The following is part of an Edward Elgar blog post of mine put up under the title, “Free Markets, Say’s Law and the Failure of Keynesian Economics” which discusses my Free Market Economics text. I have focused in this excerpt on the microeconomics side which I normally don’t mention since macro is the major issue of the moment. There is plenty about micro I have problems with as well.
But the book does more than recast macroeconomics in its classical form. The microeconomic sections of the book also provide a different perspective on the nature of the market, the role of the entrepreneur and the unparalleled importance of uncertainty whose significance in economic analysis cannot be exaggerated. The text wages a battle against the other major innovation of the 1930s, the diagrams associated with marginal revenue and marginal cost. Anyone who has done economic theory has been dragged through a set of diagrams that show how the price of individual products are determined according to where the additional cost of producing one more unit of output is equal to the additional revenue that would be received by producing that one extra unit of output. Maddeningly complex while simultaneously shallow, it will leave an economist almost completely unequipped to deal with the genuine questions an economy poses to policy.
This analysis has distracted economists from focusing on what is most important about entrepreneurial decision making by making it appear that profit maximisation is about getting MR to equal MC. The reality of business, however, is that the future is an absolute unknown; economic decisions are seldom about single products and never about whether one more unit of anything ought to be produced. Instead, virtually all economic decisions are based on conjectures built on the past and projected ahead into the future about which nothing can ever be known for sure, and the more distantly into the future decision makers project, the less likely they are to get right.
This, then, is how marginal analysis needs to be explained. Decision making occurs as the expected costs associated with some decision (their marginal cost) are weighed against the expected return (their marginal revenue). Such decisions have nothing to do with deciding whether to produce one more unit of output. It is about making decisions that often put millions on the line and involve years of pre-planning. The free market succeeds because there are many different projections being made by people who venture their own money and who therefore have the most intense interest imaginable in getting it right, and then correcting their errors when things go wrong, as they inevitably do. That is what marginal analysis is actually about or at least should be.
Book price: I only own a hardback version because it was sent to me by the publisher. The hardbacks are for libraries. This is from the link to the Elgar website.
Free Market Economics: An Introduction for the General Reader
Steven Kates, School of Economics, Finance and Marketing, RMIT University, Melbourne, Australia
2011 352 pp Hardback 978 1 84542 322 3
2011 Paperback 978 0 85793 244 0
Hardback £95.00 on-line price £85.50
Paperback £29.95 on-line price £23.96
£24 is about $40. I know it doesn’t have the production values of Mankiw or the latest Baumol but it’s nothing like as expensive either. And you may take my word for it, I am not in it for the money. Just buy the book and I will buy you a coffee and then we’re square.