I remember first reading Galbraith's The New Industrial State, in particular his discussion of Wisconsin dairy farmers as examples of firms more typical of those in more traditional, unplanned markets, and wondering if Galbraith would have chosen a different example if he'd ever seen his television ask him, "Got Milk?" (One thesis in The New Industrial State is that advertising implies demand management, which, in turn, implies a market dominated by "planning.")

Perhaps a better way to sum up all of these points is that orthodox Economics is all about solving a fundamental problem that no longer exists: finding an allocation of resources that maximizes the amount of met needs in society. In Adam Smit's day, society lacked the capacity to produce enough to meet everyone's basic needs. The problem, then, was how best to allocate inputs.

Today, the fundamental Economic problem is different. Poverty exists despite the fact that we have the capacity to produce enough to meet the basic needs of the entire planet. Today, the fundamental Economic problem resolves around distributing outputs instead of allocating inputs.

We graft new assumptions and methods onto an old model that focuses on allocating inputes in the hopes that it will lead to a satisfactory distribution of output, but there really is no connection between what the orthodox model seeks to describe and the basic problems we need to solve in society today.

This is why, for example, orthodox models have difficulty with employment issues. Employment is both an issue of allocating labor as a resource and an issue of distributing income to workers, and why traditional supply and demand models don't explain things like the effects of a minimum wage. We can see the effect of a minimum wage on allocating labor to firms, but we can't see the effect of a minimum wage on the distribution of income accross the labor force.

Posted at July 11, 2007 11:44 PM in response to The Ten Boxes of Heterodoxy, or Why Economics Sucks