Critique of a Pure Walrasian/Paretian Theory of the Firm
A Caricature of a Caricature
The theoretic matter presented in this document should have conveyed an overwhelming impression of disconnection from the everyday economic reality of firms. Succinctly, what we have considered here has been the theoretic construction of an abstract economy, within which certain tendencies of economic behavior (i.e. in the production and distribution/exchange of relatively scarce goods, services, and factors of production) have been accentuated to the detriment of other behavioral patterns. In this manner, the final consumption demands of households constitute the functional rationale for the workings of the entire system and the profit-driven capitalist motivations of entrepreneurs fall entirely out of the structure of the theory. Such a theory enables us to pose the production and distribution of goods and services as a collective action problem concerning coordination of many, many households contributing labor and capital to the collective endeavors in commodity production that we label firms. It emphatically seeks to tell us that a market economy is a vast collective endeavor resting on a base of independent households of sovereign, utility maximizing agents.
In fact, the theoretic/arithmetic processual counterbalance to utility maximization by households, profit maximization/cost minimization by firms, conveys a sterile arithmetic formality. Profit maximization simply constitutes an intermediary step, sandwiched between two household utility maximization procedures (i.e. in factor market supply and final commodity demand), explaining why fully integrated free market economies produce exactly what households desire to consume at the least possible cost for their production, in terms of factor resources spent and foregone opportunities for increased consumption. That is to say, the firm, as an agent, typifies efficient production arising through the decentralized, market-oriented cooperation between households. Beyond this, the firm does not need to possess an independent existence/reality, and so it does not.
Such abstractions from the real of everyday economic processes, fulfill the larger epistemological goals of Walrasian/Paretian theory, as I understand them. Emphatically, they reduce the real of economics to the sovereign choices of households in regard to factor supply and final commodity demand. In the process, they reduce the firm to an intermediary formality. Within the larger theory, we might as well write the firm out entirely, insofar as the firm is simply a way for collections of households to produce things they want that they would otherwise be unable to produce without the help of other households. In this sense, the theory seeks to rationally condense the truth about economic reality by theoretically carving away the appearance that firms possess an existence independent of households. In turn, by reducing economics to the essential truths of household utility maximization, Walrasian/Paretian theory shapes the way that real economic agents view market systems in order to reinforce a particular body of normative economics, defining the appropriateness of certain social policies addressing or otherwise impacting the functioning of markets.
With this in mind, I am prepared to argue that my particular presentation of a theory of the firm in a general equilibrium economy is unique for some of the assumptions that I make in order to enforce a particular understanding of Walrasian/Paretian theory. From the moment that Léon Walras published his Éléments d’économie politique pure, ou la théorie
de la richesse sociale (Elements of Pure Economics, or the Theory of Social Wealth) in 1873, there have been diverse expositions of general equilibrium thinking, most far more sophisticated and compelling in their accounts on the nature of equilibrium than the theory I have presented here. In particular, the version of general equilibrium theory developed in the 1950s by American economist Kenneth Arrow and French economist Gérard Debreu has been extremely influential in defining the theoretic conditions for the existence, optimality, and stability of equilibrium. The issues raised by Arrow-Debreu equilibrium extend far beyond the limited terms of my treatment of firms in a general equilibrium economy. Rather, my limited intentions in this document concern the situating of firms in relation to utility maximizing household agents. In this respect, I hope that I adequately make the point, through my overly emphatic argumentation, that the existence of firms is a formality within an economy that operates strictly to facilitate the circulation of goods and services between households to achieve a more favorable distribution of articles of consumption. For this reason, general equilibrium theorists in the (Neo-)Walrasian/Paretian tradition appear to struggle, at least in part, to find meaningful ways to introduce firms and production into their general equilibrium theorizations without simultaneously transforming/truncating the centrality of exchange and of utility maximization by households.
