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Classical Economics: Lost and Found

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  • Vernon L. Smith

    (Economic Science Institute, Chapman University)

  • Sabiou M. Inoua

    (Economic Science Institute, Chapman University)

Abstract

We argue that neoclassical value theory suffers from a more basic and serious logical indeterminacy, which is inherent in the axiom of price-taking behavior, and which renders price dynamics indeterminate before inquiring as to its stability. If everyone in the economy takes price as given, whence come these prices? Who is giving these prices? Jevons avoided the indeterminacy by assuming that people must have complete information on supply and demand, and the consequent equilibrium prices—‘perfect competition.’ Walras in effect imported an external agent who found the prices by trial-and-error-correction (the Walrasian Auctioneer). Paradoxically, both approaches had the potential better to serve central planning, than a market economy. A theory based on price taking agents required some agency for giving prices. Indeed, the fit with socialism was rigorously established by influential neoclassical authors starting from Wieser (1893, ch. VI) and Pareto (1897, 364-371; 1909, 362-364), and, more formally during the Socialist Calculation Debate, by Barone ([1908] 1935), Lerner (1934), and Lange (1936, 1937). The paradox is hidden in the idea of ‘perfect competition’ a passive treatment of individuals who are not even interacting, let alone interacting in a rivalrous manner. ‘Perfect competition’ is the negation of any real competition, as Hayek (1948) emphasized.

Suggested Citation

  • Vernon L. Smith & Sabiou M. Inoua, 2019. "Classical Economics: Lost and Found," Working Papers 19-15, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:19-15
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    References listed on IDEAS

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    1. Sabiou M. Inoua, 2020. "News-Driven Expectations and Volatility Clustering," JRFM, MDPI, vol. 13(1), pages 1-14, January.

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    Keywords

    Methodology of Economics; Micro-economic Theory; Experimental Economics; History of Economic Thought.;
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