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Int. J. Pluralism and Economics Education, Vol. 3, No. 2, 2012
Text and anti-text in teaching the economics of the
firm
Rod Hill*
Department of Social Science,
University of New Brunswick,
Saint John, New Brunswick,
E2L 4L5, Canada
E-mail: [email protected]
*Corresponding author
Tony Myatt
Department of Economics,
University of New Brunswick,
Fredericton, New Brunswick,
E3B 5A3, Canada
E-mail: [email protected]
Abstract: How can an instructor facilitate a critical examination of the theory
of the firm found in mainstream microeconomics principles texts? We suggest
not presenting a single alternative paradigm, where students might feel
constrained to choose one over the other, but rather an ‘anti-text’ that shows a
variety of different critical perspectives. The limitations as well as the ideology
of the mainstream texts are revealed both by what they say and what they don’t,
by the evidence that is ignored and by the myths that are perpetuated. Attempts
by firms to influence consumer demand and the legal, regulatory and political
environment are off limits for mainstream texts; in addition firms such as
non-profits and cooperatives are ignored. The focus is on the mythical perfectly
competitive firm with ‘u’-shaped costs, constricting it to remain a small,
powerless, price-taking entity.
Keywords: microeconomic principles; theory of the firm; critical perspectives;
economics textbooks; pedagogy; perfect competition.
Reference to this paper should be made as follows: Hill, R. and Myatt, T.
(2012) ‘Text and anti-text in teaching the economics of the firm’, Int. J.
Pluralism and Economics Education, Vol. 3, No. 2, pp.144–159.
Biographical notes: Rod Hill is a Professor of Economics in the Department of
Social Science, University of New Brunswick, Saint John Campus. Before his
appointment in 1990, he lectured at the University of Windsor and the
University of Regina. He has been a member of the editorial boards of The
Canadian Tax Journal and the Encyclopedia of Quality of Life Research. He is
the co-author, with Tony Myatt, of The Economics Anti-Textbook (2010) and
articles in professional journals.
Copyright © 2012 Inderscience Enterprises Ltd.
Text and anti-text in teaching the economics of the firm
145
Tony Myatt received his PhD from McMaster University with a distinction in
theory. He has taught at McMaster University, the University of Western
Ontario, the University of Toronto, and the University of New Brunswick,
where he has been a Professor of Economics since 1992. His research interests
include the supply-side effects of interest rates, labour market discrimination,
unemployment disparities, the effects of minimum wages, and the methods and
content of economic education.
1
Introduction and motivation
Many economists may find themselves teaching from a ‘mainstream’ principles text
while wishing to find ways to expose its limitations, omissions, tacit assumptions and
(sometimes) subtle normative viewpoint, as it presents what it claims is positive
economics.1 Ideally, students should read their text critically to uncover these aspects of
their text, but it seems that is easier said than done, even for the best and most motivated
students.
How can an instructor facilitate the critical examination of the text? There are
important pitfalls to avoid. For example, the instructor should not convey the view that
the texts are just wrong and that economics is not worth studying. We agree with the
position expressed by many critics2 that one must first understand mainstream economics
well before one is in a position to critique it effectively. The same is true for critiques of
any set of ideas in any discipline.
In addition, as Marglin points out, mainstream economics is ‘the language of power’,
another reason students should understand it. We see the standard textbooks as part of a
broader system of persuasion (or ‘propaganda’) that permeates our culture and that has
the effect of shaping or influencing people’s view of the world, or at least trying to do so.
Students of economics should consider the subject as it is presented to them in their
textbooks in that broader context. They would then be in a better position to decide for
themselves whether the worldview offered in the text is one they agree with or not.
Incidentally, we are not claiming that the textbooks are faulty because they are
not ‘objective’. They necessarily reflect an ideology – a set of views about the
world – because positive and normative aspects cannot be neatly separated, as Gunnar
Myrdal (1969) long ago noted. Even choosing which parts of positive economics to
present and what to ignore or downplay involves value judgements on the part of authors.
Every economics lecturer has an ideology too; our discussion here supposes that the
lecturer’s viewpoint differs from that of the text.
