Role of Heterodox Microeconomics in Heterodox Economics session at 12th International Conference

1. The Role of Microeconomics
in Heterodox Economics
Professor Frederic S. Lee
University of Missouri—Kanas City

2. Introduction

3. Micro-foundations of
Macroeconomics Debate
 The debate revolves around three arguments:
1. microeconomics is mainstream microeconomics and hence the
question is whether heterodox macroeconomics is compatible
with it; or
2. heterodox macroeconomics is completely separate from any
type of microeconomics and hence has no need of micro-foundations;
and/or
3. there is no such thing as heterodox microeconomics and
heterodox economics, especially its Post Keynesian variant,
consists only of macroeconomics.

4. Micro-foundations of
Macroeconomics Debate
 None of the arguments are valid because
1. heterodox “macroeconomics” is completely distinct from
mainstream macroeconomics and hence cannot be reduced to
mainstream microeconomics;
2. mainstream microeconomics is completely theoretically
incoherent and hence does not constitute any knowledge
whatsoever;
3. there is a heterodox ‘microeconomics” which is theoretically
coherent (more or less) which is completely distinct from
mainstream microeconomics; and
4. the economy is an interdependent disaggregated whole which
means that the separation between “micro” and “macro” has no
validity, no meaning.

5. The Economy as Whole: Conceptual
and Theoretical Foundation

6. Production, Social Surplus, and Social
Provisioning
 Production Schema
 Circular Production
 Circular Production, Non-Produced Inputs, and Scarcity
 Fixed Investment Goods, Resource Reserves, and the
Surplus

7. Figure 1 Stock-Flow, Social Accounting Schema of the
Productive Structure of the Social Provisioning Process

8. Social Surplus and Income
 Classes, State, and State Money
 Government Expenditures, State Money, and the
Financial Sector
 Profits and the Social Surplus
Wages and the Social Surplus

9. Figure 2 Monetary Structure of the Social Provisioning Process

10. Agency, Organizations, and Institutions
 Acting Person
 Business Enterprise
 State
 Household
 Market Governance
 Trade Unions

11. Figure 3 Agency and Core Decisions

12. Figure 4 Economic Model of the Social Provisioning Process

13. Figure 5 Model of the Economy as a Whole

14. Effective Demand and Production
Constraints?
 Production of the Surplus: Is there an input constraint?
 Savings, Profits, and Investment
 Government Expenditures, Savings, and Profits
 Wage Rates, Wages, Consumption Goods, and Profits
Output-Employment Model of the Economy
Output-Basic Goods Sector Q1 = [I – A11
T]-1A21
T S
Output-Surplus Goods Sector S = Q2 = Q2I + Q2C + Q2G
Total Employment L* = lT
1[I – A11
T]-1A21
T S + lT
2S + L31
T

15. Organizing Economic Activity and the Social
Provisioning Process: Price Mechanism?
 Price Mechanism: Exchange, Prices, and Production
 Prices and Quantities: Are they connected?
Wage Rates and Employment: Are they connected?
 Interest Rates, Savings, and Investment: Are they
connected?

16. Organizing Economic Activity and the Social
Provisioning Process: Effective Demand
 Effective Demand qua the Social Surplus Organizing Economic
Activity
Output-Employment Model of the Economy
Output-Basic Goods Sector Q1 = [I – A11
T]-1A21
T S
Output-Surplus Goods Sector S = Q2 = Q2I + Q2C + Q2G
Total Employment L* = lT
1[I – A11
T]-1A21
T S + lT
2S + L31
T

17. Organizing Economic Activity and the Social
Provisioning Process: Effective Demand
 Social Surplus, Social Provisioning, and the Creation of Prices
 Possibility of Prices qua Distributional Variable (Wage Rates, Profit
Mark-up, Interest Rates) Directed Economic Activity?
Price Model of the Economy
Prices-Basic Goods Sector p1 = [I – Rd1Zd1M11]-1Rd1Zd1[l*1w + d1]
Prices-Surplus Goods Sector p2 = [Rd2Zd2M21][I – Rd1Zd1M11]-1Rd1Zd1[l*1w + d1]
+ Rd2Zd2[l*2w + d2]
 Enterprises, Prices, and the Going Concern
 Inflation, Economic Activity, and Financial Assets

18. Heterodox Microeconomics

19. Heterodox Microeconomics and
the Economy as a Whole
What is meant by Heterodox Microeconomics in
the Context of the Economy as a Whole?
What is not meant is Micro vs. Macro.

