Henry Liu on the debt-propelled economy

Louis Proyect lnp3 at panix.com
Sat Sep 14 07:31:54 MDT 2002

Global Economy

Perils of the debt-propelled economy
By Henry C K Liu

Economics is a complex subject. Any subject, however complex, if looked
at in the right way, will become even more complex. This fact baffles
many experts who tend to avoid small errors meticulously while sweeping
on to grand fallacy.

One of the shortcomings of economics is the inadequate attention paid to
it as a behavioral science. The problem can be traced to the
neoclassical concept of the economic man who is supposed to act
rationally in his own interest which in a money economy is generally
defined rather simplistically as financial gain. Economics is obviously
more than finance, and economic well-being is not synonymous with
financial gain. Modern economics of course deals with the problem of
human behavior with some sophistication, albeit always through the back
door, and always equating self-interest with rational individual
response to pricing. A market economy is coordinated through the price
system operating on the principle of marginal utility.

Economists construct indifference curves to show consumer preferences.
In economics, the effect on consumption of a pure change in price is
shown in an income-compensated demand curve (also known as a Hicksian
demand curve after economist John Hicks - 1904-89). A Marshallian demand
curve (after economist Alfred Marshall - 1842-1924) is based on the
concept of marginal utility. Marginal utility is observed only through
choices. Marginal utility in consumption is simply a problem of choosing
the bundle of goods that maximizes a buyer's utility, subject to the
income constraint - the requirement that the bundle the consumer chooses
costs no more than the buyer's disposable income.

Yet the demand for goods is affected by human behavior. A good whose
consumption increases when its price goes up is called a Giffen good,
after Robert Giffen, a 19th-century English statistician, who noted that
Irish peasants bought more potatoes when the price of potatoes rose.
This contradicted the law of demand, one of the basic laws of economics.
For the poor Irish peasants, potatoes, as the main staple, took up a
huge share of their income. If the price of potatoes went up, the share
of their income available to purchase other foods would shrink markedly,
forcing them to consume more potatoes to make up the difference.

full: http://www.atimes.com/atimes/Global_Economy/DI14Dj01.html


Louis Proyect

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