ECONOMICS FOR HERETICS: DEBUNKING THE MYTHS OF ORTHODOX ECONOMICS Excerpt from Chapter 5 – “The Myth of Competitive Markets”

(Are welcome the guidance and indications -emails, web addresses, name of head of area publications, etc. - about publishing houses and institutions that could publish the book).

Redemption failed: The “false messiah” of the successive approximations

Let us turn now to the issue of unrealism of the model of perfect competition. What orthodox economists say about this lack of realism? Simple: they minimize it by saying that all scientific models are in some measure unrealistic. However, as already mentioned, the model of perfect competition is not a simplification of reality but rather is openly at odds with reality . But orthodox economists have an answer yet. They say: “This model is only the basis and principle of our research program. After, starting from this we will develop other models of imperfect competition more realistic, with market power, product differentiation, barriers to entry and uncertainty. The student only needs to be patient. Little by little as he progresses in his courses, will go looking models more and more realistic”. Here we have, therefore, the grand means of redemption that has neoclassical theory to its unrealism: the method of “successive approximations”.

The first thing we must say about this is that it is a big scam. In effect, during the first years of study is said to economics students that they will study models more and more realistic, but later, already explained the models of imperfect competition (monopoly, oligopoly and monopolistic competition), economic theory courses become much more unrealistic and abstract. Anyone can check this by reviewing any advanced economics textbook. For this reason, Martin Shubik, in his famous article “Curmudgeon's Guide to Microeconomics”, says: “There are very few textbooks that indicate to the students that there are several forms institutionally different in that a company can operate. Insofar more elemental is the textbook, it is more probable that contains information on various forms of organization. However, as soon as our study becomes advanced, we do not bother to differentiate between General Motors and a small candy store. There are several institutional forms the basic text by Samuelson, but not in its Foundations” (1).

But even setting that aside, we must say that the proposal of successive approximations to reality starting from unrealistic models is a terribly misguided strategy because, in doing so, ends up turning to the reality in a sort of “special case” of theory!

And not only that. The method of successive approximations, while it may be appropriate for systems in which the parties are not intrinsically interrelated, it is never for complex or holistic system, in which the elements are intrinsically interrelated and display emergent properties. Well, this is exactly what happens with the market structures. In them the information, risk, uncertainty, technology and the relative power of the participants should never be considered as exogenous elements that may be introduced into the system after keeping intact the basics of the above structure because when the system has a holistic structure emerging properties as soon as a new element is added, the system is fully reconfigured.

It is precisely due to this that the orthodox theory can never build realistic models even through his method of successive approximations. By keeping the same structure always deterministic, the neoclassical economics can never build “open models”, can only move from a closed system to another slightly larger closed system. The mathematical formulation, although allows us to play to the theoric ping-pong and formulate fun exercises, sterilizes any attempt to holistic analysis, which is what really should to the market structures. So Shubik, referring to the model of duopoly (competition between two firms with market power), notes that: “Personally, I like the theory of duopoly. I like it more that the crossword puzzles. However, if I forget the distance that separates highly simplified models that I study and real markets of our society, would cause a lot of damage to myself and to my students” (2).

Finally, regarding the method of successive approximations should also be pointed that in the process of building new models (supposedly more realistic) frequently are maintained many of the false previous assumptions and what is worse, are added new false assumptions in order to secure the deterministic-mathematical “closing”  of the new system. Thereby falsehood is placed over falsehood and promise to eliminate false assumptions is never fulfilled. Therefore, the method of successive approximations, or successive closings, maybe it should be called "method of successive falsehoods". But what is sure is that it is a "false messiah" because it does not "redeems" to the orthodox theory of its lack of realism. And neither redeems to young students of economics who wish to understand well the reality and end up getting scammed by their teachers (who in turn were scammed when they were students).

References:

1. Martin Shubik, “Curmudgeon's Guide to Microeconomics”, Journal of Economic Literature, vol. VIII, nº 2, june 1970, pp. 405-434.

2. Martin Shubik, “Curmudgeon's Guide to Microeconomics”, pp. 405-434.


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ECONOMY AGAINST HAPPINESS: THE GREAT PARADOX (Part 3)

The phenomenon of the expansion of needs

It’s also sustained the argument of the “expansion of the needs” according to which in the measure that the levels of income and consumption of the people increase also increase their needs so that, paradoxically, the gap of dissatisfaction or of unsatisfied needs tends to grow up instead of diminishing.