In my view, the main sources of originality in my approach to firms arises from my emphasis of the interconnected themes of timelessness (continuous negotiation of equilibrium and instantaneous responses to changes in household preferences by firms) and perfect elasticities of final commodity supply and factor demand with respect to changes in relative prices by firms. In regard to my particular effort to decisively subordinate the firm to the overall collective direction of an equilibrium economy by households, I consider these two outcomes to arise necessarily from the theoretic demands of general equilibrium. Moreover, they decisively differentiate firms within the framework of a general equilibrium economy from Marshallian firms, operating under a wide range of Neoclassical theoretic assumptions but otherwise unconstrained by the particular arthmetic and logical demands of a fully integrated general equilibrium economy. In this respect, if Walrasian/Paretian general equilibrium theorizations, in general, constitute a caricature of the way real economies operate, then the theorization presented here might constitute a caricature of a caricature, intended to accentuate the tendencies that I find latent within Walrasian/Paretian theory with respect to firms and production.
Epistemology and the Nature of Theoretic Abstraction
Having thus far advanced the argument that theories of general equilibrium are irreducible to the economic reality of firms, this critique sets forth a problem that demands some explanation. Specifically, what purpose does theory serve if it does not produce a rigorously faithful description of the material reality of the world? The issues involved here are sufficiently broad to justify book length explanations on the role of theory as an adjunct to the broader subject of epistemology, the theory of knowledge/knowing. Thankfully, I am not going to be advancing such an expansive discursus here! However, I do want to advance a particular set of epistemological propositions, intended to clarify the particular approach that will structure our larger study of microeconomics.
To start out, I want to define a critical differentiation between two paradigms of epistemological conventions on the possibility of knowledge: realism and performativity. This dichotomy parallels, in a broader cultural context, the distinction between modernism and post-modernism. Moreover, realism subsumes a range of divergent approaches to the relationship between theorization and empirical analysis. The key issue concerns the capacity to arrive at objective truths about material processes within the world.
Realist approaches to theory and analysis, in some sense, accept that it is innately possible for theorists and analysts of material processes (e.g. market exchange) to derive truths that can explain these processes and situate such processes objectively within the world. Moreover, such truths must be inter-subjectively valid (i.e. perspectives do not matter - a truth is a truth from anyone's perspective). Truths penetrate the universalistic character of reality. In this regard, theoretic and analytic processes are quintessentially quests to find the truth about material existence.
Some realists approach the objects of their theorization/analysis with an assumption that they can realize the truth by subjecting their objects to observation by means of the senses, suitably augmented by technological/diagnostic media. They amass information from sight, sound, smell, taste, and touch, and assemble these observations to derive hypotheses about the facts/phenomena to which their senses have alluded. Then they set about testing these hypotheses with the aim of disproving what their senses have told them through rigorous investigation of new sets of observations. If they fail to disprove their hypotheses, then they codify these hypotheses as theories concerning the objects of their scientific investigations. We can label this subset of realists empiricists or positivists.
Other realists regard the empircists and their scientific method as an ill founded methodology to derive objective truths about the world. These theorists embody a skepticism in regard to the capacity of the scientific method to generate sufficiently exhaustive sets of factual information against which hypotheses can be tested, on the one hand, and doubt that the scientific method can adequately isolate the causal mechanisms for the phenomena theorists and analysts observe and hypothesize, on the other hand. In these terms, they argue that the scientific method both lacks generality/applicability to wider ranges of phenomena beyond the limited boundaries of individual experiments, and occludes valid, essential cause-and-effect relationships by saturating experimental contexts with inessential phenomena. In order to avoid these divergent problems, such critics of empiricism argue that we can only arrive at the truth by reasoning introspectively/intuitively, applying formal logical and unbiased arithmetic rules, to carve the truth of particular phenomena away from the material complexities and backgrounds of inessential relationships within which these phenomena are situated. Such thinkers may not trust their eyes or ears to deliver to them the truth, but they believe fervently in the sovereign capacity of the human mind to illuminate the overwhelming complexities characterizing the mysteries of the universe. We can label these realists rationalists.
(Two of my theoretic mentors have a more detailed and informative account on these realist epistemologies, substantially in accord with my own. Read Resnick, Stephen A. and Richard D. Wolff (1987), Knowledge and Class: A Marxian Critique of Political Economy, 30-33. Chicago: University of Chicago Press.)
