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

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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.


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