In fact, the Greek philosopher Platon had observed this more of two thousand years ago and for it he said that “poverty is not caused by the decrease of wealth, but rather for the multiplication of desires”. So, one can be miser in between opulence, a poor man in luxury; because while the poor person’s hunger can be been satisfied with by bread, the rich person’s hunger is insatiable and, what is worse, grows up as more it tries to satiate it. The rich person that seeks to be happy consuming everyday more and more goods tends for it to create for himself more needs and, therefore, to feel more dissatisfaction. In order to illustrate this with an analogy we could say that he is like a thirsty man that seeks to calm his thirst drinking salt water or that he is like a hamster that tries to get ahead of the wheel that he himself is triggering with his own forces.

But it is important to have in mind that the above not only is valid for the individuals but also for the groups and nations because, as to the famous North American economist John Kenneth Galbraith explained in his book The Affluent Society (1958), “in the measure that a society become more opulent, needs keep on being created more and more all by the same process that satisfies them” (1). In this sense, the market has passed from be a mechanism for the satisfaction of the needs to become in a producer of needs.

Only economists (specially neoclassics) ignore this uncontrovertible reality because they are afraid to verify the falseness of their religion when looks refuted the sacred dogma of the consumer’s sovereignty. But it is enough with to observe how the market of cellular phones has evolved to come to realize how the reality has refuted this theorem completely. Initially cellular phones were acquired by important executives of large firms with needs of communication. A short time after they became cheaper and began to offer services like hour, alarm, text messages and notebook, all relatively reasonable. Next they began to offer services of enjoyment such like radio, games, player of images, camera of photos, video player, internet, bluetooth, touch screens and so on. Thus, the innovation began to sophisticate themselves more and more create us many “superfluous needs” as to know the luck in the horoscope daily, to have personalized pornography, to receive advices of how to kiss, to have sex, to be infidel and a lot of things more.

Thus, the cell went from being a mere object of use to become a powerful weapon to exploit the "needs" of individuals by subjecting them to a terrible dependence on fashion and technology and making them live in a constant state of anxiety and tension as they no longer consume to be satisfied but rather to escape from dissatisfaction. It seems that rather than the production of companies serve consumer needs are the needs of consumers those that serve the production of companies, as if they were wagons of a frenetic train moved from side to side by fashion, technological change and the desire for profits.

References:

1. John Kenneth Galbraith, The Affluent Society, Ariel Press, Barcelona, 1984, p. 204.


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ECONOMICS FOR HERETICS: DEBUNKING THE MYTHS OF ORTHODOX ECONOMICS Excerpt from Chapter 4 – “The myth of profit maximization”

(Are welcome the guidance and indications -emails, web addresses, name of head of area publications, etc. - about publishing houses and institutions that could publish the book).

Maximize profits or minimize losses?: the problem of risk

The problem of uncertainty we have just analyzed inevitably leads us to consider another important business decision problem: the problem of risk. This essentially means that entrepreneurs, by always acting under conditions of uncertainty, are constantly faced with the possibility that their actions do not achieve the expected results. In other words, their decisions always involve risk.

The consequences of this for the orthodox model of business rationality are truly destructive because, in conditions of risk, the rationality of businessman will consist more on ensuring a minimum level of profits or minimize losses than in maximize profits. And this for three reasons:

First, by the direct relationship between benefit and risk. Entrepreneur are well aware that if they want more benefits will have to take greater risks. Therefore, seek maximum profits would imply also assume the greatest risks. But because practically no one wants to do that we will have that entrepreneur do not necessarily be governed by the maximum possible but rather will accept a net income in accordance with the conditions (think in the cases of economic crisis). There is no reason, therefore, to believe that the entrepreneur has to act in a position of maximum, that is only a theoretical possibility.

Second, due to the stability that businesses require to plan. In effect, every company needs to maintain a minimum level of income to carry out their plans. Otherwise, if you search always maximum profit, the company may end up having a level of profit too fluctuating and therefore, it will be extremely difficult to make long-term plans due to financial uncertainty. So not only must take into consideration the profit but also the stability and security. That's why Japanese economist Shigeto Tsuru, after reviewing several cases of real companies, refers that: “It became clear that the determinant essential criterion of the behavior of the company was rather that of stabilize the benefit for a period of time long enough. Even more recently, it has been suggested an amendment in the sense that the goal of the companies should target to “maintain position of stability for a long period”. In other words, it means that in the description of the behavior of the company, the term maximization of security is more accurate than the term maximization of profit” (1).

