Fine and Dimakou’s books, Microeconomics and Macroeconomics provide a thorough critique of orthodox economics, while explaining alternatives, finds Phil Armstrong

The hegemony of neoclassical economics is well documented; pluralism is something of a hunted hare in economics. These books represent a much needed and highly effective critique of mainstream neoclassical microeconomics and macroeconomics. The authors show a deep understanding of received theory. This is readily apparent from the clear and detailed expositions of the models contained in both volumes. The books are ideal for economists or those with a strong interest in or familiarity with economics. What makes both books innovative is the placing of the economic theory in context, both historical and comparative.

Traditional texts usually provide analysis of mainstream theory with little or no attempt to provide alternative approaches. Heterodox texts, though fewer in in number, concentrate on the provision of alternatives. These volumes add something by doing both. The authors provide an excellent analysis of mainstream theory, explained in its own terms and give a detailed ‘running commentary’ critique of the theory at an ontological, epistemological and, indeed, a practical level. This makes these books invaluable to undergraduate and post-graduate economists alike.

For students of the subject, the books can provide an excellent critical ‘study guide’ to accompany their course. As each model is studied, it would be greatly beneficial to consider Fine and Dimakou’s views in conjunction with ‘orthodox’ teaching. Such an approach should provide much needed balance to the learning of the subject.

Methodological individualism

In Microeconomics, Fine first considers the nature and impact of the marginalist and formalist revolutions and then goes on to consider the significance of the reductionist methodology characteristic of the neoclassical mainstream, in particular its stress upon methodological individualism. Fine explains the nature of the assumptions underlying neoclassicism and provides deep insights into how the various models which characterise the theory have been developed over the course of time. He then provides a perceptive critique and opens the way for alternative or heterodox views.

The critical building blocks of neoclassical economics are ‘atomistic’ with ‘rational’ actors (utility maximising individuals and firms) interacting in a universal market form to produce equilibrium outcomes. Fine describes this method and structure as the technical apparatus and architecture which underlie neoclassicism and considers that relying solely upon this reductionist methodology leads to ‘implosion’.

He then discusses the nature of economic imperialism and how this particular approach has become hegemonic and stifled pluralism. Fine contrasts implosion with ‘bringing back in’ with more than a touch of irony. Having assumed away any real world social and political factors in the derivation of their models, neoclassical economists then use the very same narrowly based deductivist theories to analyse the actual world, including situations they had deliberately excluded when constructing their theories. This approach inevitably leads to the failure to get grips with providing satisfying explanations of reality on the part of neoclassical economists. The use of this ‘implosion’/bringing back in’ terminology and the way of thinking it underlies provide readers with an insightful framework for understanding the key ideas Fine wants to get across.

Fine looks at the key areas of microeconomics, in turn, starting with the theory of consumer demand. He provides an in-depth and clear explanation of the neoclassical models from first principles using diagrams and mathematics to enhance his exposition. He then provides a critique of this approach and proposes heterodox alternatives. Fine then explains the neoclassical approach to production, supply and markets and shows how the existence of general equilibrium, in principle, might be demonstrated using the tools of mainstream economics and its relationship to Pareto efficiency. This analysis is clear and precise and is followed by a perceptive critique of the general equilibrium approach which expertly highlights the weaknesses inherent in the orthodox approach.

Markets and labour markets

In the same way, Fine goes on to consider standard models of competitive market structure used by neoclassical economists and how they utilise production functions. Again he explains how they are derived and how they are used before going on to provide a critique delivered from a heterodox perspective and the provision of alternatives. The treatment of labour markets within neoclassical economics then comes under scrutiny. Neoclassical economics views labour markets in the same way as it does other markets and uses the same tools of analysis it always does – an approach consistent with its acceptance of the universal market form. It does add human capital theory to its ‘tool kit’ – an approach not without significant problems – and an acceptance of the critical importance of both market segmentation and ‘information asymmetries’ which prevent labour markets working in the same way as other markets. However, as Fine stresses, a consideration of the key issues of power, class and conflict are absent, meaning that neoclassical theory is unable to provide a rich and full analysis of how labour markets actually function.

