Fixing the Economists Article of the Week
by Philip Pilkington
Neoclassicals are a slippery bunch indeed. The moment you think that you’ve pointed out a flaw in their theoretical armor they turn around and say that the theory can accommodate the criticism. Soon after, you see them once again making the same mistake you were pointing to. This leaves you mystified: are they liars or are they just stupid?
I’ve come to think that a great deal of this is down to neoclassicals not actually understanding what their theories mean. Much of the theoretical framework is mathematical and geometric but in order to be relevant for the discussion of economics such mathematics or geometry must be interpreted in an economic way. This is where most neoclassicals fail. Hypnotised as they are with the tidiness of the mathematics they never really think through what it means.
A very good example of this is the typical supply and demand curve presentation.
At first glance this appears easy to interpret. The point at which the supply and demand curves intersect is the point at which price is set together with the quantity bought. Great. Right? Well no.
Actually there’s two ways of interpreting this graph. One way is what I call the “teleological” interpretation. The teleological interpretation is essentially that the curves are set in stone and that the market will always tend in this direction. The outcome then is pre-determined and thus the graph contains ex-ante predictive power: it can tell you what will happen in a market.
The other interpretation is the non-teleological interpretation. In this interpretation the supply and demand curves are not set in stone. We can play with them, manipulate them and give the all sorts of shapes. For example, we might look at the housing market in the run-up to the 2008 recession. Here is a case where demand increased as prices rose because people thought that these prices would rise forever. In such a case the above graph would have to be altered so that the demand curve was upward-sloping and basically overlapped with the supply curve.
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