AM02 S&D Models

ADV MICRO Sep 2018: Work on 2nd Lecture, to be completed before Tuesday 18th Sept 2018

BACKGROUND MATERIALS:

Conventional Theory of the Firm from Varian READ pages 1-8 as a review before class.

Also, start reading the ANTI-TEXTBOOK. Hill Myatt =- page 46 - 66 will be covered in the first few lectures on Supply and Demand Models.

BOTH of these readings -- to be covered in next few lectures on SUPPLY and DEMAND, are ATTACHED at bottom of page.

READING/VIDEO ASSIGNMENT: On my personal website: AM02 S&D Models: (1) brief 100 word summary, (2) link to video lecture, (3) Longer, 3000 word outline of lecture.

Come to class with TWO POINTS written down for submission: What is the most important thing that you learned from this lecture? What was the most confusing thing -- one question that you would like to ask.

In addition to using these two points as basis for discussion, also think about the Sample Question for Final Given below -- these questions will also be discussed in classroom

Role of Theories

‘Demand and supply’ is one of the most powerful theories ever developed by Economist to control the minds of masses. It is important to understand what role do theories play in shaping the minds of people. Broadly put, a theory is a set of explanation of some relevant phenomenon. A theory selects some objects, defines them in a particular way, relates them through some rules and sets priorities among them.

Everyone has some theory, no matter how simple or naïve. Understanding these theories is important because it is one way people reach decisions about what to do, who they are and how to treat others. For example, different theories of state (e.g., religious or secular), affect how state should distribute rights and duties of its citizens. Different theories of beauty produce different choices about cities, parks, street and home designs, hair-cuts and clothing fashions etc. Similarly, different economic theories give birth to different behavioral, institutional and policy patterns.

Which factors you select, weigh and how you organize them is affected by theories. Theoretical differences lead to divergent expectations and hence to resentment, each participant focuses on different aspects and interprets them differently. Neoclassical economics explains income differentials across people in terms of their marginal productivity while Socialism relates them to the exploitative market relationships. Believers of the two theories end up with an altogether different attitude towards market order, one justifies and promotes it while the other attempts to overturn it, one makes an effort to become part of it while the other distances himself from it, one sees the successful ones of this system as justified ‘hero’ while the other views them as villain. Thus, theories play vital role in shaping our conception of the world and of ourselves, i.e., ‘who we are’.

Theories are made to explain how the world around us is working, incorporate a sense of whether or not that functioning is justified, and prescribe how we ought to participate in it—i.e., behave in one way and not the other. Neoclassical economics is one such example which is a technology to legitimate capitalist order. Agents who believe in the truth of this theory make specific choices and not the others. For example, modern governments follow economic advice based on conventional economics—monetary policy, business regulations, privatization, liberalization, anti-trade unionism etc. We see politicians and bureaucrats handing over the world to economists to make it a better place to live in—a world with ever increasing possibilities of capital accumulation. This subjugation of countries’ fate in the hands of economists is not because they have won some public election, rather it is due to the belief that economic theory is sound (both valid and true).

Theory-society relationship is often bi-directional. Not only that people do what they think but they also tend to invent ideas to rationalize what they do. Social conditions impact upon people to invent and endorse theories. When massive wealth flew to Europe as a result of an unprecedented plundering of continents all over the world in which almost every European family participated (directly or indirectly by receiving a share in riches flowing to Europe), the flood of vices spread across Europe. The traditional morals of valuing chastity and simplicity of life were corrupted and started losing meaning in the hearts of common public. The flood of the vices of greed and covetousness led the Enlightenment philosophers to present theories that articulated the epistemological and aesthetical critique of Christianity and celebrated the growth of these vices.

Often, the objects of one theory don’t exist in other. This is so because the concepts used in theories (their objects) don’t exist out there waiting to be explained. Concepts such as class struggle, surplus and use values that constitute the central core of Marxist theory do not exist in Neoclassical economics. Our view of the world (observation of objects) is affected by theories we use to explain them because observation is affected by theories! It is in this sense that not only do theories explain the world differently, but they also influence us to see an altogether different world to explain.

This makes communication across different theorists difficult: the world they see is not the same for each of them because they disagree not only on how to explain the given world, but also on what they perceive that world to be. Communication among conflicting theorists may result in (a) harmony (‘consent of minds’) if one side changes its mind for some reason, (b) intellectual conflict if each side continues with its ‘right’ way, and (c) socio-political conflict—i.e., controlling, constraining or eliminating the ‘other’.

QUESTION for discussion in classroom:

The goal is to show that Conventional Textbooks DECEIVE students about the generality of the Supply and Demand Model

1. What do textbooks STATE or IMPLY about S&D which is false? Provide TEXTUAL evidence

2. What impression is created in minds of students about scope of Validity of S&D -- provide EMPIRICAL evidence, discussions with fellow students for example.

3. What is the TRUTH, which is DIFFERENT from what Textbooks state, and what students believe?

4. What THEORETICAL EVIDENCE can you provide for this TRUTH -- That is, provide logical arguments

5. What EMPIRICAL EVIDENCE can you provide for this truth - give evidence from observation about firms, markets, consumers from real life.