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HETERODOX MICROECONOMIC THEORY
OUTLINE OF LECTURE NOTES
2
HETERODOX MICROECONOMIC THEORY
I.
Introduction to Heterodox Microeconomics
A.
Introduction to Heterodox Microeconomics
1.
Rejecting Neoclassical Microeconomic Theory – see Appendix A
2.
Brief Potted History of Heterodox Economics
a.
The Contested Landscape of American Economics, 1900 – 1970s
(1)
Political Economy, 1870 – 1900
(2)
Contested Landscape and Heretical Theory, 1900 – 1940
(a)
(3)
b.
Inter-War Heterodoxy: Institutionalism and Administered Prices
Post-War Economic Landscape: McCarthyism, Conservatism, and
Modernism, 1945 – 1970s
Heresy, Blasphemy, and Radical Economics in Post-War America
(1)
Marxism and the Parties Schools, 1945 – 1957
(2)
Science and Society, Monthly Review, and Marxian Scholarship, 1945 –
1960
(3)
Radical and Marxian Economics, 1960 – 1970
(4)
Emergence of the Union for Radical Political Economics, 1965 – 1970.
c.
Institutionalism and the Emergence of the Association for Evolutionary
Economics, 1945 – 1970
d.
The Contested Landscape of American Economics, 1960s & 1970s
e.
(1)
The Neoclassical State of Affairs Circa 1970
(2)
Actions Taken Against Heterodox Economists
(3)
Life Among the Econ Tribe is Difficult, Brutish, and Short
(4)
Positive Efforts to Build Heterodox Economics
The Contested Landscape of British Economics, 1900 – 1970
3
(1)
Economics in Britain, 1900 – 1945
(2)
The Emergence of Heterodox Economics in Post-War Britain, 1945 to
1970
(3)
f.
h.
Cracks in the Status Quo
(b)
Crisis in Economics
(c)
To Be Different and Separate: Challenging the Status Quo
Heresy to Blasphemy: Cambridge, 1950 to 1970
The History of Post Keynesian Economics in America, 1971 – 1995
(1)
g.
(a)
Creating a Social Network of Post Keynesians, 1971 – 1980
(a)
The Beginning – December 1971
(b)
The Term ‘Post Keynesian’
(c)
Social Network Building, 1972 - 1977
(d)
Union for Radical Political Economics
(2)
Building Institutional Structures for Post Keynesian Economics, 1977 –
1982
(3)
Pluralism and the Reproduction and Development of the Post Keynesian
Social Structures, 1978 to 1995
Heterodox Economics in Britain: Conference of Socialist Economists, 1970 –
1995
(1)
The Beginnings
(2)
Developing Marxian-Heterodox Economics, 1971 – 1975
(3)
Change, Decline and Stagnation, 1976 to 1990s
Heterodox Economics in Britain: Non-Marxist-Post Keynesian Developments,
1970 – 1995
(1)
Building Heterodox Economic at Cambridge, 1970 - 1988
4
i.
j.
3.
4.
(2)
Building Heterodox Economic Outside of Cambridge, 1970s – 1988
(3)
Post Keynesian Economics, 1988 - 1995
Mainstream Strikes Back: Heterodox Economics Under Attack, 1980s & 1990s
(1)
Heterodox Departments and Programs in the United States, 1980s &
1990s
(2)
Research Assessment Exercise and the Attack on Heterodox Economics in
the United Kingdom, 1992 - 2000
(a)
Research Assessment Exercise
(b)
Peer Review and the RAE Economics Panel
(c)
Impact of the RAE on Economic Departments
(d)
RAE, Peer Review, and Heterodox Economics
Heterodox Economics in a Contested Landscape
Heterodox Economic Theory: An Overview
a.
What is heterodox economics and heterodox economic theory
b.
Interdependencies and structures
c.
Business enterprise
d.
Markets and workers
e.
Government and finance
Heterodox Microeconomic Theory
a.
