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1 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 7 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 9 (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 10 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 11 (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 12 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 18 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