AM02: Supply & Demand

2nd Lecture (90min) on Advanced Microeconomics at PIDE, (14 Sep 2017). While planning to teach a heterodox micro course, I was faced with the dilemma of choosing a suitable textbook. Interestingly, there are many options available, but I was not happy with most of them. Some were too mathematical for my taste, some made too many concessions to conventional micro while being critical of it, and some were simply not suitable for use as texts. Eventually, I decided to use Rod Hill and Tony Myatt’s: The economics anti-textbook: a critical thinker’s guide to microeconomics. Zed Books Ltd., 2010. I am very pleased with this choice. It provides contact with conventional micro that we need, together with a critique that is easy to understand, and can be used as a basis for construction of good alternative approaches.
I started the course (first lecture was preliminary introduction to methodology and approach) by covering Chapter 3: How Markets Work (In an imaginary world) of the H&M anti-textbook. This chapter attacks the central Supply and Demand model which is at the heart of mainstream micro in a beautiful and elegant way. I am impressed! I have myself written what I thought (and still think) is a very good critique (see The Conflict between General Equilibrium and the Marshallian Cross). I have also seen other critiques (like Sraffa). But H&M pointed out an angle that I had not considered before. They survey conventional textbooks to pick out the main message being conveyed in the S&D model and its policy implications. Then they show that the S&D model is heavily dependent upon the assumptions of perfect competition, which require small price-taking firms, full information and zero transaction costs. All conclusions of S&D and policy implications fail when firms have market power, and the reverse policy ocnclusions can be easily derived. As a RHETORICAL strategy, firms use S&D as a universally applicable model, do not caution students about its limited applicability. It is in fact easy to show, with very simple examples, that even slight violations of the perfectly competitive markets assumptions lead to the complete failure of S&D analysis. HONESTY would at least require textbooks to ASSESS a market to see if it satisfies the assumptions required for validity of S&D. However, because textbooks have a hidden ideological agenda, they fail to mention any restrictions on applicability of S&D. Not only that, but they actually use Oligopolistic markets with large firms to illustrate S&D, which is simply wrong, since S&D does not work in such markets. As a result, students go away from Micro courses with the impression that S&D works in all markets.
WHEN we can easily display these flaws, and especially when we can destroy the S&D model, as H&M effectively do, this is of substantial value in training student to step outside the box of neoclassical orthodoxy. When students realize that they have been duped, it incentivizes them to distrust orthodoxy. This is what the first few lectures in my course attempt to do. At the same time, I try to teach them about viable alternative approaches.

LINK for (1) brief summary, (2) Video Recording (90min) and (3) Longer Outline and Summary (2500 words) of 2nd lecture in Advanced Micro based on Chapter 3 of Hill & Myatt’s Anti-Textbook


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