By contrast, the spectrum of approaches to theorization/analysis that I label performative discounts the capacity of theorists and analysts to realize objective/inter-subjective truths about material existence. For various reasons, performative epistemologies acknowledge that neither the scientific method nor rational introspective inquiry is capable producing objective accounts on material reality. In contrast to expositors of realist epistemological foundations, performative theorists consider theory and analysis to be processes contained within the broader structure of material existence. In this manner, theorists actively participate, by means of their theorizations and analyses, in the way that the objects of their theories are both understood and lived. By reshaping the way some particular material process is understood, theorists reshape the practices of agents engaged within the process. Thus, theory does not merely describe material reality; it actively seeks to perform material reality and, perhaps, transform it by transforming the way it is understood.
To draw a comparison with realist epistemologies, performative approaches may vary widely in their understandings of the role of the theorist/analyst relative to the objects of theory/analysis. Some performative theorists retain a strong connection to the belief that objective truths exist and that the purpose of theory and analysis is to uncover them. For example, various theorists within the loose community identified with Actor Network Theory (ANT), some of whom I plan to acknowledge further within this critique, define their epistemological approach as performative and acknowledge that theory constitutes a moment of agency contained within the broader assemblages of human and non-human agency that form actor networks. The epistemological frameworks from which ANT theorists proceed is, therefore, founded on a theory of material being/ontology that can be characterized as relentlessly constructivist (material processes are the outcomes of piecewise assemblages/constructions of diverse, spatially and temporally divergent moments of agency). However, these theorists retain a highly skeptical belief in the objectivity of science, holding implicitly or explicitly that the purpose of theory is to derive objective truths about material existence even if such truths never actually crystalize into matters of fact (Latour, Bruno (2005), Reassembling the Social, 87-120. New York: Oxford University Press.). In this sense, the idea of performativity adopted by these theorists rightly can be characterized as straddling a boundary between empiricist realism and the performative embeddedness of the theoretic process as a participant within the construction of material reality.
Like ANT, the epistemological framework embodied in my approach to theory is founded on a connection to ontology - all performative epistemologies acknowledge that theory/analysis cannot be separated from its object in a way that renders theory/analysis neutral, impartial, and wholly objective. Moreover, in certain ways, the constructivist network metaphors that characterize ANT might be used as a starting point to describe my understanding of ontology. However, I regard material reality as an irreducibly complex (overdetermined) totality of processes seamlessly connected spatially and temporally. This irreducible complexity/overdetermination ensures that theory/analysis can never produce objective accounts that unravel the complexities through which particular material processes are constituted/constructed. The most that theory and analysis can do is to develop coherent and discursively persuasive explanations of material phenomena constructed by piecing together arbitrary subsets of causal linkages between material processes.
In rejecting the possibility of objectivity, I attribute a manifestly partisan role to theory/analysis. That is to say, theory/analysis reconstructs the reality of its objects by selecting and piecing together explanatory/causal components in particular ways that conform to the theorist's subjectively-defined agenda. I regard this underlying subjectivity of theory/analysis to be no less true for the natural and physical sciences than it is for the social sciences. Thus, a performative analytical account in, say, climate science might accumulate substantial quantities of empirical data conforming to a particular hypothesis on ecological transformations to congeal an argument that seeks to persuasively reshape its audience's understanding of climate change. The relative truthfulness of such an account (i.e. the degree to which it exhaustively accounts for contextual variations in the phenomenon it describes/interprets) is, perhaps, less important here than its capacity to be convincing to its audience even as it simultaneously acknowledges its incompleteness and its incapacity to tell the absolute, objective truth of climate change. In this view, the specifically scientific character of the account derives not from its objectivity but from its willingness to acknowledge the contested nature of truth, against which it is simply one perspective whose relative value must be adjudged in relation to its consequential impact.