Fine then brings the volume to a close with an excellent summary conclusion, drawing together the threads of his argument. This argument I find altogether convincing. Fine also notes how the mainstream subjugates macroeconomics to microeconomics; the whole is merely the sum of the parts. Fine contests this view:

‘Is it not simpler just to let go, delve back or across into history or economic thought or heterodox economics, respectively, and begin with the macro as the precursor for specifying the micro, as has been traditional within and around the discipline of economics (and political economy) prior to the emergence and flawed triumph of mainstream microeconomics?’ (Fine, p.152 emphasis added, parentheses in the original).

This statement serves to provide an excellent link to the second volume.

Macroeconomics subjugated to microeconomics
 

In Macroeconomics, Fine is joined by a co-author, Ourania Dimakou. The same high standards of economic analysis are maintained. The style of the volume remains the same; the authors first consider a key aspect of macroeconomics and analyse it carefully in context before going on to provide a critique. The authors reflect upon the relative status of macro and micro and consider the ‘New Consensus Macroeconomics’ as being subjugated to microeconomics. In simple terms (in contrast to times in the past) the ‘micro dog’ wags the ‘macro tail’. Macroeconomics has been reduced in scope, in large part this is due to the fact that the focus of mainstream economics has converged on general equilibrium and how the short run – long run dichotomy has become a critical foundation to the way neoclassical economists go about their work.

Weaknesses of mainstream reductionism

The central theme of the book is to show how this reductionism has affected orthodox attempts to deliver satisfying explanations of macroeconomic processes within a range of contexts. The authors provide persuasive criticism, highlighting the significant weaknesses that follow from the adoption of his approach. First, they consider the accelerator/multiplier theory of the trade cycle and its links to growth theory, explaining its origins, its structure and limitations. This provides a clever lead into a detailed consideration of the ‘classical dichotomy’ or the idea that the real and nominal aspects of the economy can be isolated and considered separately.

Neoclassical economics considers money to be neutral and the economy is analysed as a real exchange system where money is merely a ‘veil’; its introduction into a barter economy improves efficiency but leaves quantities produced and relative prices unchanged. The quantity of money merely determines the general price level. Fine and Dimakou provide a critique of this view and convincingly contest the axiom of money neutrality.

Following on, the authors consider a second dichotomy or ‘tension’ that exists between the short run and the long run (all mainstream economists accept long-run money neutrality but disagreement exists concerning short-run neutrality). They criticise the reductionism of mainstream economics inasmuch as it presupposes the existence of a long-run equilibrium path determined by ‘the so-called fundamentals of preferences, technologies and endowments’ (Fine and Dimakou, p.42) and macroeconomics merely becomes the study of short-run variance around the trend. The micro/macro dichotomy ‘tension’ which was discussed in Microeconomics is revisited and the mainstream approach is again criticised. The authors, correctly in my opinion, suggest that macroeconomic factors determine the nature of individual action. In other words and in contrast to the orthodox position, the ‘macro dog’ wags the ‘micro tail’.

The book goes on to consider growth theory and international economics and also provides a lucid and succinct analysis of the nature of the Keynesian revolution and the counter-revolutions provided first by monetarism and then new classicism and the real business cycle theorists. Clear explanation of the nature of these approaches, set in historical context is followed by convincing criticism. The authors consider the nature of Post Keynesianism and radical alternatives to orthodoxy. Such approaches necessarily need to include explicit reference to fundamental uncertainty and involve an attempt to capture the systemic nature of the macroeconomy; a nature ‘subject to dynamic changes that defy the fixity of the relations, structures and processes and agents (not necessarily individuals) that underpin it’ (Fine and Dimakou, p.187). The authors contend that such an approach cannot be delivered by mainstream modelling.

In summary, I congratulate authors for the way they successfully make the reader think about the validity of mainstream theory. This is not achieved by criticism alone but also by the provision of detailed explanations of the theories themselves, the appropriateness of the assumptions, the internal consistency of the models and their predictive capacity – expertly interspersed with thought-provoking insights. Each section is followed by the provision of useful links to further reading. I feel that even mainstream advocates would find it hard to criticise the way Fine and Dimakou explain neo-classical economics. They might disagree with their criticism but that, of course, is another matter! I, for one, agree with their arguments. They are persuasive and hopefully should promote an open-minded debate amongst economists. I agree with Joan Robinson when she said ‘the purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.’^[i] A thorough reading of these books should help a student avoid deception.

Notes