20. The Economy as a Whole is an Interdependent,
Disaggregated, Agent-Causal Economy
 Agency Specific Analysis
Acting Organizations Core Decision Variables
Business Enterprise Q2I, Q2C, Q3L, LB1,2, L11, L21, L31, p, w, pmu, ΠGRE, ΠGD, iB, iD, tp
State Q2G, L41, w, iG, iB, GP4, ti, tp
Household Q2C, LB5, w, L11, L21, L31, L41
Market Governance p, w, pmu, iB, iD
Trade Union L11, L21, L31, L41, w, GPd
 Market, Industry, Sector, and Location Specific Analysis
 Each Specific Analysis is Interdependent with other Specific Analysis:
 Examples—market governance, enterprises, and trade unions: cartels
and employer associations

21. Specific Analysis
 Specific Analysis must be consistent-integrated with the
Model of the Economy as a Whole
 Example: state and state created money, classes and
class-based access to social provisioning, state-dependent
financial sector, and social accounting
relationships
 Absence of the Fallacy of Composition: Emergent
Interdependent Specific Analysis

22. Output-Employment, Price Model of the
Economy
Output-Employment Model of the Economy
Output-Basic Goods Sector Q1 = [I – A11
T]-1A21
T S
Output-Surplus Goods Sector S = Q2 = Q2I + Q2C + Q2G
Total Employment L* = lT
1[I – A11
T]-1A21
T S + lT
2S + L31
T
Price Model of the Economy
Prices-Basic Goods Sector p1 = [I – Rd1Zd1M11]-1Rd1Zd1[l*1w + d1]
Prices-Surplus Goods Sector p2 = [Rd2Zd2M21] [I – Rd1Zd1M11]-1Rd1Zd1[l*1w + d1] + Rd2Zd2[l*2w + d2]

23. Conclusion: Core Theoretical
Research for the Future

24. Truism: Develop Heterodox Economic Theory
Not just one heterodox approach to the
exclusion of others, but integrate.
Look for other possible theoretical contributions
beyond the usual heterodox approaches.

25. Specific Theoretical Topics—Just a Few
 Concept of the Going Concern as applied to the
Economy as a Whole and its various Acting Persons-
Organizations-Institutions and Core Decisions
 Labor and Resources as Socially Constructed Inputs
 Integration of Ecology into the Economy as a Whole
without bringing
 along scarcity and other mainstream concepts
 How Ideology (mainstream economic theory) affects
how Agency is conducted

26. Most Important Theoretical Research
 Developing Heterodox Theory in the context of Engaging
with the Mainstream Price Mechanism and Refuting It
 Example: Pricing, Administered Prices, and Price Stability
 Example: Wage Rate Determination, Wage Rate
Stability, and Employment
 Example: Interest Rates/Rates of Return and Investment
 Example: Heterodox Production Theory and Relative
Scarcity

27. Final Remarks
 Only by Attacking and Refuting the Price Mechanism
Combined with the Alternative Class-based Effective
Demand/Social Surplus Approach to Organizing and
Directing Economic Activity and to Access to the Social
Provisioning Process can Mainstream Economic Theory
be Theoretically Dismissed.
 Dealing with the Social, Organizational, and Institutional
Existence of Mainstream Economics/Theory Requires a
different set of activities which Heterodox Economics
have Historically Decline to Pursue (which has
contributed significantly to its precarious state that it finds
itself in today)—but that is a different story for another
time.