Two aspects of the framework are critical in differentiating it from alternative performative approaches on epistemology. First, it envisions the process of theory as a contained within the struggle between competing ideas in every conceivable disciplinary context where theories/analyses are deployed. Second, it emphatically compels the theorist/analyst to self-consciously acknowledge his/her own subjectivity and support for a particular contested/contestable body of ideas, notwithstanding the incapacity of the theorist/analyst to appeal to objectivity as the rationale for supporting such ideas. Conversely, in rejecting the objectivity of his/her own accounts, the theorist/analyst can rightly counter that all competing accounts likewise lack the potential to be objective.
An ANT theorist would certainly dispute this overdeterminist rejection of objectivity. ANT and overdeterminist conceptions of performativity diverge in regard to the potentiality for theories/analyses to realize objectivity. In broader terms, such differences shape the understanding of both performative perspectives on the sources of ontological uncertainty in deploying theoretic accounts. That is to say, accounts consistent with each approach would be apt to evaluate the effects of the theoretic process in different ways, and these differences constitute the particular terms in which the theoretic process might be characterized as performing the reality of its theoretic objects. The ontological presumptions manifest by ANT approaches prioritize the capacity of agents to mediate the range of agencies influencing their own actions. In these terms, the theorist, as an agent involved in the performance of his/her theoretic objects, may fail to produce the ends predicted by the theory simply because his/her theoretic objects maintain the capacity to resist the particular influences of the theoretic process. Thus, for ANT, the theorist may strive to make his/her theoretic objects perform in accordance with his/her objective theoretic predictions, but theory operates within a larger context of mediation. By contrast, in rejecting objectivity as a possibility for the theorist, the approach to performativity that I label overdeterminist counters that the relationship between the theorist and his/her theoretic objects is continuously shaped by an infinitely varied range of other processes, ensuring that theorist can never comprehend the particular ways in which the theoretic process shapes reality. Given this incapacity of the theorist to unravel the complexities of his/her relationship to theoretic objects, the most that theory can do is produce empirically and/or rationally consistent and persuasive arguments conforming to the theorist's theoretic agenda in the hope that his/her intervention into material reality will produce the desired ends.
Having laid out a range of divergent realist and performative epistemological approaches, my larger goal in this section is to situate Walrasian/Paretian theoretic conceptions in relation to their underlying epistemological presumptions. In this regard, there is always a danger inherent in attributing a particular epistemological approach when a given body of theory never explicitly spells out its relationship to objectivity. Moreover, approaching from my own overdeterminist conception of performative epistemology, there is a further danger in attributing a partisan agenda on a given theory where none is explicitly enunciated. With these dangers in mind, the business of evaluating theory and performing criticism is, in my view, an inherently partisan exercise, even to the extent that we are crossing the intractable boundaries of epistemological paradigms. From my perspective, a theorist engaging in criticism must strive to achieve a thorough comprehension of the theories he/she is critiquing, not to evaluate whether or not these theories present an objectively true account of material reality, but to ask what particular material consequences might arise if the theories are taken seriously and acted upon. Invariably, even to the extent that we acknowledge that a body of theory is conceived as an effort to unravel the objective truth in some aspect of material reality, a recognition that every theory is consequential to material reality demands that we inquire into the potential sources of given perspectives.
In the spirit of taking Walrasian/Paretian theories of the general equilibrium seriously and inquiring into their effects on the functioning of markets and determinations of economic policy, I want to advance a set of propositions. First, any derivation of the characteristics of firms, the roles performed by firms, and the structural/arithmetic features of profit maximization/cost minimization must recognize that these processes derive from a larger theoretic context in which the role of households in achieving utility maximization is conceived as dominant. In this sense, before Walrasian/Paretian theorist ever go about the business of collecting data or performing statistical analysis to validate the objectivity of their presumptions about the role of firms in particular market contexts, they have already introspectively truncated the reality that they are analyzing to determine the relative importance of particular economic facts. Walrasian/Paretian theories emanate from theoretic processes that can be characterized as rationalist.
