Neoclassical economics begin with generalizations upon ‘the firm’. Firms epitomize economic activity by continuously transforming inputs into an output; and the relationship between inputs expended and output created dictates the possibilities for economic analysis. Neoclassical theory posits the production function as governing the proportions by which inputs are combined into a firm’s output — these proportions being shaped by a presumption that every input’s utility diminishes with increasing application.
Characterizing firms by their production functions allows economists to theorize about firms’ behaviors, e.g.: firms seek maximal profits by constantly repositioning themselves on their loci of technical indifference so as to equate marginal revenues with marginal costs, e.g.:
The free market’s system of positive and negative sanctions, which we call profit and loss, governs microeconomics.1It is then only logical to conclude that, since all these fractal elements of the economic whole behave in the same way, we can be sure that the entire economic system is directed by a general tendency for marginal revenues to equal marginal costs.
The production function (along with the household utility function) has also commended itself to economic thinking because it embodies the indispensable notion of diminishing marginal utility. If the utility of economic goods does not generally diminish at the margins of their application, then economics would be left without an account for the bounded nature of economic activity, which we may take as the observation most suggestive of economics as a system having some possibility of analysis.
Unfortunately, economics’ implementations of diminishing marginal utility have proven problematic as models of actual firms. However useful the neoclassical model has been for the torment of MBA candidates, it has yet to demonstrate any empirical validity. It seems that whenever an economist has examined an actual enterprise to see if it is operating where marginal revenues equal marginal costs, he finds what should be received as shocking indifference to this diktat of his theory.2 Finding no evidence of actual firms or households operating in the vicinity of maximal profits or maximal utility, heterodox dissent formed around managerial economics’ structural inadequacies in representing its subject.3
SFEcon participates fully in heterodoxy’s conclusion that neoclassicism has no acceptable model of the firm.4 Our macroeconomic system references no such model; and we maintain little more than passing acquaintances with the alternate views on firms and households being developed by accountants, behaviorists, sociologists, historians, game theorists, et al. To our way of thinking, microeconomic phenomena might never prove amenable to productive generalization; while even the most incisive understanding of micro activity is not likely to forward an understanding of the logic behind value creation.
Believing as we do that value ensues in the plenary interactions of forces transcending the boundaries of micro systems, we collide with those heterodox economists who insist that their understanding of some familiar, directly observable social activity is essential to any proper explanation of the global economic superorganism. To the contrary, our prejudices require that macroeconomic causality be re-imagined as a phenomenon complete and entire unto itself.
The nature of SFEcon’s re-imagination of macroeconomics is unfortunately convoluted with respect to current presentations of economic thought. To begin untangling this thicket of issues, we recapitulate our conviction that mainstream economics is wrong on two of its most important suppositions, viz.:
1) production and utility theory describe firms and households; and
2) whatever causality might be attributed to the economy’s micro elements can be scaled-up to represent behaviors of the economic whole.We agree with heterodoxy in that point 1) has been falsified to an extent that should satisfy any objective criteria of science. But our further rejection of point 2) prevents us from accepting heterodoxy’s claim that its falsification of neoclassical microeconomics also falsifies neoclassical macroeconomics.
SFEcon’s central hypothesis is that, though marginalism fails to describe micro phenomena, it is quite effective when applied to macro phenomena. This hypothesis has remained un-examined in economics because the possibility of its being instantiated by a formal system has not been considered. Presumably the only way to derive the production or utility function of a macroeconomic entity is through some combining of the production or utility functions for the microeconomic elements of which the macro entity is composed. This is because micro activity presents the only observable data upon which functional expressions of technical indifference might be computed. Direct computation of a production function based on the data available for an economic sector is unthinkable because of the polynomial factoring problem.
In SFEcon’s view, economic science proceeds from this tacit conclusion in one of two directions. Neoclassicism has placed its Great Marginalist Truth beyond empirical investigation by making it the sacred mystery of their secular religion — which they then defend with the most obtuse of moral asseverations. Heterodox macroeconomists reject marginalism because any idea that cannot be quantified is simply useless as a foundation for the scientific discipline they intend to create.
SFEcon offends both movements by insisting that they proceed from an algebraically demonstrable falsehood: marginalism’s notion of a general equilibrium upheld by economic optimality is perfectly well-expressed in a polynomial that can always be factored. The premise of general optimality can, therefore, be instantiated in direct computations of utility parameters for the sectoral level abstraction; and these parameters can be empirically examined for their serviceability as descriptors of the economy’s technical potential.
Having settled on the illumination of value as economics’ raison d’être, and concluded that value ensues in operations of the economic whole, SFEcon presumes that Wassily Leontief set economic science on its proper plane of abstraction with his input/output formulation. Input/output analyses focus on the related activity of economic sectors comprising all material transactions; and the global competition among sectors for capital is the motive force controlled by SFEcon modeling.
While Professor Leontief’s I/O context is implicit in SFEcon’s matrix structure, the causality that has come to be associated with an input/output formulation conflicts with ours. Computable general equilibrium modeling CGE relies on constraints expressing the proportions by which inputs create their respective outputs. This is ultimately another instance of reductionism: in this instance a micro phenomenon — the firm’s familiar aspect of defining its product in terms of a bill of materials — is scaled-up to an account of macroeconomic behavior.
CGE’s methodology is somewhat relaxed in this regard when its modeling makes reference to production functions determined for economic sectors through the Cobb-Douglas or some related formulation. And we are glad to report that SFEcon’s hyperbolic production function is being considered in this role with pleasing results.5 But we do not participate with this movement because 1) absent the constraints of marginalism, production theory is unbounded; while 2) adding marginalism to the constraints of a bill of materials must over-determine any specification of economic order.