Marginalism I

By M. Northrup Buechner

April 15, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

We begin this analysis of “marginalism” with an overview of the current state of economics:

There are three basic premises that together explain virtually every detail of modern economics (by modern economics, I mean economics as it is practiced and taught today in graduate schools). Those premises are: (1) subjectivism; (2) marginalism; and (3) model-building. Underlying all these is altruism, as I explain in the Preface to Objective Economics. Here, I want to deal with premises that are specifically economic premises.

Subjectivism sets the philosophical context, the basic philosophical assumptions. Marginalism names the basic economic insight, the new way of looking at economic choices and actions, that originated about 140 years ago. Marginalism drew a hard line, a line in principle, between the classical economists and the neoclassical (new classical) economists that followed them. Model-building names the universal method of today’s economics and includes “higher mathematics” as an integral part of this method.

Contemporary economics has been called neoclassical economics for a long time. Too long. Today, some economists are calling for a new name for modern economics because today’s economics no longer resembles the neoclassical economics of the late 19th and early 20th centuries—which is when the name “neoclassical” originated. Beginning about fifty years ago, mathematical model-building began to accelerate its take-over of economics, until today this method totally dominates the field.

Over the same period that mathematical model-building was becoming the method of economics, the content of economics was splintering into many subdivisions—for example, public choice economics (the economics of political decision-making), the economics of crime, the economics of marriage and divorce, agricultural economics, urban economics, the economics of growth and development, housing economics, transportation economics, natural resource economics, environmental economics, the economics of religion, the economics of the arts, labor economics, forensic economics, neuroeconomics, sports economics, the list goes on and on. In principle, modern economics now embraces every sphere of human thought and endeavor.

Why are all of these subjects called “economics?” Because mathematical model-building is the method used to study them, and predominantly, they are studied by people with Ph.Ds. in economics, who are employed in departments of economics in colleges and universities across the country.

I am completely opposed to the method of mathematical model-building, as it is practiced in modern economics (see Appendix B of Objective Economics). But I want to make clear here something that is not clear in Appendix B. In principle, I am not opposed to the application of mathematics to economics. I think it is possible that someday, mathematics may contribute important insights to our understanding of how an economy works. But I am afraid that contribution is far in the future.

Why?

Human beings are by far the most complicated existents of which we are aware in the universe, much more complicated than the objects of study in any of the branches of physics. The mathematics that today is invaluable to the understanding of inanimate phenomena is helpless to illuminate anything about the economic activity of human beings.

Perhaps one hundred or two hundred years from now, mathematics will have advanced to the point that it can deal meaningfully with beings of volitional consciousness. Today, “volitional consciousness” is the insuperable barrier that mathematics cannot cross. The subject matter of economics is human beings, and the consciousness of human beings is volitional. Today’s mathematics has no way of “modeling” a creature whose actions, by their nature, are freely chosen.

Instead, the pretense of applying contemporary mathematics to economics requires a blizzard of assumptions that are patently untrue, that distort everything out of any resemblance to reality, but which are required to create a subject matter with which the relatively primitive mathematics of our time can deal. Every alleged item of knowledge that comes out of this method is a distortion.

What about subjectivism? As an Objectivist, I am unalterably opposed to it in all its forms and expressions. Those forms are legion in modern economics and they vitiate the value of all the work that is inspired by or an expression of subjectivist philosophy. I have much more to say about this in my book. Here, we will deal only with how subjectivism entered economics (next time).

So I reject mathematical model-building and subjectivism. Marginalism is not so easily dealt with, because there are both valid and invalid aspects to the marginalist idea. Next time, we will look at how subjectivism and marginalism entered economic thought.