Marginalist Microeconomics as Authoritarian Poison

Article of the Week from Fixing the Economists

by Philip Pilkington

“The world itself is the will to power — and nothing else! And you yourself are the will to power — and nothing else!” – Friedrich Nietzsche

Lars Syll has directed me to an interesting post by Ole Rogeberg. It is about an interview that was undertaken with labour economist Daniel Hamermesh. In the interview Hamermesh explains that the problems with economics today are mainly to do with the macro side, not the micro side. It is the macro side, Hamermesh explains, that failed to see the crisis, not the micro side.

First of all, this is an entirely dubious argument. Anyone who knows their history of economic thought knows that contemporary macro is basically an outgrowth of micro and has been so since the Lucas critique that effectively said that a real economic theory requires microfoundations (a topic I have written on before, here and here). Since contemporary macro — of both the New Keynesian or New Classical variety — builds itself on the principles of micro, any errors that the former falls into must rest in part on the structure of the latter.

That aside though, I think even the focus here is wrong. Economics is currently under fire for not just missing the financial crisis but also for providing a Panglossian opiate during the run-up to said crisis. This opiate came in two forms. The first was contemporary macro which essentially says that markets will sort themselves out and that any problems that arise will only have short-run effects.

The second was contemporary finance theory — most notably the Efficient Market Hypothesis and its “noise trader” derivatives. Finance theory made similar claims to contemporary macro — almost identical, in fact — but it also effectively gave trading advice to financial types in that they should trust the information that the market was feeding them and not try to think outside the box. This, some claim, led to a myopia on the part of those trading complex derivatives; a myopia that was then subject to a “surprise event” during the 2008 meltdown.

I don’t buy this story. I won’t get into why I don’t, but let’s just say that Ireland had a far, far bigger housing bubble than the US and we didn’t need sophisticated derivatives to hide the obvious from ourselves. The derivatives that went sour in the US banks in 2008 were a symptom, not a cause of the crisis.

Anyway, back to micro and the disrepute of economics. For me, micro is the worst part of contemporary economics by far. Any screw-ups that macro guys or finance guys make can ultimately be traced back to the biases ingrained in them by a training in micro. All notions of rational agents, of perfect foresight and information, of prices balancing supply and demand and not being subject to speculative pressures come directly from micro.

It is thus micro that is the real poison in economics; it is the assumptions that micro rests on that drag the rest of the discipline down into the swamp. And if you create a theory that doesn’t rest on the biases ingrained in the profession’s collective unconscious by micro it is these very biases that keep your work from being considered “serious”.

On that note I found it particularly interesting that Hamermesh cited Gary Becker as one of the “good guys” of contemporary economics. The reason that he says this is because Becker is one of the micro guys who tried to apply the autistic vision of contemporary micro to all sorts of other situations; for example, family members are seen to be selfish rational individuals who scrutinise each other in line with the paranoiac vision of game theory.

This shows clearly how the micro poison spreads. You see, it’s very versatile in its uselessness. While it says nothing of interest about how people actually behave and what motivates them, it nevertheless provides a framework that can be applied to almost everything (something that should make us suspicious from the outset). This means that savvy microeconomists can search out new applications in everything from family bargaining to workplace bargaining and so on.

This, in turn, can inspire actual attempts to apply such models in real life. A good example of this are the performance targets that the NHS used to try to boost employee performance — known in some academic literature as “targets and terror”. The targets led to Soviet-like absurdities within the hospital system. Here is some flavour:

Targets have been blamed for distorting clinical priorities. The Conservative party has claimed that the four-hour target for waiting times in accident and emergency (A&E) has led to distortions such as holding emergency patients in trolley waiting areas. And media reports based on internal ambulance service documents suggest that some patients have been held in ambulances outside emergency departments to avoid ‘starting the clock’ (Guardian 2008, Telegraph 2009).

Just as in the old Soviet management system people figure out ways to get around the targets and this causes all sorts of chaos and disruption. This is because people do not act in line with the rigid rules that the targets — and contemporary micro — assume and so, as they manipulate the rules to suit their own motivations, the system falls into chaos.

The NHS targets are a nice example of the authoritarian heart of contemporary micro (something I have called elsewhere a “blueprint for social control”). Like all authoritarian systems of thought contemporary micro gives its proponents a theory of man that functions for them as a means of control. They claim that man acts in a certain fashion and this ultimately leads to the setting up of structures to accommodate these supposedly innate behaviours. The reality, of course, is that man does not act in this way and so the structures turn authoritarian. It is only one or two steps from said authoritarianism to absurdism.

It is also for this reason that economists are so reticent about giving up their beloved micro. When you criticise it you often hear “but what better tools do we have?”. What that really means is “what better tools do we have to assert our authority over others?”. Thus much of the debate over micro is not a normal, rational debate. Much of it is a debate over who holds authority and on what basis. It is for this reason that contemporary micro is a malign spirit that is unlikely to be exorcised through rational argument; rather it is likely to remain in place so long as Western civilisation continues to be subjugated to the invalid scientism it kneels before today.