We suggest that by presenting both ‘text’ and ‘anti-text’, students can be shown by
example how to distance themselves from their text to examine its limitations, omissions
and ideology, and how to compare its implicit value judgements with their own. This is a
variation on the ‘broader questions, bigger toolbox’ approach where “each individual
theory, model, or concept is presented as a partial and fallible construction” [Nelson and
Goodwin, (2009), p.175], not as the model which students are expected to learn
uncritically. The goal is not to present a single alternative paradigm, where students
might feel constrained to choose one over the other;3 instead, we try to show ways in
which elements of the text can be critiqued from various perspectives with the goal of
stimulating a more critical attitude on the part of students.
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This paper presents an example of this approach using the theory of the firm. This
part of the principles course has little connection with students’ everyday experience;
even teaching the content of the typical text presents a challenge for the instructor. After
briefly summarising what we consider to be the core content of the mainstream texts, we
then compare the ‘text’ with an ‘anti-text’ to raise questions that highlight what we
believe are important themes that illustrate the limitations as well as the ideology of the
mainstream texts. Note that we say ‘an anti-text’ because the content of the anti-text is
not unique. Instructors with other viewpoints might challenge the omissions, tacit
assumptions and lack of evidence in the texts in different ways and provide different
alternative perspectives. The point to convey to students is that alternative perspectives
do exist. We summarise text and anti-text in a series of tables that compare and contrast
them.
2
Text
We begin by asserting that it’s reasonable to generalise about the core content of
‘mainstream’ microeconomics principles texts and intermediate level texts too, for that
matter. If instructors switch texts, the core content of their lectures need not change, as
anyone who has done this will have noticed. This is likely no accident. If instructors had
to revamp their courses in a major way, this would be a real barrier to adopting a new
text, something publishers and authors of new texts might not find attractive. However,
instructors would not bother trying a new text if there was absolutely no difference
between them. The selling points become minor differences between texts and the quality
of support materials.
Similarly, it’s fair to say that these texts have a common approach to describing the
theory of the firm. Very briefly, because this is familiar territory, the texts’ story goes
something like this:
“A black box entity with no internal structure called ‘the firm’ produces a
single product and sells it to well-informed consumers with given preferences.
To produce this product, it hires factors of production, ultimately simplified
into simple categories like ‘labour’ and ‘capital’ whose units are left rather
vague.4 The factors are almost always hired at a given market price in
competitive markets.”
First, production relationships between inputs and outputs are described. The idea of
‘diminishing marginal returns’ to variable inputs dominates the discussion of the short
run. The various concepts of ‘returns to scale’ (increasing, constant and decreasing) are
used in the discussion of the long run.
Second, these production relationships and given input prices give rise to the typical
short run and long run relationships between costs and outputs. Given these cost curves
and some description of the demand for its product and the associated marginal revenue,
the firm selects a rate of production (and perhaps a price) to maximise its economic
profits. In principle, the firm acts to maximise the discounted value of current and future
profits (i.e., the value of the firm). In the text, this is usually simplified to considering
only one time period, so no discounting or considerations of the future are involved.
Implicitly, this treats all time periods as if they are the same.
Text and anti-text in teaching the economics of the firm
3
147
Text vs. anti-text
Students may well spend their energies focusing on what is in the text and trying to sort
out the unfamiliar ideas, tables and diagrams, forgetting to think about what is tacitly
assumed and what is not there at all. But, as Noam Chomsky (1993, p.109) puts it, “We
can learn a great deal about the way the world works by observing what fails to reach the
threshold in the ideological institutions”. Reminding students of what has failed ‘to reach
the threshold’ in their texts is one of the major functions of the anti-text; pointing out the
possible consequences of those omissions in shaping students’ worldview is another.
Our approach contrasts the texts’ content (or the absence of content) with the content
of an ‘anti-text’ that challenges the claims or omissions of the standard text. Instead of
giving students one single view of the firm, we suggest giving them competing views and
asking them to think about how to choose between competing views in general.5
So what do we think is missing from the very narrow approach to the firm that is in
the typical text? Here are four examples.
3.1 Who controls the firm and what are its objectives?
The imbalance of power between owner-shareholders and their elected board of directors
on the one hand, and the managers they appoint on the other, has been recognised for a
long time. The principal-agent problem has been studied intensively by economists in
recent decades.6 The principals (shareholders) seek ways to get their agents (the board of
directors) to appoint managers (the agents of both shareholders and the board) to
maximise profits. They face two important difficulties.
The first is asymmetric information; managers have better information about the
firm’s true performance and the nature of their own efforts. Although outside observers
such as auditors, bond-rating agencies and analysts for brokerage firms are supposed to
help oversee management, they suffer from asymmetric information too. As well, recent
scandals have revealed the potential for conflicts of interest and corruption.