Partial history of heterodox microeconomic theory
(1)
Administered prices doctrine
(a)
Brief background
Gardiner Means
Berle and Means, The Modern Corporation and Private Property
5
Industrial Prices and Their Relative Inflexibility
(b)
Administered Prices Doctrine
structure, organization and coordination of economic activity
corporate economy
business enterprise: atomistic and corporate—organization,
motivation, production and costs, pricing
administered prices and the visible hand of coordination
(c)
Developments in the doctrine
E. Nourse, R. A. Gordon. A. D. H. Kaplan, A. D. Chandler
(2)
Normal cost prices doctrine
(a)
Brief background
Oxford Economists’s Research Group
Hall and Hitch and Full Cost Pricing: non-market clearing,
problem with short and long period
P. W. Andrews: Courtauld Inquiry and moving towards his theory
(b)
Theory of competitive oligopoly
business enterprise
production and costs
pricing: no MR = MC; normal cost pricing and prices
movement of prices over time
profit margins and competition
(c)
Developments
profit margins: P. Sylos Labini and H. R. Edwards
reproduction of the business enterprise: W. Eiteman and J.
Williams
6
Market institutions and the market price: R. Robinson and G.
Richardson
(3)
Mark up prices doctrine
(a)
M. Kalecki’s microanalysis
production schema: Burchardt production model
constant average direct costs (CADC)
difference between CADC and price is the degree of monopoly:
define the degree of monopoly, factors that determine it,
neoclassical economics, iron law of wages, increasing the
degree of monopoly and economic activity
(b)
Developments
production schema  Sraffa
pricing: neoclassical monopoly pricing model, mark up pricing,
mark up pricing is not neoclassical
determination of the profit mark up: non-neoclassical
determination of the mark up—P. Riach and P. Reynolds;
investment—A. Eichner, A. Wood, G. Harcourt
stagnation thesis: J. Steindl and P. Sweezy
(4)
b.
Controversies
(a)
marginalist controversy
(b)
administered prices controversy
Scope of heterodox microeconomic theory
(1)
business enterprise
(2)
the market and the business enterprise
(3)
competition, the market price, and market governance
(4)
microfoundations of heterodox macroeconomics
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c.
B.
Theoretical concerns of heterodox microeconomics
(1)
price mechanism: the business enterprise, markets, demand, and pricing
(2)
investment and economic activity: investment decisions, financing of
investment, and the profit mark up
(3)
general equilibrium: non-equilibrium disaggregated price-output model of
a monetary economy
The Methodology of Heterodox Microeconomics
1.
Philosophical Foundation
a.
Common Sense Propositions
b.
Critical Realism
c.
2.
(1)
realism
(2)
open systems
(3)
causal mechanisms
(4)
structures
Epistemological Relativism
Methodological Foundation: The Method of Grounded Theory
a.
Pre-existing Ideas and Concepts
(1)
familiar with all empirical and theoretical literature
(2)
critical awareness, theoretical sensitivity
(3)
skepticism of existing theory
(4)
self-conscious approach to theory building
b.
Data Collection with Constant Comparisons
c.
Conceptual Categories Identified from the Data
(1)
based on data
8
d.
e.
(2)
derived directly from the data
(3)
developed by the economist
(4)
properties
(5)
theoretical sampling
(6)
theoretical/empirical saturation
Core Categories Identified and Developed
(1)
categories as structures
(2)
categories as causal mechanisms
(3)
further data collection
Creating Substantive Economic Theory
(1)
central causal mechanism, secondary causal mechanisms, and structures
(2)
narrative, analytical explanation
(3)
economic reality seen and heard
f.
Creating Formal Economic Theory
g.
Evaluating Grounded Theory
(1)
cannot be falsified
(2)
evaluated by how well it explains
(3)
theory evaluation is a community activity
(4)
evaluated in terms of: categories
dealing with new data
3.
Methodological Issues
a.
Assumptions, Realisticness, Deductivism, and Logical Coherence
b.
Data
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(1)
qualitative vs. quantitative
(2)
research strategies:
surveys
interviews/oral statements
ethnographic studies
participant-observation
questionnaires
fieldwork
statistical/quantitative work
c.
