Price Theory & Public Policy

2.5 Complications

Of standard 'neoclassical' or 'hedonistic' microeconomics Tibor Scitovsky has said it is :

... an admittedly artificial and unrealistic model of economic behavior and economic organization, whose merit and justification are its simplicity and the fact that it is in many (though not all) respects a standard of perfection. 

(Tibor Scitovsky, Welfare and Competition,

 Irwin, Homewood, Illinois, 1971, p. 26)

There are many grounds on which the standard model can be assailed including:

  • the arbitrariness of taste and preference making mathematical specification questionable;

  • the fact that no firm actually uses marginal costing to determine its price/quantity and profit maximization decisions;

  • the problem of oligopoly (the dominant form of industrial organization) that resists a deterministic solution due to the 'reactionary' nature of game playing; and,

  • the rivalry rather than cooperation that fuels the entire model.

To round off the 'theoretical' part of Microeconomics +, I will consider four complications arising from the standard microeconomic:

1. Competitiveness - What does it means?;

2. Economic Equafinality - Marx meets Markets;

3. Imperfection Rules; and,

4. From General Equilibrium to Industrial Organization.


1. Competitiveness -What does it mean?

- altruism & philanthropy: Kenneth Boulding


2. Economic Equafinality

- Markets and Marx


3. Imperfection Rules

- the right angled cost curve & Microsoft


4. From General Equilibrium to Industrial Organization

General equilibrium analysis did not lead to the study of the economy as a whole.  Rather at the beginning of the 20th century, in the hands of Vifredo Pareto, it lead to 'welfare economics'.  With Keynes' General Theory in 1936, a new and distinct level of economic analysis emerged: macroeconomics, the study of the economy as a whole.  A compelling linkage between competition in one market and the economy as a whole had to wait until the late 1950s with the innovation of 'industrial organization' (IO) as a sub-discipline of economics.

IO is the brain-child of the late Joe Bain. His seminal work - Industrial Organization - was published in 1959 (Bain 1968).  Using IO, Bain began what has become an ongoing process within the economics profession of linking macroeconomics (the study of the economy as a whole) to microeconomics (consumer, producer and market theory) to better understand the way the 'real' world works.

The IO schema (Exhibit 1) consists of four parts.  First, basic conditions face an industry on the supply- (production) and demand-side (consumption) of the economic equation.  Second, an industry has a structure or organizational character.  Third, enterprise in an industry tend to follow typical patterns of conduct or behavior in adapting and adjusting to a specific but ever changing and evolving marketplace.  Fourth, an industry achieves varying levels of performance with respect to contemporary socio-economic-political goals.