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Chapter 1 A Very Beautiful Theory Anybody with the slightest mathematical bent can't help but view neoclassical , general equilibrium theory, with utility-maximization as a driving mechanism, as a very, very beautiful thing. ... Economists are very reluctant to recognize and accept facts in the real world that seem to fly in the face ofthat beautiful theory, or undermine its basic assumptions. -Herbert Simon, "The Failure ofArmchair Economics" Kenneth Burke, in A Grammar of Motives, wrote, "In any term we can posit a world, in the sense that we can treat the world in terms ofit, seeing all as emanations, near or far, of its light" (1969a, 105). He calls them "god-terms," indicating that they are sacred, all-powerful, and supposedly never to be questioned. The words themselves are simplified "reductions" of more complex matters, and "when we confront a simplicity we must forthwith ask ourselves what complexities are subsumed beneath it." That is what I propose to do with the "beautiful theory" that is driven by utility-maximization. Organizations and Markets In November 1937 Ronald Coase published an essay, "The Nature of the Firm," in the journal Economica. It contains the following sentence (1937, 387): "Ifa workman moves from department Y to department X, he does not go because ofa change in relative prices, but because he is ordered to do so." That mildly ironic statement does not seem to be the earth-shaker that, half a century later, it turned out to have been. Bosses give orders and workers obey; it is a familiar part of our culture , obvious to everyone except, it seems, to those who read Economica in 1937. Coase was awarded a Nobel prize in 1991, in part for his work on the nature of the firm. On that occasion some ignoramus whose name 16 Expediency I do not recall, a columnist in the Los Angeles Times, poured scorn on the award, saying it was given for discovering something that was obvious to anyone who gave a second's thought to the matter. In the real world, workers and foremen and managers are all too familiar with ideas of command and hierarchy, and such concepts surely have an obtrusive reality that demands their inclusion in models of organizational behavior (including economic models). Why, then, did the world's economists, albeit belatedly, mark Coase's contribution as an intellectual invention of some importance? They surely did not do so in 1937; they treated his article as a nonevent. The Nobel prize came to Coase half a century after the essay was written, and it was the early 1970s-a thirty-year delaybefore the field that he had opened began to be exploited and the transaction-cost economics that he propounded began to grow. Why should an idea, which starts from a fact that seems so obvious and so much in the daylight, be left so long by economists in their dark unfathomed caves? Coase was pointing out that internally firms rarely function on market principles. Within a firm or a corporation (or any kind of formal organization) much goes on that has more to do with the obedient servant than with the unremitting bargainer. Command and obedience evidently are forms of conduct that economists find problematical. Why this is so becomes clear in the contrast between neoclassical economics and its predecessor, political economy. Here follows a brief description of how chalk is not cheese. Classical economists, often styled political economists, appear in a genealogy that includes Marx, J. S. Mill, Adam Smith, David Hume, Rousseau, Locke, Hobbes, and a legion of other political and moral philosophers. Neoclassical economic writing emerged here and there for most of the nineteenth century, in greater force about the 1870s, and began to dominate around the turn ofthe century, which marked a paradigmatic shift in the discipline from the study of how wealth is produced and distributed to a more narrow inquiry into the conditions that determined market equilibrium (the position at which supply and demand are balanced). Political economists place economic activity in the context of political , religious, and familial institutions. Economic behavior is a function of institutions which both make it possible and limit its scope; thus, for example (further considered in Chapter 3), it is argued that the evolution of order-bringing institutions enabled an increase in the world's wealth. Reasoning in political economy is inductive. The method, roughly speaking, is to survey different institutions and find [18.223.32.230] Project MUSE (2024-04-25...

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