The incoherent emperor: a heterodox critique of neoclassical microeconomic theory.

Abstract It is somewhat common for heterodox economists to come to the defense of neoclassical microeconomic theory. This is due to many reasons, but perhaps the commonest one is ignorance. It seems that most heterodox economists are not aware of the many critiques or that as a collective they completely undermine neoclassical theory. The objective of the article is to dispel ignorance by using the existing criticisms to delineate a systematic critique of the core components of neoclassical microeconomic theory: the supply and demand explanation of the price mechanism and its application to competitive markets. The critique starts by examining the choices, preferences, utility functions, and demand curves, followed by examining production, costs, factor input demand functions and partial equilibrium, and ending with perfect competition and the supply curve. In the conclusion, the implications of the results will be extended to the firm and imperfectly competitive markets, and then the question whether general equilibrium theory or game theory can save neoclassical microeconomic theory.

Keywords: neoclassical microeconomic theory, heterodox critique

**********

It is often found in conversations with or at meetings of heterodox economists that if a disrespectful comment is made about neoclassical microeconomic theory, there is someone who objects. The typical responses include that under restrictive conditions neoclassical theory works, that in a rough and ready way the economy works according to the principles of supply and demand, that the perfect competition model seems to fit industry X, that neoclassical microeconomic theory provides an array of tools and their usefulness depends on their specific situational applications, or that there surely must be some aspects of the theory that is useful to heterodox economists. And following the responses, specific references are made to the usefulness of neoclassical consumer demand theory, demand curves, price elasticity of demand, production functions, supply curves, relative scarcity, rationality, profit maximization, and the like. In a reasonable proportion of the comments, the individual making the retort is not a micro-economist, does not do research in microeconomics (heterodox or neoclassical), has no memory of the many critiques of neoclassical micro, and does not sleep, dream, and wrestle with the theoretical issues of microeconomic theory everyday of her/his life. Thus, it seems that such responses are based in part on ignorance of the various damning criticisms of neoclassical theory, and in part on the intellectual incapability of rejecting what s/he was taught in graduate school. (1) The issue of intellectual rigidity is beyond the scope of this article, but the problem of ignorance is not. That critiques of neoclassical microeconomic theory exist is not news to heterodox economists; but the number of critiques and their extent maybe. More importantly, most heterodox economists are unaware that as a collective, the critiques completely undermine neoclassical theory. Hence the objective of this article is to dispel ignorance by bringing together the various existing criticisms to delineate a systematic critique of the core components of neoclassical microeconomic theory (NCMT); and it is the constructing of the critique of NCMT--making visible as a whole what was once disparate, isolated and obscure--that is the article's novel contribution and significance to heterodox economics.

Before starting, it is necessary to make clear the critique's target since many heterodox economists seem to be unsure what the core elements of NCMT are while others think that NCMT is an imprecise concept. In this article NCMT is defined in terms of its theoretical tools and the theoretical models (either formal-mathematical and/or literary) that utilize the tools; and the discourse that links together the tool-based models constitutes the neoclassical microeconomic theory that is delineated in the textbooks assigned in introductory, intermediate, and graduate courses. In particular, Table 1 lists the tools and models included in such textbooks for the last sixty years. These twenty-nine topics represent what is taught to every heterodox (and mainstream) economist in their core graduate microeconomic theory courses as well as what they learned in their undergraduate microeconomic theory courses. Moreover these core tools and models and associated discourse underpin virtually every book, article, and model that utilizes NCMT. Thus they constitute the minimum standards of what the profession expects every new Ph.D. economist to know. (2) And they are also the foundation of neoclassical economic theory, for if the tools and models are incoherent and/ or dismissed for empirical or theoretical reasons, then the associated discourse would be unintelligible. Hence there would be no neoclassical theory, micro or otherwise. (3) Consequently these tools and models will be the subject of our critique.

Our critique of the tools and models of NCMT will in general not include novel arguments or claims, but rather will bring together many longstanding critical expositions combined with drawing out their theoretical implications. In some cases, the form of the argument will be external theoretical analysis directed at the sensibility of the neoclassical tools and models, while a second form of argument will be an internal theoretical criticism. The third form will utilize empirical evidence to question the empirical support a particular tool or model but more generally to complement and support the other forms of argument. What we will not argue is that NCMT should be dismissed because its tools and models lack realism or because it utilizes abstruse mathematical language. In the case of the former, it is not a question of the degree of realism but whether they exist at all. As for the latter, we take the position that mathematical language is neutral with respect to theoretical tools and models; and besides that heterodox economists also utilize abstruse mathematical language, such as indecomposable semi-positive square matrix and eigenvalue: we will not be a kettle calling the pot black. More specifically, the mathematics of utility maximization and cost minimization will be used for expository purposes leading to criticisms; but what shall be criticized are the economic components, such as the second partials of the production function, that make up for example the bordered Hessian matrix, not the mathematics itself. (4)

There are many critiques of the tools and models of neoclassical microeconomics, far more than we can utilized given the word-page constraints of the article: so much incoherence, so few words. Hence only a portion of the critiques will be used, while the others will be cited in footnotes as supporting critiques. (5) It should also be noted that our critique is not intended to change the minds of neoclassical economists for paraphrasing Joan Robinson: convinced against their will, they are neoclassical economists of the same opinion still. Rather as stated above, our article is directed primarily at heterodox economists who believe that NCMT has some usefulness and secondarily at heterodox economists who would want an integrated digest of criticisms that establish the incoherence of neoclassical microeconomics along with a list of supporting citations that would be useful to them for their research and teaching.