(3)
Case Study
(1)
defined
(2)
principle method of data collection and comparison
(3)
types: intensive concerned with a specific object/theme
extensive concerned with a specific object across many case
studies
a narrative that explains an event
d.
Mathematics and Economic Models
(1)
economic model empirically grounded
(2)
rigor/non-deductive vs. logical deduction/coherence
(3)
use:
pedagogical purposes
evaluating the theoretical literature
evaluating new data
e.
Econometrics
(1)
open vs. closed system
(2)
grounded econometric model
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4.
C.
(3)
provides support for existence of causal mechanism outcomes
(4)
demi-regularities
Historical Economic Theories and Heterodox Microeconomics
a.
Grounded Theories and Critical Realism
b.
Grounded Theories and Historical Narratives
c.
Historical Heterodox Theories
(1)
issue of aggregation
(2)
quasi-aggregative narratives
(3)
absence of general laws vs. existence of transfactual outcomes
Structural Organization of Economic Activity: An Overview
1.
Structures and Framework of Economic Activity
a.
Production
(1)
Production Schema
(2)
Production Schema for the Economy as a Whole
(a)
introduction – the different possible production schemas
(b)
classical production schema
(i)
(ii)
(iii)
(iv)
(v)
(c)
historical background
digression on Austrian production models
the one-stage classical production model
the two-stage classical production model
development in the two-stage classical production model
Burchardt production schema
(i)
(ii)
(iii)
(iv)
historical background
the one-sector Burchardt production model
the two-sector Burchardt production model
extensions of the model
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(d)
circular production schema: corn model
(e)
circular production schema: Leontief model
(i)
(ii)
(iii)
(f)
circular production schema: Sraffa model
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(g)
(3)
c.
2.
production schemas, circular production, and linkages
production schemas, price models, and prices
production schemas, quantity models, and issues
why choosing the circular production schema
Circular Production Schema
(a)
describe the schema
(b)
particular features
(i)
(ii)
(iii)
b.
introduction
production for subsistence and the price system
production with a surplus and the price system
prices, wages, and the rate of profit
rate of profit and non-basic commodities
labor theory of value and the transformation problem
comparative analysis of the production schemas
(i)
(ii)
(iii)
(h)
introduction to the Leontief model
closed Leontief model
open Leontief model
G11  Qd1 and the implications
issue of land—a non-produced input
labor skills differentiated, insufficient by self for survival,
and social context
Structural Linkages
(1)
Income – Final Demand
(2)
Structural Linkages
Flow of Funds and Monetary Production
Agency, Social Institutions, and Organizations
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a.
b.
3.
Agency and Social Institutions that Direct and Engage in Social Provisioning
(1)
enterprise
(2)
family
(3)
government
(4)
location of agency
(5)
agency as a structure
Emergent Market Institutions and Organizations that Facilitate the Elements of
Social Provisioning
(1)
markets
(2)
market governance
Representation and Modeling
a.
b.
Input-Output Model of the Economy
(1)
markets with prices and products
(2)
behind the markets—enterprises
(3)
agency
(a)
in general
(b)
in enterprise, family, and government
(c)
agency: in general; in enterprise, family, and government; in
market organizations
Agency
(1)
self-contained
(2)
linked to structures
(3)
causally-timed linked to other causal mechanisms—prices, quantities,
investment
13
c.
Economy: structurally-causally, quasi-disconnected at a point in time but
connected over time
d.
Implications
(1)
aggregation/disaggregation
(2)
pedagogical modeling
(a)
sectors/markets/goods
(b)
different agency/causal mechanisms
II.
The Business Enterprise
A.
The Structure of the Business Enterprise
1.
2.
Legal and Organizational Structure
a.
type of enterprise
b.
ownership and control
c.
functional managerial structure
d.
divisional managerial structure
Decision-Making Structure
a.
centralized administrative structure
b.
decentralized administrative structure
c.
institutionalized patterns of activity for decision-making with regard to pricing,
investment-product development, wage rates, and production
(1)
institutional patterns of activity as sub-structures
(2)
accounting institutions
(3)
long range planning
(4)
rules and customs
(5)
procedures for investment, pricing, and production decisions
14
wage rate procedures
(7)
committees/individuals
3.