The second difficulty is shareholder-voters’ rational ignorance, if there are many
shareholders and none with a significant block of shares. Top management can gain
control of the firm, particularly given the considerable influence managers exert over
boards of directors. When imperfect and asymmetric information is taken into account,
the claim that the firm’s managers simply maximise the firm’s value is not very
convincing [Stiglitz, (2002), pp.480–481].
The plundering of shareholder assets in recent years by managers has become hard to
overlook. Bebchuk and Fried argue that “[t]he pervasive role of managerial power can
explain much of the contemporary landscape of executive compensation” (2004, p.2).
They show that for a large sample of companies, the total compensation of the top five
executives increased from 5.2% of the companies’ net income in 1993–1997 to 8.1% in
1999–2003 (2005, p.10). Had compensation remained at 5.2%, shareholders would have
saved $69 billion, a tidy sum indeed.
Nevertheless, after at least acknowledging the existence of some debate, the typical
text asserts in the end that profit maximisation is the sole objective of the firm’s
managers. An alternative description of management’s goals, which we find more
plausible, was sketched out by John Kenneth Galbraith forty years ago:
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“There must be a relatively high threshold level of profits to keep the
stockholders and creditors quiet ... to avoid takeovers, to minimize recourse to
banks, to secure the autonomy of management and the technostructure. In
addition, an increase in the profit level from year to year remains an important
test of the efficacy of the management and the technostructure… an important
justification for their continued autonomy, power and independence.”
[Stanfield and Stanfield, (2004), pp.81–82]
In his landmark book, The Visible Hand, business historian Alfred Chandler (1977, p.10)
agrees, proposing that growth and stability are the main goals of the managers who run
firms.7 These alternative views are summarised in Table 1.
Table 1
Who controls the firm and for what ends?
TEXT
ANTI-TEXT
Objectives of the firm
Claim
Owners control firms which
maximise profits.
Management has effective control. It
seeks levels and growth of profits
sufficient to safeguard its position.
Potential for abuse of power.
Evidence/argument Claims that shareholders and their
board can effectively monitor
management. Threat of takeovers
acts as an incentive to maximise
profits.
Evidence of excess pay for
management; management influence
over Boards of Directors. Arguments
against takeovers as an effective
threat.
Implications
Potential for misallocation of
resources as managers pursue their
own goals (e.g., bubbles bursting)
Simplifies economic theory. If
profits act as signal to allocate
resources efficiently, managers are
responding to this.
Do these differing views have any important implications for the course as a whole? A lot
might be said about this, but we will just make a few remarks. Clearly, sticking with the
assumption of profit maximisation simplifies the economic theory of the firm and of the
market structures that are developed later. As well, if profits act as a signal to allocate
resources efficiently, managers are responding to this. This reinforces a central theme of
the course: how an invisible hand helps to allocate resources efficiently in a competitive
economy.
If, at the other extreme, managers may plunder firms, reward themselves with stock
options that encourage short time horizons, and other behaviour that may misallocate
capital, then the standard efficiency story is much less convincing. The events
surrounding the asset price bubbles of recent decades (the dot.com stock market bubble,
and housing price bubbles in the USA and other countries) illustrate how capital
allocation can go horribly wrong while many of the players involved not only escape jail,
but walk away with large fortunes.
3.2 Silence about alternative governance and ownership structures
The textbook firm is a profit-maximising, capitalist firm, run by its owners or by
managers acting on behalf of shareholder-owners. Non-profit firms get little or no
Text and anti-text in teaching the economics of the firm
149
attention, although they are not rare in the real world.8 As well, the textbook firm is not
democratic. Its authoritarian hierarchical nature plays a central role in the daily life of
most people who go to work every day in such firms. The textbooks forget to mention it
because this state of affairs is simply taken for granted and apparently not a matter of
choice. The bias towards supporting the status quo and the existing distribution of power
is made more visible by pointing out this omission.
The idea of economic democracy is just an extension of the movement for greater
democracy that has gone on for centuries. Although most textbooks now mention no
alternative to the status quo, the idea of workplace democracy has a long history in
economic thought. John Stuart Mill, for example, saw economic democracy as the way of
the future [Mill, (1965), p.775].