Second, as a body of rationalist theory, Walrasian/Paretian general equilibrium theory seeks validation of assumptions and predictions on the functioning of market processes, formed a priori (i.e. before any empirical evaluation of real markets), in order to determine whether markets function as if they operated according to the predictions of general equilibrium theorizing. Moreover, the invalidation of particular assumptions (e.g. homotheticity of production functions) may not invalidate the larger structure of the theory to the extent that important predictions derived from the theory (e.g. stable positive cross price elasticities between particular complementary commodities, negative impacts of labor-saving technological innovations on labor compensation rates) continue to hold. In this sense, we might differentiate between those assumptions that promote the internal logical consistency of the theory and those conclusions, emanating from theoretic assumptions, that enable the theory to make realistic predictions on the functioning of actual markets. It may be that the assumptions of the theory do not conform to the realities of actual firms and actual markets, but if the theory continues to make accurate predictions regarding the functioning of sectoral economies or entire market systems, then it continues to enjoy some degree of validity, against the larger validity criteria of rationalist theories.
Third, in conformity with its larger commitment to epistemological realism (i.e. its implicit assumption that the purpose of the theoretic process is to unravel the objective truth in its theoretic objects), Walrasian/Paretian theory has no explicit partisan agenda. On the contrary, it might be possible to extract partisan agendas from the theorizations of individual theorists within the larger tradition. For example, we might conclude that Léon Walras' particular partisan position against the private ownership of land, as a factor of production, shaped the particular way in which general equilibrium theory has approached land, inasmuch as general equilibrium theory has continuously sought to divorce land, theoretically if not practically, from the larger mechanics in the determination of equilibrium pricing (i.e. tâtonnement)(see Walras, Léon (1896). Études d’économie sociale: Théorie de la répartition
de la richesse sociale. Paris: F. Pichon, Imprimeur-Éditeur. Located at the archive "gallica.bnf.fr" of the Bibliothèque nationale de France, at: http://gallica.bnf.fr/ark:/12148/bpt6k111751z). Likewise, the quasi-collectivist, cooperative utilitarian imperative in general equilibrium economics on which I will subsequently elaborate comments in this critique appears to emerge, most succinctly, from the partisan motivations of later Walrasian/Paretian theorists like Oskar Lange (who, after merging Paretian analytic methods with socialistic planning principles and theoretically debating the nature of state planning against Austrian rigorous free market supporters, went on to serve advise the post-World War II communist government in his native Poland on central planning of consumption). Whatever Lange's exact motivations were, it stands to reason that his particular emphasis on the relationship between utilitarian consumption preferences over entrepreneurial imperatives contributed to the larger focus of general equilibrium theory.
On some level, we have to accept that such theorists were engaged on a conscious search for objective truth and that this motivation constitutes the overriding imperative, in their minds, driving the development of their theories. On the other hand, we have to conclude that the specific manner in which individual theorists approached the theoretic process was shaped by prior conceptions, leading each to pursue particular abstract methodologies in order to clarify the myriad sources of empirical data revealing the workings of real economic systems. Such abstractions must, thus, be recognized as moments in which the subjective operation of individual perspectives, shaped in turn by myriad prior life experiences and influences, determine the development of theory.
Concluding, it is my contention that the particular abstractions developed within Walrasian/Paretian theorizations of the firm reflect particular partisan agendas, even to the extent that such agendas were oblivious to individual Walrasian/Paretian theorists, who conceived their work in realist terms. These agendas, over time, promoted an imagery of free market systems that prioritized individual choice by consuming households in relation to traditionally capitalist imperatives of profit maximization. Hence, the autonomous role of the firm disappears in Walrasian/Paretian theorizations, replaced by sterile, arithmetic profit maximization/cost minimization processes, sandwiched between autonomous household utility maximization processes.
Abstraction, as a methodological tactic, seeks to clarify impossibly complex contexts to extract the truth underlying market exchange and production. However, to the degree that abstraction constitutes a wholly rational, logical tool exercised by individuals with overdetermined perspectives, it can never objectively resolve the complexities contained with market exchange and define the unique linkages among final commodity markets and between these and factor markets. My intention is, thus, to definitively oppose the capacity of Walrasian/Paretian theory to present objective theories on market exchange. Having dispensed with the objectivity of these theories, however, I seek to resuscitate those elements of the tradition that, indisputably offer important insights into market dynamics, especially in this era of globalization.
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