Structure of Production and Costs: Introduction
4.
Structure of Production and Costs: Plant Segments and Direct Costs
4.
5.
6.
7.
B.
(6)
a.
plant segment
b.
direct costs: plant segment and plant
c.
direct costs: multi-plants
Structures of Production and Costs: Managerial Technique and Shop Expenses
a.
managerial technique
b.
indirect costs: cost of the shop technique of production
c.
depreciation
d.
shop expenses
Structures of Production and Costs: Enterprise Technique, Enterprise Expenses, and
Overhead Costs
a.
enterprise technique and indirect costs
b.
depreciation
c.
enterprise expenses
d.
overhead costs
Structures of Production and Costs: The Enterprise
a.
structure of production and costs for a single product
b.
structure of production and costs for the enterprise
Enterprise Costs Through Time
Agency and the Theory of the Business Enterprise
1.
Motivation
15
2.
3.
C.
Pricing and Prices
a.
costing and pricing
b.
prices and their properties
c.
pricing and the profit mark up
Investment
a.
long range planning
b.
investment procedures
c.
investment decisions
d.
profit mark up
4.
Wages, employment and production
5.
Theory of the business enterprise
Applying grounded theory: a case of creating a heterodox theory of pricing
The Objective – Creating a Heterodox Theory of Pricing
1.
Pre-existing Ideas and Concepts
a.
knowledge of neoclassical pricing theory
(1)
derived from microeconomic theory classes and readings
Example 1:
(2)
derived from survey of neoclassical micro texts
Example 2:
b.
Advanced Microeconomic Analysis
Neoclassical Microeconomic Theory in Textbooks
knowledge of heterodox pricing theory
(1)
derived from microeconomic theory classes and readings
Example 3:
(2)
Colloquium in Advanced Microeconomics
derived from general reading and surveying the literature
16
Example 4:
Example 5:
c.
theoretical controversies, knowledge, and theoretical sensitivity
(1)
administered price controversy
Example 6:
(2)
Administered Price Hypothesis—case study using
archive material and government records
marginalist controversy
Example 7:
Example 8:
2.
Surveys of Post Keynesian Economics
Pricing Procedures Utilized by Post Keynesians
The Fate of an Errant Hypothesis—case study using
archive material, letters-correspondence, and
interviews
The Marginalist Controversy—case study using
interviews and letters-correspondence
Critical Awareness
a.
theoretical problems with neoclassical pricing theory
Example 9:
b.
Neoclassical Microeconomic Theory
theoretical problems with heterodox pricing theory
Example 10: Full Cost Prices, Classical Price Theory
c.
empirical support or non-support – an impressionistic survey
Example 11: Price Theory and Business Behaviour--interviews
Example 12: Pricing in Big Business—field studies based on interviews
3.
Skepticism of Existing Theories
a.
evaluating the relevance of the various theories—neoclassical theory cannot be
sustained
b.
sensitivity to the various theoretical issues involved
c.
skepticism and open-mindedness
Data Collection and Categories
1.
Type of Data Collected
17
a.
pricing studies
Example 13: Studies on pricing
b.
cost accounting/costing studies
Example 14: Studies on cost accounting and costing practices
c.
data in studies arranged and compared
Example 15: Two pricing studies—case studies across enterprises
Example 16: Two costing studies—case studies across enterprises
d.
participant-observer data
Example
Example
e.
IWW Calendar
own shopping - price of Kansas City Star
quantitative/statistical data
Example 17: Archive - data on prices—gunpowder
Example 18: Government Statistics – frequency of price change, United
States and United Kingdom
Example 19: Questionnaires/surveys – asking about prices
2.
Data and Creating Categories
a.
categories and properties
Example 20: Categories and Properties
b.
theoretical sampling
c.
theoretical/empirical saturation—mention pricing procedures and frequency of
price changes
Theory Construction
1.
Categories into Structures
a.
information/accounting procedures
b.
administrative structures
c.
structure of production and costs
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2.
3.
