipline must offer imagery that conforms closer to reality, that is, imagery that can be built upon when designing public policy. This imagery must start with a recognition of the difference between the mechanics of the true economic forces at play within an economy and the mechanics at play in a market. The student must understand that the problem he or she is attempting to solve is not a business problem. With that in mind, economists must ensure their profession acts to ensure that its mission is regenerated anew with each generation. Only then can they hope to put an end to the label of ‘the dismal science’.
Saunders. P. and Walstad, W. (1990) “Foreword,” in The Principles of Economics
Course: A Handbook for Instructors, McGraw-Hill Publishing Company, New York
Kalecki, M. (1944) Political Aspects of Full Employment, Political Quarterly, pp. 1-5.
As was stated in Part One of this series, the profession of economics has long carried the label of ‘the dismal science’, perhaps due to a failure on the part of the discipline to properly conceptualize the nature of an economy. Part Two argues that the standard economic curriculum is intractably flawed perpetuating this unfortunate label. It is argued here that attempts to understand how an economy works by way of market forces misdirects the new student.
Teaching Economics
A perusal of leading macroeconomic textbooks reveals the principles of supply and demand as critical to understanding how economies work. These textbooks place markets at the center of the economic universe and support the invisible hand theory of social benefits.
The invisible hand theory describes the unintended social benefits of an individual’s self-interest. This theory is short-sighted and assumes too much. It assumes a balance between competing interests, the interests of the entrepreneur and the interests of the wage earner. It assumes an equitable distribution of financial power. With rare exceptions, this is not the case. Given the power dynamics of this relationship, the entrepreneur has historically exercised a commanding influence, with predictable results.
The operational force at work in an economy must be viewed in terms of buying power. These operational forces recognize the very human need for goods and services which create the demand that drives an economy. An economy built upon the market principle of self-interest cannot itself guarantee an effective demand. Evidence of this is how the invisible hand disappears when consumers have no money. Markets feed an economy but are not its fulcrum. Markets are ancillary to the operation of an economy.
In its current interpretation, the discipline assumes that an economy has an overall price that is then used to affect overall quantities purchased. This abstraction is the initial sleight of hand on the path toward the discipline’s betrayal of the student. It has yet to be demonstrated that an economy has an overall price. The ability to generate one mathematically does not make it meaningful. Prices are a function of a market and not of an economy, as was offered in Part One of this essay. To suggest that the forces of supply and demand operate at the level of aggregates abuses this principle.
The Law of Supply and Demand
Introducing the concept of supply and demand to the student of economics in an introductory macroeconomic course is brilliant if the intent is to deceive. This well-known and intuitive law is readily accepted by the student as useful in the attempt to understand how economies work. With an easy-to-understand concept the subjugation is complete. This misrepresentation has the effect of imprinting the student with a direction not unlike a hatchling that identifies the first creature it sees as its mother. Perhaps this is what Paul Samuelson meant when he said, “I don't care who writes a nation's laws -- or crafts its advanced treaties -- if I can write its economics textbooks.”
Interlacing the principles of finance with those of economics sends the student off into a blind alley where the true nature of an economy is not to be found. Economies cannot be managed at the level of business. They cannot be managed in terms of markets. Economies must be administered by managing aggregate demand. Good economic policy is the result of adjustments to aggregate demand for goods and services in relation to aggregate output. Factors that go into a buying decision and the outcome of those decisions is beyond the scope of the economic profession.
A Social Science
Teaching economics from the business college with business instructors, as is the case at many universities, sends the wrong message. Imagining economics to be a function of business is destructive. Unlike business, economies operate on principles far removed from products and competition. Economies do not have a profit motive. At the national level, an economy do not compete. Properly administered, an economy works to ensure full employment and a healthy business environment.
The student must recognize that influencing economic policy is not possible from within the business community. Economic policy takes place outside of market activities. If the intent is to work for a privately held firm with the expectation of high wages, any passion for public policy will remain unfulfilled.
Where are the social scientists in this betrayal? How is it they allow business interests to override their home turf? Where are the real economists that look out for the needs of the broader community? Are they more concerned with their own careers than the needs of the students or the greater issue of social welfare? Are they comfortable with students of economics being taught to be good businessmen and businesswomen? What if the student understood in advance the goal of an economist is the public welfare and not increased profits for a privately held firm? Who is there to advise the student? Perhaps, most economists themselves are unaware of their true mission.
Conclusion
When passing knowledge from generation to generation, economists must prevent an intellectual fatality. Suggesting an economy can be understood in terms of the same forces that govern a market does a disservice to the profession. To avoid self-mutilation, the discipline must offer imagery that conforms closer to reality, that is, imagery that can be built upon when designing public policy. This imagery must start with a recognition of the difference between the mechanics of the true economic forces at play within an economy and the mechanics at play in a market. The student must understand that the problem he or she is attempting to solve is not a business problem. With that in mind, economists must ensure their profession acts to ensure that its mission is regenerated anew with each generation. Only then can they hope to put an end to the label of ‘the dismal science’.
References
Saunders. P. and Walstad, W. (1990) “Foreword,” in The Principles of Economics
Course: A Handbook for Instructors, McGraw-Hill Publishing Company, New York
Kalecki, M. (1944) Political Aspects of Full Employment, Political Quarterly, pp. 1-5.
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