real-world economics review, issue no. 98 subscribe for free
The 1-2-3 toolbox of mainstream economics: Promising everything, delivering nothing Shimshon Bichler [Teaches Political Economy at universities and colleges in Israel] Jonathan Nitzan [York University, Toronto] Copyright: Shimshon Bichler, Jonathan Nitzan, 2021
You may post comments on this paper at https://rwer.wordpress.com/comments-on-rwer-issue-no-98/
Abstract We write this essay for both lay readers and scientists, though mainstream economists are welcome to enjoy it too. Our subject is the basic toolbox of mainstream economics. The most important tools in this box are demand, supply and equilibrium. All mainstream economists as well as many heterodox ones use these tools, pretty much all the time. They are essential. Without them, the entire discipline collapses. But in our view, these are not scientific tools. Economists manipulate them on paper with impeccable success (at least in their own opinion). But the manipulations are entirely imaginary. Contrary to what economists tell us, demand, supply and equilibrium do not carry over to the actual world: they cannot be empirically identified; they cannot be observed, directly or indirectly; and they certainly cannot be objectively measured. And this is a problem because science without objective empirical tools is hardly science at all.
1. Introduction Our purpose in this paper is not to criticize demand, supply and equilibrium as such, but to show that, right or wrong, these tools do not translate into actual science.1 We begin in Section 2 with what we call the 1-2-3 toolbox of mainstream economics. Mainstream economists claim that the key tools in this box namely, demand, supply and equilibrium explain virtually any and every market. We argue they do not. In Section 3, we illustrate how in practice these tools produce baffling if not contradictory results and suggest they merit closer inspection. In Sections 4, 5 and 6 we offer a clean-slate outline of demand, supply and equilibrium analysis, show the price and quantity history of the U.S. shoe market, and illustrate how mainstream economists would use their 1-2-3 toolbox to explain it. Their explanation, though, is deeply problematic, and for the simplest of reasons: nobody, including economists, has any idea what demand, supply and equilibrium look like! As we explain in Section 7 and 8, the demand and supply curves express the intentions of buyers and sellers, and these intentions are unknowable to outsiders (and sometimes even to those who supposedly possess them). In practice, the best economists can do is estimate demand and supply indirectly and that does not work either. The first method, which we examine in Section 8, is to interview buyers and sellers. On the face of it, this method might seem sensible, but a deeper look shows its results are impossible to assess and often nonsensical. The second method is to estimate demand and supply curves econometrically, based on actual price and quantity data. In Section 9 we show that this method too runs into the wall. Demand and supply regressions, no matter how fancy, are 1
Perhaps the most accessible yet rigorous critique of mainstream economic theory is Keen (2011). For our own bit, see Nitzan and Bichler (2009: especially Chs. 5 and 8).
23