Categories into Causal Mechanisms
a.
cost-based pricing procedures include depreciation at historical costs,
based on normal output, and include a mark up on profit
b.
pricing administrators use cost-based pricing procedures to set the price
for its products
c.
decisions for setting and change the price include magnitude of costs and
the profit mark up; changes in costs, profit mark up, and competitive
conditions; and the relationship between price and sales
Transfactual Outcomes of the Causal Mechanism
a.
pricing administrators use cost-based pricing procedures to set prices that are
stable
Example 21: Pricing Procedures and Price Stability
b.
is price stability dependent on concentration and/or product characteristics—use
of econometrics to develop the causal mechanism
Example 22: Re-testing Gardiner Means
c.
do prices converge—use of model simulation to examine theoretical property
supposedly associated with cost-based prices
Example 23: Convergence
4.
5.
Heterodox Theory of Pricing
a.
structures and causal mechanisms empirically grounded
b.
a narrative story with analytical explanation and transfactual outcomes
c.
economic reality seen and heard
Evaluating Heterodox Theory of Pricing
a.
existing theory empirically grounded
b.
new data – does it fit the existing heterodox theory of pricing, that is fit in the
existing categories or is there something new about it
Example 24: asking about prices
19
Example 25: realist approach to pricing
III.
The Market and the Business Enterprise
A.
Industry and Market
1.
Market as a social structure
a.
b.
c.
2.
b.
B.
(1)
property rights
(2)
organization of the business enterprise
(3)
institutional practices
social component – social rules defining how markets are organized and
controlled
(1)
competition
(2)
cooperation
(3)
rules of exchange
social network
Market
a.
3.
legal components – property rights and laws specifying the
defined and properties
(1)
abstract – specific to product which has technical/income dimensions
(2)
non-clearing
(3)
sequential transactions/concurrent transactions
Types of products and effects on characteristics of markets
Industry
Structure of Market Demand
1.
Structure of Consumer Demand
20
a.
lexicographically order based on the separability and hierarchy of needs
b.
social needs
c.
Causal Mechanism – Household
d.
e.
2.
3.
4.
(1).
social organization/cooperation, not isolated individual
(2).
socially learned perception of what goods can do
(3).
household decision making
Properties
(1)
purchases affected primarily by money income, not variations in prices
(2)
substitution possibly take place in a narrow band only
Points to Notice
(1)
no price elasticity of demand
(2)
income elasticity of demand is problematical
(3)
distinction is between routine versus discretionary, not necessary versus
luxury goods
Industrial Demand – Investment Goods
a.
causal mechanism: business enterprise investment decision
b.
property – price of investment good not very important
Industrial Demand – Intermediate Inputs
a.
major causal mechanism: business enterprise production decision
b.
secondary causal mechanism: business enterprise investment decision
c.
property:
(1)
price not relevant
(2)
substitution not possible
Demand for Non-Market Goods: Government Goods and Services
21
C.
a.
causal mechanism: government units
b.
property: price of good not important in general
Structure of Market Demand, the Business Enterprise, and the Market Price
1.
Differential Prices and Fluidity of Market Shares
2.
Relationship between Market Price and Market Sales
3.
Sequential Production and the Market Price
4.
Sequential Production, Reproduction, and the market Price
5.
Investment, Growth, and Administered Prices
6.
Summary
IV.
Competition, the Market Price, and Market Governance
A.
Competition, the Market Price, and Market Governance
1.
Factors causing price instability and declining price/profit mark ups
a.
b.
c.
Market power creates problems of common uniform market price because
enterprises have different characteristics:
(1)
costs
(2)
growth rates
Costs and the Business Cycle
(1)
Hierarchy of enterprise costs
(2)
Decline in output and price cutting – the impact
(3)
One-upmanship
Change in market growth rate
(1)
Growth rate of enterprise decline
(2)
Decline in actual EATC
22
2.
3.
Problem with costs in the short term
(4)
Conflict of enterprise growth rates in markets
Competition
a.
Defined
b.
Factors affecting the degree of market competition
(1)
Enterprise size
(2)
Market concentration
Need to deal with price instability – competition: regulating markets or market
governance
a.
b.
B.
