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Words: 1982 |
10 min read
Published: Nov 8, 2019
Words: 1982|Pages: 4|10 min read
In this paper, I shall examine three major characteristics of the current dominant economic theory and discuss what I have counted to be its three major assumptions. This theory can nowadays be understood in neoclassical [or neoliberal] economic terms. It is a tridimensional-based theory: people’s selfishness, consumption factors and production dynamics. Neoclassical economic theory holds on the idea that individuals should be left alone, for they know what they do and want. This implies that selfishness is at the heart of whatever happens at the market. Governments should therefore opt for free-markets and privatisation. Since the market itself would tend towards the economic equilibrium, the end result will be then the economic growth. From this idea emerged three models as three major characteristics of the dominant economic theory. First, there is a demand model that intends to explain the behaviour of the consumer. Second, there is a supply model that aims at explaining the factors of production. Third, there is a firm model that studies the behaviour of firms. Its three major assumptions are closely related to these characteristics. Firstly, contemporary economists assume that people have rational preferences between the outcomes of their choices associated with their values. Secondly, they assume that individuals always act for utility maximisation, while firms act for profit maximisation. Thirdly, they assume that people act independently with full and relevant information about their needs. In discussing the above-specified characteristics and assumptions, I will refer to some aspects of human life. I will conclude by asserting that all assumptions should be revised for the better.
Consumption and production factors should be in accord with a clear and practical approach while seeking truth for economic-growth-equilibrium not from assumptions, but from facts. The dominant economic theory is to be, at first, understood as something that comes and goes away at a particular moment depending on certain circumstances. In other words, it is nothing other than any time-period-effect from the adjustments of the ongoing changes in the history of economics. In order to have a well-shaped economy, the dominant economic theory always poses its features and assumptions in connection with the conditions. The focus of economics has been shifted from production to consumption and exchange (Chang 121). This justifies why Africa is currently targeted by China and some other economic powers. In this sense, the current dominant economic theory has set solutions to economics. It did so by focussing on the determination of goods, productivities and incomes distributions in markets through supply and demand models. Such a determination is generally ensured with two hypotheses. First, it is seen through a “hypothesised maximisation of utility via income tamed by individuals” (Yanis 116). Second, it is perceived in the “implicit maximisation of profit by firms in fixing the costs of their production” (130). Hence, contemporary economists believe themselves to have generated morality in commerce by using the available information on consumption and exchange factors in accordance with the principle of rational-choice. Based on the fact that individuals are guided by rational choices and their selfishness, contemporary economists hold that people seek to increase their happiness while making economic decisions. Such rational choices entail consumption and production factors. These two factors play then an important role in shaping the market with an aspect of utility and profit, given the available information. In this sense, contemporary economists have then been trying to understand well the relationship between consumption and production. Once this relationship is understood, they believe that they can easily and fairly shape the economy. Yanis argues that “instrumental rationality demands that our choices are consistent with our preferences. Thus the same preferences must produce the same actions given the same information” (55). Given that in most cases economists are always competitive, the crucial question that comes in here is to know whether all contemporary economists have agreed upon all possible characteristics and assumptions of the current dominant economic theory. My attention is only on the ones specified above, since they may not be exhaustively listed. First, the demand model requires people to get information on what is available at the market. This information can be relevant or irrelevant to what they expect from market. It is the nature of information that guides them whenever they are to decide on what they want to get from market. Jonathan Aldred states that “shopping is equally central to understanding how economists think.
Modern economics is built on theories of ‘rational choice’, which is supposed to be the kind of choice made by consumers when they shop” (11). I agree with him because individuals know what they want while shopping, and more choices are far better than less not only for them, but also for firms. An assumption related to this model is that people always use ‘rational choice’ in shopping and consuming commodities. For instance, in the education domain, as consumers, individuals pay fees for degrees hoping to gain much money and a better life in the long run. Still, they may not be fully informed about their future or the potential relevance of the education they desire to get. At the market, people do not confuse what they want with what they do not want. They buy what they need. Yet, one may want to know whether whatever produced or offered at the market is of the best quality. Thus, contemporary economists should better opt for rational-choice-values rather than any formal-rational-choice for marketing-standards in whatever involves commercial dimensions. In addition, a ‘rational choice’ of consumers can only be effective once they are fully informed on what is offered to them. Still, the “consumer can make rational choices without ever having full and sufficient information on production” (Yanis 96). Again, consumers, whether taken as sovereign or not, do not intervene in fixing prices of the commodities. Economists think they are promoting morality in taking rational choice model as a major factor of the consumption-production cycle. In fact, not everyone would agree with them on such a view. For example, Aldred argues that “many economists are profoundly cynical about human behaviour and the motivation that underlies it. Morality, they seem to suggest, is for losers: real people are almost always selfish” (11). It cannot be a win-win case. Based on this lack of objectivity, one may want to know if there is such a thing as ‘objective free-choice’ in economic terms. Contemporary economists rely on their assumptions about consumers while shaping the market. The more assumptions are considered, the more markets for further transactions are created. Still, such an attitude can inconvenience the shape of economy, because consumers can sometimes change their mindset. Thus, they are not always consistent in making choices, given what they encounter on the market and the circumstances. Second, the supply model that puts an emphasis on consumption and production factors is meant to deal with the changes that arise from the consumption-production cycle. For instance, the more production declines, the more demand increases. On the contrary, higher consumption seems to imply at the same time higher production. In other words, when there is little supply, the demand grows, while as the demand increases, supply grows and focuses more and more on the demand.
