Peter Radford has contributed a couple of good articles to the WEA Review blog. In Blind leading the blind he dissects the claim made by Dianne Coyle of the University of Manchester that “…microeconomics is both robust and often verifiable with real-world data.” Obviously one can find “real-world” data to support practically any theory. Scientific verifiability requires searches for data that a theory cannot explain. On this basis microeconomics is a seething swamp of inconsistency and assumptions wildly conflicting with observed reality.
In Can we move on? he explains:
Economics has become a small minded sub-discipline designed to produce analysis of small issues or problems that can be contained within the massive restrictions of the subject’s edifice.
This is why, perhaps, none of its younger tyros attack big problems anymore. All of them apply their undoubted intelligence against microeconomic targets in the vain hope that accumulating answers at the micro level will somehow aggregate into macro changes.
They have all, in other words, been cowed by the absurdity of the micro-foundations zealotry of the older generation. Apparently they are unaware of the hollow nature of the micro adventure. I have always thought that the micro-foundations project was foolhardy. After all garbage-in is garbage-out. Bedside it represents a stubborn refusal to take on board some of the more modern and exciting insights of evolution, complexity, and chaos thinking. Not least amongst which is the idea that reality is multi-layered with phenomena emerging at one level without cause from the effects of other layers.
No empirical fact contradicts conventional economics more clearly than the fact of long term economic growth. Robert Solow published his ground breaking paper “A contribution to the theory of economic growth” in 1956. He demonstrated that increases in population and capital investment accounted for no more than 20 per cent of economic growth. The rest he attributed to “technological change” but since there was no room for such change under the standard microeconomic assumptions it was reclassified as the “Solow residual” and ignored for the next twenty five years.
Paul M Romer broke the logjam in 1986 with his article “Increasing Returns and Long-Run Growth” published in the Journal of Political Economy. He described his proposal as “endogenous growth theory” suggesting that technology developed in response to financial incentives. This was a somewhat belated response to Joan Robinson’s comment: “In the Solow model technology drops like manna from heaven.”
Adam Smith laid the foundations of economic growth theory
Adam Smith was keenly interested in economic growth and development. In the first quote below Smith lays out two key factors: innovation; and specialization (the division of labour).
…from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations. (Smith WoN B1. I. 3)
In the second quote Smith makes the point that the possibilities of conditions favourable to such economic growth are created by extensive markets: growth is limited by the extent of the market
As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. (Smith WoN B1. III. 1)
Neoclassical economists reject Adam Smith
While Adam Smith set out the basic facts about economic growth— scope of the market, returns to experience, innovation, and the division of labour—these are incompatible with the standard microeconomic assumptions.
- The division of labour requires teamwork, but standard microeconomics assumes purely selfish behaviour. Imagine an Association Football team whose members never passed to each other, each hoping to score a goal. You have the neoclassical view of teamwork.
- Innovation is hard work and requires a strong incentive; but under standard microeconomic assumptions all knowledge is instantly and costlessly transmitted, so there is no possibility of a commercial reward to innovation.
- Returns to experience mean that every time a worker repeats a task he or she gets a little better at it. Under standard microeconomic assumptions the economy is in an equilibrium state, from which no further change is desirable.
- Making the scope of the market the ultimate limit of firm growth rather than some mystical diseconomy of scale wrecks the whole basis of standard microeconomic competition theory.
Vandalizing Grandpa’s grave
It would be an unusual economics textbook indeed that did not offer tribute to Adam Smith as the “father of economics.” This will probably include a misleading reference to his book the Wealth of Nations. The insult may be extended by a quotation from a paper that no longer exits and that only Dugald Stewart claimed to have read.
Economists do themselves and their discipline no favour by pretending to honour Adam Smith while rejecting his most critical insights.