Third, because the managers are more punished for incurring losses than rewarded for make profit. Effectively, given the context of separation between management and ownership, managers are more interested in avoiding losses than in achieve the maximum profit. Why? Because while managers and executives do not receive the benefits that may result from assume higher risks (shareholders take these), they may be dismissed if incur significant losses. Therefore, they will seek carry out their work efficiently obtaining for shareholders an acceptable profit level, but not necessarily will seek the maximum profit because this could also endanger their own job security.

Thus, if, as often happens, the maximization of profits increases the risk of losses, the manager will not accept the bet for basic considerations of interest. And more even if it is a large company with market power. It's no wonder that Paul Samuelson himself accepts that “as the company gets to have significant size and to have some control of prices, it can afford to loosen up a bit in its maximizer activity” (2). Or that the orthodox economist Carl Kaysen says: “While in the very competitive market the company has no choice but to seek maximum benefits, because the alternative to it is a insufficient benefit to ensure the survival, in the less competitive market the company can choose between seeking maximum profits or conform with a profit “aceptable” and pursue other goals” (3).

References:

1) Shigeto Tsuru, “¿Ha cambiado el capitalismo?”, in: ¿A dónde va el capitalismo?”, Oikos Press, Barcelona, 1967, p. 47

2) Paul Samuelson, Economics, McGraw-Hill, New York, 1976, p. 508.

3) Carl Kaysen, “The Corporation: How much power? What scope?”, in: The Corporation in Modern Society, Edward S. Mason ed., Harvard University Press, Cambridge, 1959, p. 90.


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ECONOMY AGAINST HAPPINESS: THE GREAT PARADOX (Part 2)

The “hedonic adaptation”

A second explanation is based on the hypothesis of “hedonic adaptation” which maintains that individuals quickly adapt to new circumstances so that, after enjoying higher consumption and income levels, they return to their initial state of satisfaction (or dissatisfaction?).

Think, for example an individual who wins the lottery. He goes crazy, jumps, calls all his friends, makes a big party... Shortly after he gets used to his new standard of living, moving house, has other friends and can have parties every week. What he previously only dreamed is now a reality. But with time he gets used to it. Everything returns to normal and nothing is special, so that now he is fascinated less by that lifestyle and even it comes to seem to him more and more boring. Think too in the children of this “lucky” man who, given his level of wealth, can afford to satisfy every whim of them. His little son constantly requests a sophisticated toy which he has seen on TV and his daughter, one fashion jean. The father buys on Christmas Day and the children are happy at the time, but for New Year they forgot these gifts.

The satisfaction threshold

In third instance is the proposal based on the threshold of satisfaction or “comfort line”. According to it once the individual reaches a certain level of income or consumption no longer increases his happiness. In economic terms, in so far as his income and consumption tend to level of comfort, the marginal utility he gets from them tends to zero.

Could be said that this is a particular application of the “paradox of value” raised by Adam Smith, being that the marginal utility of consuming one more unit of good in a situation of opulence is almost null. And that is when our level of income increases we tend to consume increasingly superfluous goods which do not really need and, to get used to that lifestyle, having those goods is almost indifferent while not having them would be catastrophic for us.

We ourselves can check this if we go and say to a child of the street that we invite him to eat at McDonalls. We will see how his eyes shine with joy. Then we can go and say the same to a child of a prestigious (and expensive) school and he will answer that does not mind because he goes with his dad every week to places like this and much better yet. But the irony is that this same child who rejects our invitation would feel very bad and would make a tremendous tantrum if any week his daddy refused to invite him to some of those places.

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ECONOMICS FOR HERETICS: DEBUNKING THE MYTHS OF ORTHODOX ECONOMICS Excerpt from Chapter 3 – “The myth of theory of distribution”

(Are welcome the guidance and indications -emails, web addresses, name of head of area publications, etc. - about publishing houses and institutions that could publish the book).

Do the free and competitive labor markets exist?: the institutionalist criticism

Until now we have assumed that exist so-called “labor markets”, ie spaces (not necessarily physical) in which entrepreneurs and workers come together to transact the employment levels and wages in a free and competitive context. Well, now we will criticize this assumption. Are there in the reality free and competitive labor markets? We think that do not, and in this position supports us the institutionalist school. Let us consider its arguments.

