The irony of microeconomics: Excess supply and a study of scarcities

How has economics built the excess supply of land, labour, capital and product into its formal analytical structure which, even now, is predicated on the study of scarcities? The answer is, it hasn't

Microeconomics is the study of four markets and their participants — land, labour, capital and product. The first three combine to produce the fourth. This combining is more effective or less effective depending on technology, whose main contribution is to save on labour. This is what is called productivity. 

Two decades into this century, labour, capital, output and technology are all in excess supply. Labour because of runaway population growth. Capital because currencies are no longer pegged to gold and countries are feee to print as many notes as they need to. Output because the above two have become cheaper and plentiful. And technology because of a paradigm shift in electronic computing. 

My question is: how has economics built this excess supply into its formal analytical structure which, even now, is predicated on the study of scarcities. The answer is that it hasn’t. 

There is a lot of intellectual activity because of the imperative to publish research that uses one or more of the four methodologies I had listed in this column yesterday. Each paper explains some observed fact. But when you try to add it all up, you get nothing by way of a grand theory. It’s all bits-and-pieces work that is elegant, data-intensive, experimentally valid, etc. But it’s not of any use to governments, firms, workers and others. 

My explanation for this is the steadfast refusal by the discipline to explain how all the excess labour, capital and product markets will interact with each other in the years to come. 

Read Part 1: It's a mystery why economists persist with imperfect methods of economics

The disconnect with reality is almost total because you can’t have data about the future. But without data modern microeconomics is helpless. That’s how it’s practitioners have set up the game. And the problem isn’t just that. It is also that in human affairs the past is a very imperfect guide to the future. 

In economics, thanks to technological change, it is especially so. And the more rapid the technological change the less effective the past is as a guide. 

Let’s consider three markets, for jobs, food and finance, where the two mainstays of microeconomics, namely risk and uncertainty, have diminished to such an extent that modern microeconomics now nearly disregards them. 

Read Part 3: Macroeconomics needs to focus on managing abundance and not scarcity

There is a glut of food, although it’s distribution remains dependent on incomes. But insufficient output is no longer the most pressing problem of agriculture. 

Jobs as we understand them have started giving way to work in what’s called the gig economy. This is disrupting labour markets massively. And finance is so plentiful that it costs virtually nothing to borrow. This impacts risk assessment for both borrowers and lenders. 

In other words, the framework within which microeconomics operated until now doesn’t exist anymore. Reinventing itself is the big challenge before it. It needs to go from the effects of analysing scarcity to analysing the effects of gluts. 

In this context, I can only reproduce what I had written about economics in 2004 in this newspaper. For those who are interested, the article was called ‘Mullahs of Economics’. “Then there is the role of intuition. Thomas Kuhn showed how it played a very important role in scientific progress. He was also the populiser of the term paradigm and therefore 'paradigm shift'. 

“He annoyed a lot of scientists by saying that most of them clung to what they had been taught and that they solved puzzles whose answers they knew in advance. Most of all, he said, they ignored insights and findings that threatened the existing paradigm.

“He then went on to describe the tension between the old and the new and the crises this tension generates when anomalies emerge between what is accepted and what actually happens. 

“These crises, he said, were resolved in one of three ways. First, the existing body of knowledge proved capable of dealing with it. Second, it proved unsolvable and was stored for the future. Third, a new paradigm emerged, which after the usual wrangle replaced the older paradigm wholly.”

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This is the second part of a three-part series. Read part 1 here and part 3 here