David Colander’s (2004, p.369) introductory text is exceptional in describing the
philosophy of economic democracy:
“For one group – the owners of stock – to have all the say as to how the
business is run, and for another group – the regular workers – to have no say, is
immoral in the same way that not having democracy in deciding on government
is immoral. According to this view, work is as large a part of people’s lives as
is national or local politics, and a country can call itself a democracy only if it
has democracy in the workplace.”
Democratic firms are not fictional constructs, like the perfectly competitive firm. Both
consumer-owned and worker-owned cooperative firms exist and are important in some
sectors of the economy, yet they have virtually vanished from the textbooks (Hill, 2000;
Kalmi, 2007).
This omission would not matter if the presence or absence of democracy did not
matter for firm behaviour. But would managers pursue different goals if they were
elected by the workforce rather than appointed by a board of directors representing (at
least in principle) shareholders? For example, if demand for the firm’s product falls,
some workers may get laid off in the capitalist firm, but democratic firms seem to prefer
to share the work and to avoid layoffs. Better worker health and safety and more pleasant
working conditions compared with the choices of authoritarian managers might be
another outcome. The structure of pay would likely be radically different, if the
experience of worker-controlled firms is any guide.
For worker-cooperatives, there is evidence that worker productivity is higher than in
comparable capitalist firms [Bowles et al., (2005), p.138]. Centred in the Basque region
of Spain, the famous Mondragón Cooperative comprises more than 250 companies with
about 84,000 employees (as of 2010), forming a prototype of a cooperative economy in
which the primary, manufacturing, financial and service sectors form an interlinked
network.9
However, there are real barriers to the growth of democratic firms that leave
them greatly outnumbered by capitalist firms. They have trouble raising financial capital
from banks and worker-owners face significant risks by having to invest much of their
wealth in the same business in which they also have their jobs [Bowles et al., (2005),
p.340].
It is revealing that while the textbooks claim their subject is about choices between
alternatives, yet no alternatives are discussed pertaining to the central institutions of
economic life, as we summarise in Table 2.
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Table 2
Types of firms
TEXT
ANTI-TEXT
Types of firm organisation
Claim
[implicit] Focus is almost entirely on
the capitalist profit maximising firm
(sole proprietorship, partnerships,
corporations)
A wide range of firms exist:
profit-seeking capitalist firms,
non-profit firms, various types of
cooperatives.
Evidence
Implicit justification: other types of
firms are empirically unimportant.
Empirical evidence of existence and
practical importance (in some areas)
of other types of firms; issue of
choice of firm structure and
objectives.
Implications
Reflects an ideology of ‘there is no
alternative’ to the standard
hierarchical profit-maximising firm.
Supports the status quo and existing
structure of power.
Raises issues of authoritarian firms
vs. economic democracy. Asks: is
there an alternative to the status
quo?
3.3 Empirical evidence about production and costs
The presentation of the theory of the firm offers almost nothing by way of empirical
evidence about the relationships between inputs and outputs and the nature of firms’
costs. Do actual firms’ costs look like those described in the texts? If they do not, why do
texts insist on telling a different story?
In fact, it has been known for a long time that the conventional theory of the firm
rests on a very weak empirical foundation. Objections were raised to the conventional
costs curves by Sraffa in 1926 and have never been properly resolved (Cohen,
1983, 1996).
3.3.1 The short run
In the short run, the texts assume that the ‘law’ of diminishing marginal returns applies
and marginal costs rise in the short run, choking off the firm’s production where
MC = MR. Do marginal costs typically rise? The late Edwin Mansfield (1994, p.242) was
exceptional in offering a review of the evidence in his widely used intermediate
microeconomics textbook:
“[an] interesting conclusion of the empirical studies is that marginal cost in the
short run tends to be constant in the relevant output range. This result seems to
be at variance with the theory presented earlier… which says that marginal cost
curves should be U-shaped… Although marginal costs may well be relatively
constant over a wide range, it is inconceivable that they do not eventually
increase with increases in output.”
And so he retained the theory of upward-sloping marginal costs in his text, despite the
evidence against it.
More recently, Alan Blinder led a team that conducted a representative survey of 200
large US businesses to try to understand their price-setting behaviour. They found that the
results about marginal costs in the short run were “overwhelmingly bad news here (for
Text and anti-text in teaching the economics of the firm
151
economic theory)”. Forty-eight percent of firms reported constant marginal costs; 41%
claimed that marginal costs were decreasing; and only 11% said they had increasing
marginal costs [Blinder et al., (1998), p.103].