First we have the phenomenon of collective bargaining and labor unions. Regarding it is interesting to note the context in which it originated labor institutionalist approach. Institutionalist theory of labor markets emerged during the 1940s in the United States at a time when the unions were growing rapidly in the country and centralized collective bargaining was spreading. This prompted some economists to consider that the orthodox theory of wages had ceased to be realistic and relevant. Why? Because the collective determination of wages in the presence of labor unions was very different than the competition. This difference was primarily qualitative and not merely quantitative. And is that unions are institutions primarily political, not economic, which operating in a context of “game of pressure” between the government, employers and workers themselves following a logic of negotiation rather than of optimization.

As a consequence of the foregoing, the wage becomes more a administrated wage than a market wage. And in effect, given this context of collective bargaining, the wages turn into the result of conscious human decisions and no longer of impersonal market forces. Or in any case, as the institutionalists say, rather than the wage conforms to the supply and demand of labor, the supply and demand of labor conform to the wage.

The second critique from the institutionalist school to orthodox theory of distribution is based on the famous theory of dual labor market. According to this theory, originally raised by Doeringer and Piore (1) - there are two types of well differentiated labor markets: “primary” and “secondary”.

Primary labor markets are, by definition, those where the jobs are "good". Its features are: 1) stability and security, 2) high and increasing wages, 3) opportunities for ascents in the scale of positions, 4) utilization of advanced and capital intensive technology, and 5) existence of effective and efficient labor unions.

By contrast, secondary labor markets are those where the jobs are "bad". Its features are: 1) instability (because of the high labor rotation), 2) relatively low and stagnant wages, 3) scales nonexistent jobs or with few opportunities for promotion, 4) utilization of outdated technologies and labor intensive and 5) absence or weakness of labor unions.

Why this is so problematic for orthodox economics? Simple: because it contradicts that postulate according to which it “proves” the righteousness of capitalist distribution, meaning that to each worker is paid according to his productivity. For if indeed there duality in the labor markets (or, at least, in the most of them) we will find that wages are no longer unique and primarily determined by the productivity of workers but rather by the type of labor market to which they belong (primary or secondary).

Perhaps an orthodox economist can object at this point that even accepting the existence of duality in the labor markets is not necessary to deny labor mobility because it may well be the case that a worker pertaining to a secondary labor market increase his productivity and come to the primary market. Obviously this case can be given, and sometimes occurs. But it is the exception, not the rule. And even more so when the features of secondary labor markets are interrelated and feed back each other. In effect, because of the low level of wages paid in this type of market, entrepreneurs have no greater incentive to introduce labor-saving technology and, consequently, the productivity of workers, along with their wages, stagnates (and this to say nothing of the case in which this technology is incorporated but wages do not rise to obtain higher “profits”). And not only that. The presence of a stagnant technology decreases the opportunities and incentives for workers to improve their skills. Therefore, it is not so easy that a worker of these conditions can "climb" to a primary labor market.

Finally, the third line criticism of institutionalist is related to the existence of so-called internal labor markets. An internal labor market can be defined as an administrative system of the firm which is regulated by a set of intra-institutional rules and procedures to determine prices and allocations of labor.

Thus, according to this approach, even if we accept the orthodox theory of wage setting via supply and demand we would have to say that its validity ends at the door of the company, ie, precisely where this theory should enter. Why? Because of the door inwards the very "universal" and "apodictic" laws of supply and demand are immediately replaced, as we have said, by a series of rules and procedures to fix the positions and salaries of employees.

Any economist who has had the opportunity to meet real firms will realize that the existence of these so called internal labor markets is not a mere “bureaucratic anomaly” but rather it is a widespread phenomenon in the organization and enterprise management. The main reason is the need of the companies (especially medium and large) of reducing employee turnover. First, because the costs of recruitment are usually pretty high (not think only the monetary costs) and, secondly, because when entrepreneurs invest in specific qualifications of their workers are aware that they must stabilize the employment for obtain better performance by these investments in human capital.

Therefore, talk of “free” and “competitive” labor markets in the sense that it does orthodox economics is nothing more than a theoretical fiction that has nothing to do with reality. And this is well known by university professors of economics who, on the one hand, in the classroom, talk about sacrosanct "free" and "competitive" labor markets and, on the other, to leaving the classroom, are not daily at the prospect of being displaced from their jobs for another person equally capable and willing to work for lower wages. Thus, in the practice, neither they believe what say orthodox theory...

