Equilibrium versus Understanding: Towards the Restoration of Economics as Social Theory

Equilibrium versus Understanding: Towards the Restoration of Economics as Social Theory

Equilibrium versus Understanding: Towards the Restoration of Economics as Social Theory

Equilibrium versus Understanding: Towards the Restoration of Economics as Social Theory

Synopsis

Equilibrium Versus Understandingargues that neo-classical theory is incapable of explaining or understanding people's conduct. As a result it is unsuitable for explaining decisions and choices. Mark Addleson asserts that a different sort of economic theory is required if economists are to understand how the world works. He proposes a hermeneutic theory. Addleson discusses what a hermeneutic theory entails, why it is a suitable framework for explaining people's conduct, how it differs from orthodox economics and how it enlarges the scope of economics. The discussion of methodologies throughout the book provides a novel critique of equilibrium thoery and insight into the nature of business decisions and uncertainty, the issue of prediction, and the use of mathmatics in economics.

Excerpt

Economics is about how people organise and manage the production of goods and services, as well as the resources that are used in the process of production. The subject matter of economics covers an enormous range of issues, problems, and questions, including questions about how production is organised; why particular activities are undertaken and whether they should be; the nature and functions of the institutions that are associated with organising and carrying out production activities—from banks and manufacturers to shipping and training; and the efficacy of the production processes—what criteria should be used to evaluate them, what purposes they serve, and so on. It is the task of economic theory to elucidate these problems and issues which all have to do with people’s activities and, at the root of their activities, their decisions and plans.

Although it did not matter much at the time, from my earliest encounter with neoclassical economics I remember feeling uneasy about this portrayal of decision-making and choice. The ‘theory of consumer choice’, unfortunately, was the undergraduate’s introduction both to economics and to a neoclassical model. Explaining the purpose of this model, our lecturer spoke about selecting an optimal shopping basket. In spite of the penchant that undergraduates are supposed to have for swallowing whole whatever they are told, the analogy of compiling an optimal basket when faced with an income constraint, while detailing a huge range of possible things on which one might spend money, seemed a long way from the experience of going shopping or from buying the things that family members want. I imagine that students still feel this way about the models, and in teaching economics to graduate management students (who are a critical bunch at the best of times) I used to try to make these models more palatable, arguing—using Hayek’s terminology—that one could think of them as attempting to bring out the logic of what is involved in making effective (optimising) decisions, i.e. as a ‘pure logic of choice’.

I now think that this sort of rationalisation is specious. Part of the purpose

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