Is the ‘law’ of diminishing marginal returns wrong? After all, it only claims that the
additional output produced by variable factors eventually diminishes and thus marginal
cost eventually rises. This can never be proven false. It can be defended (as we saw
Mansfield doing) by claiming that in the particular cases we observe, we simply have not
reached the point where diminishing returns begin. That, however, does not make it a
very useful ‘law’.
It’s also easy to explain to students why we might not observe it in practice. For
example, if we imagine a manufacturing facility with some excess capacity, more output
can be produced using additional doses of labour and capital (with marginal costs
constant) up to the capacity of the plant, at which point no additional output can be
produced in the short run at least. (In effect, a marginal cost curve would become vertical
at plant capacity). Figure 1 sums up some views of short-run costs consistent with the
empirical evidence.
Figure 1
A more accurate description of short run costs?
$/unit
Panel A
Constant short run marginal costs
Average cost
$x
Marginal Cost =
Average Variable Cost
Rate of output
$/unit
Panel B
Decreasing short run marginal costs
Average Cost
Marginal Cost
Rate of output
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R. Hill and T. Myatt
3.3.2 The long run
The textbook story of long run costs, with U-shaped long run average cost curves, fares
no better when confronted with evidence. Panzar (1989, pp.37–38) writes: “Conventional
wisdom holds that average costs in many industries decline for a range of outputs, attain
their minimum at minimum efficient scale, and then remain constant for a considerable
range of output levels”. In his text, Mansfield concurs, citing empirical studies: “the
long-run average cost function in most industries seems to be L-shaped… not U-shaped.
That is, there is no evidence that it turns upward, rather than remaining horizontal, at high
output levels (in the range of observed data)” (1994, p.242, our emphasis). Panzar (1989,
p.38, n.27) adds “Of course this latter region may never be observed, since no firm would
be operating there under most reasonable notions of industry equilibria”.10
In fact, most introductory textbooks now include a diagram showing long-run average
costs with a long region of constant returns to scale, as shown in Figure 2, although they
insist on an upward curve at the right-hand end to show eventual diseconomies of scale.
After this one brief appearance, the usual U-shaped curves reappear for the rest of the
book without exception, to our knowledge.
Figure 2
A more accurate description of long run costs?
$/unit
Average costs
Long-run average cost
with increasing and
then constant returns to scale
Long run marginal and average costs are
equal beyond this point
Long run marginal costs
Minimum efficient scale Rate of output
The late Joan Robinson (1972, p.4), always a good source for a sharp comment,
remarked: “[with] the great concentrations of power in the multinational corporations …
the text books are still illustrated with U shaped curves showing the limitation on the size
of the firms in a perfectly competitive market”. Forty years later, this is still true.
3.3.3 Why these textbook cost curves?
A perfectly competitive market can only exist when each firm experiences decreasing
returns to scale at an output level that is small relative to the size of market demand. Then
the firm’s response to any rise in price would be constrained by rising long run marginal
costs.
But if firms do not experience decreasing returns in practice over relevant rates of
output, they can grow large enough to be able to influence the market price, which is
incompatible with a perfectly competitive market, as Joan Robinson noted earlier.
Preserving the viability and supposed relevance of this market structure seems to be
Text and anti-text in teaching the economics of the firm
153
critical enough to the principles textbooks that the evidence about firms’ costs has to be
set aside.11
And why is the perfectly competitive market structure so important to preserve,
despite its practical irrelevance as a description of the structure of actual markets? We
conjecture that it is needed to put the current economic system in the best light possible,
to allow the student to see the market economy as if it consisted largely of perfectly
competitive markets, producing generally efficient outcomes. A realistic description of
firms’ costs would undermine this central message. Table 3 summarises these points.
Table 3
Claims about production and costs
TEXT
ANTI-TEXT
Production and costs
Claim
Marginal costs rise in the short run; Marginal costs do not tend to rise in
long run average costs are U-shaped. practice; long run average costs are
L-shaped or declining with constant
or increasing returns.
Evidence
Verbal arguments illustrated with
artificial numerical examples.
Empirical evidence from cost
studies and surveys of firms.
Implications
Provides a theory consistent with
perfect competition and firm
production constrained by rising
costs
Consistent with the view of the
prevalence of imperfect competition
and demand-constrained production.