References:

1. Peter Doeringer y Michael Piore, Internal Labour Markets and Manpower Analysis, Ed. Lexington, 1971.


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ECONOMY AGAINST HAPPINESS: THE GREAT PARADOX (Part 1)

The common economist during his professional practice, is immersed most of time in hills formulas, tables, indexes and statistics looking at each time taking more “rational” and “efficient” decisions. However, there are times when he experiences a deep doubt about its real contribution to human welfare.

Evidently he knows of the great economic and material progress of humanity but he can not avoid that also come to his mind the samples of a increasing dissatisfaction in contemporary man, of moral and spiritual degradation, of how the emptiness and meaninglessness take possession of his soul and how stress and anxiety become constants in his life. At that moment, perplexed and worried, he asks himself why of all this.

Then he shakes his head and says “I need to stop thinking nonsense, that's for idealists and philosophers. I am a serious man who deals with more accurate and important things”. And thus, ignored the problem, he returns to his professional work or an ultra-specialized theoretical research, as the case may. But the issue has already been posed and requires a response, especially from those who think about the economy as an social science at the service of man and his welfare.

Several economists have been concerned about the relationship between economic progress and happiness. One is the Briton Richard Layard who in his famous book The Secret of Happiness (2003) made a statistical comparison between GDP per capita and average happiness in the United States during the period 1946-1991, reaching the curious result that even when income had tripled, self-perceived wellbeing index remained relatively equal, decreasing from 2.35 to 2.2. This conclusion is particularly worrying for liberal economists who believe that higher income, higher production and higher consumption necessarily imply greater happiness. But what is the reason for this great contradiction? Curiously, Economics itself provides important arguments to explain. I will address some:

Relative income hypothesis

A first explanation is based on the thesis of the "relative income" which asserts that, if possible such a choice, an individual would prefer a 50% increase in their income without increasing the income of anyone than an increase of 100% on the income of all people around him including himself.

Evidently this is a hypothesis and not a universal law, but has high explanatory power in the conduct of individuals and, under certain restrictions, it is very difficult opposing it. Why? Because the welfare that give us the goods we consume depends not only on the utility but also of the image and social prestige they give us. Let us consider the grisly case of a girl who buys a beautiful (and obviously very expensive) red dress to attend a party. She arrives at the party and finds that all the girls in the party have a equally or more beautiful dress. Her utility level falls precipitously…

But must not think that this is an isolated and purely individual phenomenon: rather it is a structural problem in the economic development of societies. For example, according to figures from the United Nations Program for Development (UNDP), the richest (20% higher) in countries like Peru, Colombia and Brazil earn on average less than the poorest (20% lower) countries like Sweden or Japan. Thus, if a rich Peruvian goes to Sweden would become a "wretched man". But be careful. We should not infer from there that Swedes richer are necessarily happier, because we have to keep in mind that they also live in a constant state of tension, competing with other richs. In fact, this was what sustained the American institutionalist economist Thorstein Veblen in his famous book The Theory of the Leisure Class (1899) when he talked about the “pecuniary emulation” and “conspicuous consumption” (1).

References:

1. Thorstein Veblen, The Theory of the Leisure Class, Fondo de Cultura Economica, Mexico, 1944, chapters II and IV.


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ECONOMICS FOR HERETICS: DEBUNKING THE MYTHS OF ORTHODOX ECONOMICS Excerpt from Chapter 2 – “The myth of the production function”

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And with what produce?: ecologist criticism of the production function

Let us imagine for a moment that the production function that sustains the orthodox economics is valid. Furthermore, let us imagine that, in fact, we have to carry out an actual production process based on it. Let us think, for example, in the production of a cake. What do we need to do? According to the neoclassical production function –which has the general notation Q = f (K, L)- we would need capital and labor. Get together, then all elements of capital (defined as the set of instruments used to produce): jars, bowls, trays, pallets, oven, pans, knives, etc. Now we gather the elements of the labor factor: basically be our own labor (or the of a chef) incorporated with all the abilities to make cakes. Then, given a technological configuration, ie, an established relationship between the factors of production bringing together the elements of capital (K) and labor (L) which we have listed, we get the product, that is a cake. But we get nothing! It’s not possible... there has to be an explanation...

We try with an intensive increase of productive factors: we get much bigger bowls (K) and we hire several chefs (L)... but still not we get a single cake! “Why?”, we ask ourselves.