Consumers play an important role in shaping the market, they are even taken as sovereigns. Aldred points out what the sovereign consumers does in economics. He states that “the sovereign consumer is the actor, a person who is fully informed, knows what they want, and never makes mistakes in getting it. In economics, the sovereign consumer is very much in control of their life” (12). It follows that if the supply in the market is well-balanced with the demand, automatically prices will go either high or down depending on the demand level. As a result, people will get better off, just because of the balance between the two. However, one may want to know whether the result will always be the case for all kind of commodities. Aldred answers this question saying that “some early investigators of relative position assumed that only relative consumption levels matter for some goods while only absolute consumption matters for others” (57). The theory does not always fit in other domains. For instance, a sick person does not have full information about medical care. For that person to get what she needs for her healthcare, a doctor’s prescription is needed. Once a doctor is mistaken, all the consequences fall on the sick person, whereas she has already paid all the medical services. Therefore, consumers are never fully informed and not in control of their lives. Consumption is really perceived in a very relativistic manner. Suppose that there is more supply of clothes in the market, and yet the demand is not balanced with the supply, prices go down for the sake of utility maximisation. Instead, if there is less supply, prices go high for the sake of profit maximisation. The satisfaction of both consumers and producers will not be equally appreciated. “The consumers’ intention is just to buy a certain quantity of products at the lowest possible price. In contrast, the producers’ intention is to sell a certain quantity of products at the maximum price. That’s all. Neither side is interested in the least in whether supply and demand will be coordinated nicely” (Yanis 17).
In this case, utility becomes a major factor of consumption-production cycle. Taxation cannot even affect firms, since they put first their profits. The quality of life seems to remain the same, because there is no accurate cooperation when both consumers and producers act for their own interest. Their happiness cannot be derived from utilities or profits maximisation. In fact, they all sell their selfishness and quit to morality. The idea that the utility and profit maximisation in economics mostly makes people happier is a deceiving one. Happiness and values cannot be quantifiable in terms of economic utilities and profits. Third, the firm model that studies the behaviour of firms presupposes that a rational producer always acts with a goal of maximisation under constraint. Based on the nature of the market, firms inspect the factors of production and use them to produce in order to sell. Aldred sates that “firms will always try to subvert competition by colluding or establishing monopolies. Free markets, left alone, hardly ever stay free” (84). Still, from this firms’ behaviour, two questions arise. First, without any given standard on quality production, one may want to know how much to produce for least costs. Second, without any given standard on quantity production, one may want to know how much to produce for profit maximisation. In this case, the assumption that people act independently on the basis of having full and relevant information on products cannot hold. In fact, whatever happens in the market depends on what firms support.
Firms are the only ones in control of whatever happens at the market given the quality of their services. Consumers are somehow manipulated. Therefore, consumption sovereignty is just an internal game among firms, its story has misled people. In conclusion, from the above discussion, I have identified what I have considered to be three major characteristics of the current dominant economic theory. I have also assessed its three major assumptions and illustrated some cases where they fail to meet the best for the people’s lives. If the dominant economic theory wants itself to be taken as dogma, it will then prove itself as the cause of the economic decay. It does not have a solid foundation since it is built upon assumptions. Its apparent strengths are just a driving force of profit maximisation and not for a better life. Consumption-production cycle is not necessarily the engine of the economic growth, since selfishness is at its heart. Poor people remain poor, and the rich ones get richer. Hence, economy should not be left to economists alone. Contemporary economists should seek truth for economic-growth-equilibrium not from assumptions, but from facts.
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