3.4 Silence about other profit-maximising activities commonly undertaken by
firms
An anti-text could point out that many firms use factors of production (or hire other firms
to do so) to do things besides just producing units of output. They use resources to try to
shape aspects of their external environment, chiefly the preferences and demand of
consumers (through advertising) and the institutional environment in which they operate
(e.g., through lobbying, political donations, production of propaganda).
3.4.1 Advertising and influencing tastes
The typical textbook deals with the theory of consumer demand before turning to the
theory of the firm. An examination of advertising and its influence on tastes serves to link
those two parts of the course, throwing light on the limitations of the theory of consumer
demand and a notable omission in the theory of the firm.
With their default assumptions of given preferences and perfect information in
perfectly competitive markets, the textbooks assume away persuasive advertising that
tries to change people’s wants and to stimulate new wants. Advertising is seen as simply
providing information to consumers that they need to make their decisions (e.g., prices,
product quality, and location of sellers). But it’s clear to most people that advertising also
attempts to persuade, to alter the perception of needs and wants. Indeed, Stiglitz (1989,
p.842) claims, “most advertising is not informative”.
The advertising industry is large. Individual firms can spend billions annually on
advertising. Coca-Cola spent $2.5 billion in advertising worldwide in 2010, for
example.12 In the USA, perhaps the most advertising-saturated country in the world,
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advertising was about 2% of US Gross Domestic Product in 2008.13 Advertising by major
corporations fell sharply in the wake of the 2008 meltdown, but has rebounded since.
In his classic book The Affluent Society, John Kenneth Galbraith (1958, p.122) wrote
that advertising expenditures “must be integrated with the theory of consumer demand.
They are too big to be ignored”. At least regarding the microeconomics principles
(and intermediate) textbooks, this view proved far too optimistic.14
The efforts of the persuasion industry also have an important implication for the
theory students are taught. Imagine that clever advertising produced on Madison Avenue
persuades people to be willing to pay more for a product. Consumer surplus is now
produced where there was none before, if we decide to accept current preferences as the
ones to use in making an evaluation of the efficiency of the situation. Stiglitz (1989,
p.842) gives an example and raises the central question:
“but how are we to judge welfare in a world in which individuals gain greater
pleasure out of smoking a Marlboro cigarette, because they have pleasant
sensations when they do that, stimulated by the images left in their mind by the
ad?”
The basic problem is that it is not obvious whether the preferences before or after the
change are the ones to use. Which preferences are the most valid? Does it depend on why
preferences changed? The problem becomes even more complex if people’s preferences
continually change because of their experience and their changing social environment.15
The textbooks implicitly claim that the origin of wants is unimportant by simply
ignoring the question; only the wants of the moment matter and the extent to which they
are satisfied. But this involves a value judgement that reasonable people may – and
do – disagree with. How people’s preferences are formed is important. While the great
economists of the past were often willing to make explicit value judgements about
people’s wants, now most economists remain silent [McPherson, (1987), p.403]. By also
remaining silent, the textbooks fail to raise questions that students might find interesting:
for example, should advertising directed at children be restricted or banned?
Even when a text, such as McConnell and Brue (2005), actually acknowledges the
existence of persuasive advertising that gets consumers to pay high prices for inferior
products, it does not let this have any fundamental impact on the analysis. To open wants
up for scrutiny and debate, the textbooks would have to admit that their method for
judging individual and social outcomes does not always work. Avoiding discussion of the
problem in this way does not solve it.
3.4.2 Influencing the external environment: politics and propaganda
The textbooks almost entirely ignore the power that some firms, particularly large ones,
have to shape their external environment to enhance profitability.16 Business power is
most evident in its efforts to shape public policy to its advantage. This affects virtually
every aspect of public affairs, including foreign and military policy, trade policy, tax and
subsidy policy, environmental regulation, intellectual property law, social insurance, and
product safety regulation. The ‘think tanks’ funded by corporations and foundations
established by very wealthy business owners produce policy papers that reach the desired
conclusions, provide talking heads for television and op-ed columns to fill newspaper
space with corporate-friendly opinion.17
Text and anti-text in teaching the economics of the firm
155
As Madison Avenue has become synonymous with attempts to persuade, so K Street
in Washington has become identified with the flood of business money to fund lobbyists
and campaigns that has corrupted the US political system. The OpenSecrets.org website
provides detailed data on which politicians are getting how much money from whom.