The answer is very simple: nothing is produced because there is nothing with what to produce! No matter how many bowls we get or how many cooks we hire if there's no cake dough to cook! In effect, on the basis of the neoclassical production function, we have gathered all the elements of capital and labor but we have not had any account of the raw material. We have listed several things, right. But at no time we have mentioned flour, sugar, eggs, etc. Thus, based on the neoclassical production function, we have tried to be God: we wanted to create something out of nothing! However, it becomes patently absurd in this context: can not make cake without cake dough. Can not produce without raw material.

Well, it is precisely on this basis that the great economist Nicholas Georgescu-Roegen, initiator of the ecologist approach, raises his criticism of the production function and orthodox economics. He begins by analyzing the physical basis of the production process (1) and immediately realizes the implications of the First Law of Thermodynamics (according to which “the matter is not created or destroyed, only transformed”): not possible to produce without a material basis. Consequently, the neoclassical production function becomes inconsistent and absurd for not taking into account the nature factor.

And this was to be expected. In the nineteenth century, when was born the neoclassical school, the modernists believed in the “theory of indefinite progress” and they claimed that the resources of nature were endless. Orthodox theorists assumed that belief and built on this basis in economic theory. So, the most essential factor of the economic process was relegated to the sidelines : the ecological factor. However, as rightly said Max Neef: “There is no economy possible regardless the services provided by ecosystems. This is so absolutely clear and so absolutely obvious that is truly a epistemological scandal that in any economics textbook, if you go to index words, may be find the words “ecosystem”, “nature” or “thermodynamics”. They do not exist! Simply they do not exist. Why? Because the economy that is taught is conceived as a closed system in itself that is not related to any other system (...) when obviously it is embedded in a bigger system called biosphere and around which are all services provide the elements of that biosphere. Where would be the economist if it ends the photosynthesis? Economists do would not exist! What would happen with the economy if suddenly all the bees died? There would be no pollination... But no economist presumes that he has to know that. (...) All this happens in a gigantic sea of ignorance on the part of the economy” (2). In other words, there can be no economy without ecology and orthodox economics still does not know it.

“But the problem is easy to solve!”, orthodox economists will say. “We add the variable R (natural resources) in the production function and ready!”. What ignorance! One ignorance comparable only with that ignorance that orthodox economists also show when claim to have understood the process of technological change just because they incorporate a variable “A” to the production function (3).

Let us see. Given a variant “Solow-Stiglitz” (as it is called to the artifice upon which it has been tried solve the problem) of the production function we have that in the form Cobb-Douglas this will be:

Q = K^a.L^b.R^c

such that: a + b + c = 1

As this is a Cobb Douglas production function, this implies complete substitutability of factors, ie, that can be replaced one factor by another (or others) while maintaining the same level of production. But it is precisely where the inconsistency resides. Mathematically, if R (natural resources) tends to zero the reduction may be compensated by increases in K or L maintained the same level of production. The structure multiplicative of the function allows it. However, it is inconsistent in the facts because if R tends to zero necessarily have to do so at some time K and L. First, because they depend on R: the capital goods are products of a previous process which presupposes the nature factor and, in turn, the labor force needed of natural resources to sustain itself  (can anyone imagine what would happen with our productivity if we drank only one glass of water a month?). Second, because the quantity of product that capital and labor can generate depends always and necessarily of the flow of inputs to transform (no matter how quick work the cook or how big is the bowl which has, if he has only one gram of mass he can not do a single cake).

Thus, Georgescu-Roegen criticism to the production function shows clearly that the economy has ecological limits. And that brings us to the central concept of his analysis: “entropy”. Basically the entropy means that the availability of a certain amount of energy, once it has been used, not retains throughout time to the same properties to create useful work. Thus, as soon as the natural resources are transformed, they pass from a state of low entropy to a high entropy and, consequently, it is increasingly difficult transform them into products useful to man. Ergo, the use of our the natural resources have a objective limit: capital and labor can not exploit the nature indefinitely because this is also subject to the Law of diminishing returns.

And that not to mention the problem of the environmental pollution brought about by any production process. In effect, given that, because of the law of entropy-is impossible to achieve 100% efficiency, produce something always and necessarily generate a residue or waste (4) which should be treated. That is, after making a cake you need to clean the kitchen. And the same applies for the whole planet.