(3)
market governance
(1)
defined
(2)
contrast to hierarchy and market
social network
(1)
existence of trust; lack of opportunism
(2)
as a form of market governance
(3)
most basic
(4)
breakdown of social networks
(5)
developed forms of social networks/market governance
(a)
(b)
informal/formal bilateral/multilateral relationships
associational relationships—trade associations
(c)
price leadership
c.
market governance, government regulation, deregulation
d.
market governance as restrictive trade practices
Market Governance and the Market Price: Trade Association
23
1.
Define/describe trade association
2.
Organization
Legal
b.
Informal
3.
Management
4.
General activities
5.
6.
C.
a.
a.
Representational activities
b.
Trading and commercial activities
Regulating market activities
a.
Price-fixing; price reporting – open price associations
b.
Quota systems
c.
Resale price maintenance
d.
Other restrictive trade practices
(1)
Collective boycott
(2)
Exclusive dealings
(3)
Rebates
Some issues about trade associations
a.
Restrict output/raise prices
b.
Unstable – liable to fail because members cheat on prices
c.
Protect inefficient enterprises
d.
Only inefficient enterprises want trade associations
e.
Trade associations are inefficient and threat to the public
Market Governance and the Market Price: Price Leadership
24
1.
Define generally
2.
Forms
3.
a.
Dominant enterprise price leadership
b.
Price leadership with trade association
c.
Price leadership with collusion
Dominant enterprise price leadership
a.
(1)
Market share large
(2)
Large with respect to other enterprises
(3)
Cost advantage
(4)
Access to capital markets
(5)
Easy access to borrowing
4.
Determining the market price
5.
Appearance of dominant enterprises
6.
Stability
a.
b.
D.
Characteristics of the enterprise
Economic
(1)
Costs
(2)
Competitive strategy
(a)
First mover strategy
(b)
Barriers to entry and growth
(c)
Build capacity
Legal stability
Market Governance and the Market Price: Government Regulation and Laws
25
1.
Regulation
a.
define
b.
private interest explanations
c.
public interest explanations
d.
regulatory capture
2.
Role of government and politics in legal form
3.
Market price determination
4.
Laws and the market price
a.
market control
b.
restrictions on price competition
c.
restrictions on price determination
V.
Microfoundations of Heterodox Macroeconomics
A.
Disaggregated Price-Output Model of the Economy
1.
Putting the price model together
a.
The enterprise pricing equation
b.
Market pricing equation
c.
Production schema for the economy
d.
(1)
Multi-product
(2)
Intermediate products: 24% – 50% of sales
(3)
Intermediate inputs, basic and non-basics, consumption and investment
goods
(4)
Circular production
(5)
Production schema
Pricing model of the economy
26
2.
3.
(1)
Single-product pricing model
(2)
wage rate, depreciation in money terms
Output model of the Economy
a.
A is decomposable
b.
A, V* change with changes in the flow rate of output due to vintage technology
c.
Surplus
Price-output model of the economy
a.
Put together
b.
M and A are different, so there is no dual relationship
c.
(1)
Prices are not allocative mechanisms
(2)
Not vertically integrated to labor-based prices
(3)
Empirically grounded characteristics
Theoretical issues
(1)
Different prices
(2)
Time and convergence
(3)
Time, fast/slow moving variables, and convergence
B.
Mark Ups, Finance, Investment, and Economic Activity
1.
Review 2-sector model
2.
Mark ups, investment, and the monopoly capitalism thesis
a.
3.
Capitalists’ propensity for investment and growth
Prices, co-ordination of economic activity, and aggregate economic activity
a.
Underlying forces coordinating economic activity – investment
(1)
Basis for continual market transaction
27
b.
Forces for continual market transaction: business enterprise  prices
c.
Central to a well coordinated economy with high levels of economic activity are
the institutions of
d.
(1)
Business enterprise
(2)
Market institutions to control prices
(3)
Capitalist class
(4)
Political institutions
(5)
Financial institutions
Can they do the job?
(1)
Production efficiency
(2)
Efficient resource allocation
(3)
Distribution
(4)
Externalities and public goods