The severity of the problem has risen in the wake of the US Supreme Court decision in
‘Citizens United v. Federal Election Commission’ (Supreme Court of the United States,
2010) which opened the floodgates of corporate cash to influence elections.
While these activities are obvious from even a casual acquaintance with the news,
some detailed information is always useful to make the point that real money is involved.
A few shocking examples from current events will help to wake up those students (there
are bound to be some) who have fallen asleep as the instructor explained that the long run
average cost curve is the envelope of an infinite number of short run cost curves. Taibbi
(2011) is a nice example from recent journalism. It’s hard to beat a story that includes a
Texas billionaire personally giving more than $1m to a governor’s election campaigns
and getting in return a licence for his company, Waste Control Specialists [WCS], to run
a hazardous nuclear waste dump, making money from government contracts. Taibbi
writes:
“the WCS landfill so perfectly fits the business model of [Rick Perry’s] key
donors. The company leases the land for the dump, meaning that WCS keeps
the lion’s share of the profits, while the liability mostly stays with the state
[Texas]. There’s no real regulation to speak of, and many of the state’s
decisions appear to have been greased by massive campaign contributions or
other favors: The executive director of the state’s environmental commission,
for instance, received a job as a lobbyist for WCS not long after helping the
firm get its license.”
“What’s more, the company even got the government to pay for the landfill,
lobbying the town of Andrews to float a $75 million bond issue to finance the
construction of two new dump sites on the property. And in a final insult, WCS
managed to negotiate a loophole exempting it from having to pay school taxes
in Andrews. Instead, it offers a few small scholarships a year.” (Taibbi, 2011)
It’s not convincing to blame disciplinary division between ‘economics’ and ‘politics’ for
the lack of attention to the political power of business. Public choice theory in economics
has provided some useful ideas about the rational ignorance of voters and how the few
can dominate the many because of the free rider problem which affects large groups more
than small groups such as firms in an oligopolistic industry (Olson, 1971). We do not
have to look to politics for some useful explanations of corporate power. As well, firms’
investments in shaping their political, legal and regulatory environment are economic
decisions just as much as their decisions about how much to produce or what to charge
for their products. The amounts invested are significant and the returns on that investment
are sometimes spectacular.
More than a century ago, Thorstein Veblen (1965 [1904], p.286) wrote,
“Representative government means, chiefly, representation of business interests. The
government commonly works in the interest of the business men with a fairly consistent
singleness of purpose”. This remains the case today. Instead, the principles texts choose
to present a view of the world in which the manifestations of business power,
summarised in Table 4, are so normal and judged so unobjectionable that they are
literally invisible.
156
R. Hill and T. Myatt
Table 4
Firms do more than produce widgets
TEXT
ANTI-TEXT
Actions to influence the firm’s external environment
Claim
[implicit] advertising to influence
demand and political activities to
shape the external environment are
unimportant enough to be ignored
almost entirely
Advertising and attempting to shape
its external environment are of
central importance to many large
firms
Evidence
<none>
Empirical evidence on advertising
spending; spending on lobbying and
political donations and production of
propaganda for public consumption
Implications
Provides a theory consistent with
perfect competition
Consistent with imperfect
competition, competition through
advertising. Raises issues of
‘consumerism’ and meaning of
consumer surplus.
Reflects an ideology where
corporate power is absent and
consumer sovereignty is valid.
Propaganda for the status quo?
Questions the role of business in
politics and formation of public
policy. Are citizen interests the same
as business interests?
4
Summing up: text vs. anti-text
The picture that an unwary student could take away from the standard text is one in
which the firm, operating in a perfectly competitive environment (or one that is close
enough to it in some vague way) maximises profits by selling its products at a
market-determined price to well-informed consumers while helping to promote
an efficient allocation of resources in society as a whole. Some neutral
efficiency-maximising legal framework exists in the background, provided by a
benevolent government the origin of whose policies is not an object of inquiry.
Our anti-text approach has raised questions about the simplistic assumptions made
about who runs the firm and for what ends. We have tried to sketch out a way in which
students can be shown that reality is more complex and that the standard textbook model
will be unable to explain some important phenomena. The anti-text also points out the
tacit assumptions made about the kinds of firms that are important or relevant in the
economy. Profit-maximising capitalist firms are not all that economists can – and
do – study. The anti-text also examines the evidence about factual claims and, in the
generalisations made about the firm’s production and costs, that evidence seems
unconvincing. Finally, our anti-text also tries to point out the narrow scope of enquiry
that the texts set for themselves when they theorise about the behaviour of the firm.