Nevertheless, orthodox economics has systematically left aside all this. According to this ecological factor is purely exogenous. But “economics” etymologically means “administration of the house” (5). And our house is ultimately the planet earth. But orthodox economics has shown as evidently a bad manager because, to leave out the ecological factor analysis, necessarily have a large part of guilt in the current global warming problem that we are facing. Conclusion: orthodox economics is a bad economics.

References:

1. Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process, Harvard University Press, Cambridge, 1971.

2. Manfred Max Neef, “Economy and Environment”, conference at the Universidad Austral de Chile, Valdivia, on May 28, 2010.

3. For more details on this misery see the famous Solow growth model in any manual of “advanced” macroeconomics (!).

4. Cf. Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process, Harvard University Press, Cambridge, 1971, p. 231.

5. From the Greek: oikos = house, nomos = order administration.


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ECONOMICS FOR HERETICS: DEBUNKING THE MYTHS OF ORTHODOX ECONOMICS Excerpt from Chapter 1 – “The myth of consumer rationality”

The progress of the neurosciences (or brain sciences) has not been stranger to the economics. In fact it is thanks to it that it has been possible to inquire the physical basis of several of the discoveries of behavioral economics, being born in this way a new branch for the economic study: the neuroeconomics.

As well as in behavioral economics, with this new approach several studies it also has been conducted with very interesting results and conclusions. Thus we have, for example, the famous study by Sanfey, Rilling, Aronson, Nystrom, and Cohen (1), who applied the famous “ultimatum game” to 30 people connected to equipments of registration the neurological activity, in order to verify the existence of significant differences in the subjects facing to different stimuli generated by determined offerings. It should be noted that the selected individuals participated in several rounds of the game, with human opponents in 50% of cases and computers in the other 50%.

The results were very interesting. They showed that determined regions of the brain were activated disproportionately when individuals were receiving "unjust offers" of humans compared with what happened with the just offers of humans and all the offers of computers (just and unjust). Additionally, this disproportionate activation of a brain region was correlated to the decision to reject the injust offerings, which would demonstrate that exists a physical basis in economic decisions and that these are not free of elements of emotional nature.

A very important sub-branch of neuroeconomics that is closely related with the issue of consumer rationality is that of neuromarketing. This can be defined as an advanced discipline that studies the brain processes that influence the behavior and decisions of people in the areas of action of traditional marketing: design of products and services, communications, prices, positioning, and sales channels.

The contributions of neuromarketing were crucial. As Nestor Braidot says in his interesting book Neuromarketing: why your customers sleep with another if they say they like you?, this new discipline “allowed to confirm a set of assertions of traditional marketing, such as the emotional advertising effectiveness in the  retention of customers or the fallacy of attributing to the consumer a rational behavior” (2). Thus, it was found, for example, that “the so-called “purchase button” appears to be in the pre-frontal cortex half. If this area is activated, the customer is not deliberating, is determined to acquire or possess the product” (3). Obviously this is very far of consumer of the orthodox economics which deliberates very rationally about what is the best option given his restrictions and preferences.

And not only that. As well reported Braidot, the neuroeconomics, “analyzing the price issue, found that the maximization of utility based on rational thinking is not the main motivation for the decision because, in most cases, the factors triggering purchases are emotions, values and everything that activate the brain's reward system”. (4)

But perhaps the most interesting part of neuroeconomics is the study of the characteristics of each one of the hemispheres of the brain and how they influence in our economic decisions, mainly those of purchase.

As we know, the human brain has two hemispheres: left and right. The left hemisphere is primarily logical and analytical, which we use for verbalize a speech prepared or solve math exercises, processes the information sequentially and is related to linear thinking. The right hemisphere, by contrast, is primarily creative and synthetic, which we use for make a work of art or when we fell in love, processes the information holistically and is related to creative thinking.

Well, it is evident that the left side of our brain corresponds more with the analytical activity of homo economicus. However, and unfortunately for the orthodox economics, the role played by this hemisphere in our economic decisions is decreasing as the advertising and other forms of influence designed, developed and perfected by marketing are all targeted primarily toward the right side of our brain making that our purchasing and consumption decisions are increasingly impulsive and emotional. Thus, it “attacking” directly to the right hemisphere, is achieved prevent that the rational and critical attitude of the left hemisphere pass to the fore, and are generated in the individual thus a set of consumer habits and preferences simply irrational.

References:

1) A. Sanfey, J. Rilling, J. A. Aronson, L. E. Nystrom and J. D. Cohen, “The Neural Basis of Economic Decision-Making in the Ultimatum Game”, Science, vol. 300, 2003, p. 1755.

2) Nestor Braidot, Neuromarketing: why your customers sleep with another if they say they like you?, Gestion 2000 Press, Barcelona, 2009, p. 11.

3) Nestor Braidot, Neuromarketing: why your customers sleep with another if they say they like you?, op. cit., p. 15.

4) Néstor Braidot, Ibid, p. 35.


You can contact the author of this article in: “Dante Abelardo Urbina Padilla” (Facebook) and dante.urbina1@gmail.com (email)

THE MYTH OF THE CONSUMER’S SOVEREIGNTY

“The consumer is, so to say, the king (...) each consumer is a elector who uses his vote for it to be done what he wants”. With this expression Paul Samuelson defines the main article of faith in the orthodox economist's creed: the sacred dogma of “consumer’s sovereignty”. Such is the importance of this dogma that, if proved to be false, it would collapse the entire building doctrinal of the Economic Theology. And is that “in a market economy is always given as assumption the consumer sovereignty” (1) because it is only in virtue of this that the economic efficiency leads to increased welfare.

It is assumed that sovereign consumers have different needs and autonomous preferences which they manifest via monetary votes in the purchases made or abstentions on purchases in the market. The entrepreneur will have no choice but to submit to the demands of consumers: nobody is perpetuated in the market if does not satisfy to the consumer, if does not surrender to its sovereignty. Thus the economy fulfills its purpose to efficiently manage the scarce resources to satisfy human needs.

Evidently assume all of this was not as unreasonable in the time of Adam Smith and the classics because the firms were incipient, goods were less abundant and the needs were fundamentally basic. However, “while the world continues to evolve, the conventional wisdom is always in danger of becoming obsolete” (2). With the advent of technological society, the spread of media, development of advertising, sales strategies, the planning system and the predominance of oligopolistic and monopolistic structures of the market the situation changes radically. It would be absurd to think that big companies like Microsoft, General Motors, Nike or Coca Cola are humble servants of the consumer. Only an ignorant would think that the purpose of advertising is to only “informative” when the overwhelming evidence shows that it is essentially “persuasive”.

The mere fact that the needs of consumers are increasingly manipulated and exacerbated by advertising and sales technique shown that their preferences are not entirely autonomous. In this point someone might object that this is not entirely true because any individual is free to escape from the influence of advertising if desired. Somehow he would be right. But we must bear in mind that the manipulation of needs is not directed primarily to the individual but to the entire mass, thus that is not a great loss of sales that a single individual rescue his liberty and autonomy if it has manipulated the majority of individuals.

Precisely this is the primary objective of firms because not only seek profit but also economic security, especially as they get bigger because, besides deciding what consumers need, the firms have to take a series of policies in order that the price the consumers pay for their product to be a price such that enables them to achieve at least the minimum benefits and maintain its position in the market, besides paying to their shareholders, directors, employees and suppliers. So it is that even the monopolies, which have no competition, perform great expenditure in advertising (obviously this throws on the floor the belief that advertising is an exclusive activity of oligopolies).

Thus the economic system ends inverting its rationality because instead of firms produce what we need, they do that we need what they produce. Thus, the “general rule, with less exceptions than we imagine, is that if they produce it we will buy it” (3).

Despite all of this, the perfect competition, the utility theory, the general equilibrium and the consumer sovereignty stays as the supreme in the conventional economic education. This can only be shown by either a “fatal arrogance” that aims to have a solid theory and perfect regardless of changes of reality, or an incurable naivete on the part of economists. Ojala these would be more humble (or less naive?) and take this into account to reformulate economic theory in a way that takes better account of the specific social and economic phenomena, seeing the consumer as what he really is: a being of flesh and blood whose needs are susceptible to manipulation by big business. It is time to leave behind the myth utilitarian on the “isolated individual”.

References:
1. Franklin Fisher, Zvi Griliches, and Carl Kaysen, “The costs of automobile model changes since 1949”, The Journal of Political Economy, vol. 70, nº 5, October 1962, p. 434.

2. John Kenneth Galbraith, “The Affluent Society”, Artemis Press, Mexico, 1986, p. 57.

3. Andrew Hacker, “A Town Called America Corporated”, New York Times Magazine, July 3, 1966.


You can contact the author of this article in: “Dante Abelardo Urbina Padilla” (Facebook) and dante.urbina1@gmail.com (email)