Attempts to influence consumer demand and the legal, regulatory and political
environment are implicitly ruled out of bounds.
Some may be concerned that the ‘anti-text’ label casts the text in too negative a light.
Nelson (2009, p.62) suggests labelling what we term the ‘text’ view as the ‘orthodox’,
‘traditional’, ‘basic’ or ‘simple/simple mechanical model’, which “suggests that, while
Text and anti-text in teaching the economics of the firm
157
learning them may be necessary (for whatever reason) the course will also venture
beyond into more up-to-date and/or sophisticated explanations”. These terms also help to
stress the restrictive assumptions and limited range of the models (ibid., p.63).
We hope that by raising a few concrete questions about omissions, implicit
assumptions and value judgements, students will have some concrete examples of how
doubts can be raised about the content of the their standard texts. The goal of the exercise
is to help students see the contents of their texts in a broader context: the context of the
wide range of economic thought that exists (of which students get what we hope is an
appetising glimpse) and the way in which that economic thought is part of the ideological
currents in the wider society.
Acknowledgements
This paper was originally presented at the 2012 Midwest Economics Association
Meetings in Evanston, Illinois, in the session ‘Social Economics in the Classroom and
Beyond’, organised by Bruce Pietrykowski. The authors are grateful to Jack Reardon for
his comments as a discussant on that version of the paper and to three referees for helpful
suggestions.
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Notes
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2
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11
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17
Northrop (2000) is a fine exposition of the normative economics lurking underneath the
principles course.
See for example, Stephen Margin’s ‘Occupy Harvard’ talk at
http://www.youtube.com/watch?v=Pf0-E8X-GHo and Rapping’s interview in Klamer (1984).
Students may feel pressured to write favourably about the one that they think will get them the
highest marks in the course, particularly if they see that the instructor has a preference.
The firm’s production function really describes the production of value added, which is why
intermediate products do not appear in it. The distinction is rarely pointed out in the texts.
We do not argue that these two views are the only possible ones.
Miller (2005) surveys the major issues related to the theory of the firm.
Surveys of firms reviewed by Blinder et al. (1998, pp.40–44) provide mixed evidence: profit
maximization, target rate of return, maintaining market share figured among managers’ goals.
In his post-Keynesian text, Lavoie (2006, p.37) concludes that firms seek growth, and the
pursuit of power and profits is a means to that end.
The papers in Seaman and Young (2010) survey the economics of non-profits.
See the Mondragon Corporation website at (http://www.mondragon-corporation.com)
particularly the sections ‘Our economic data’, ‘Our companies’ and ‘Frequently-asked
questions’. As of 2008, somewhat less than one-third of employees were also cooperative
members, but plans were in place to raise this to 75% within a few years.
Panzar (1989, pp.41–55) surveys the literature on the estimation of cost functions with
emphasis on multi-product settings in which economies of scope are also an issue.
Long run average costs could still be U-shaped but compatible with imperfect competition if
demand for the firm’s output lies within the region in which average costs decline. Our point
is that if increasing and constant returns are acknowledged as the norm, then the typical firm
will tend to be an imperfectly competitive firm, even in the case where firms produce identical
products.
See the data centre in adage.com for current examples of firm spending.
Advertising Age (adage.com) data centre reported an estimate by Robert Coen of $294 billion
for all forms of advertising in 2008. U.S. GDP in mid-2008 was estimated by the Bureau of
Economic Statistics to be $14.3 trillion.
Advertising is examined from the point of view of the firm as an input in the production
process in textbooks in industrial organization, a field where real market structures are of
interest. See for example Burgess (1989, Ch.11). This remains a rather limited approach to
modelling advertising, however [Stiglitz, (1989), p.843].
Dixit and Norman (1978) argue that even using post-advertising tastes, the amount of
advertising is excessive from a welfare standpoint.
The one exception is the discussion of efforts made by a regulated monopoly to ‘capture’ its
regulators. It may (or may not) be a coincidence that this allows the text to portray regulation
as potentially ineffective and to suggest that no regulation may be a superior outcome.
The Center for Public Integrity (www.publicintegrity.org) is an excellent source of lobbying
activities in the USA. The Center for Responsive Politics website www.opensecrets.org also
documents corporate donations to political campaigns and lobbying, providing extensive data.