Introduction to Business and Society

Introduction to Business and Society 

3) Explain the main differences between mainstream economics and heterodox economics. This explanation must include at least a description of the meaning of “homo economicus” and a description of two heterodox perspectives among those presented during the lectures (Marxist, Institutionalist, and Anarchist)             

Mainstream economics is concerned with the study of how human beings make decisions under conditions of limited resources and beliefs that the market is moved by an invisible hand and all the actors are rational. It mainly focuses on individualism as opposed to the holistic framework, microeconomics as opposed to macroeconomics, consumption as opposed to production, mathematical methods and formal rationality as opposed to realistic rationality and statistical methods (Lecture 04). On the other hand, Heterodox economics analyzes economic principles outside the mainstream economic school of thought. Under this, individuals are viewed as social beings influenced by the environment they are in, which includes their social class as well as culture (Lecture 04). Marxist and Institutionalist are examples of heterodox perspectives.             

To begin with, the main difference between mainstream economics and heterodox economics is that mainstream economics views individuals as completely rational while heterodox economics views individuals as social beings influenced by the environment, they are in including their social class and culture.  Mainstream economics assumes that individuals are selfish and will always act in their best interest. Homo economicus which is opposed to individualism refers to how economists characterize human beings as free individuals who are capable of pursuing their own self-interests, know what their self-interests are, and are able to measure their own self-interest in economic terms such as cost or price and act in the best possible way. When viewed as a consumer, Homo economics considers consumers’ preferences to be independent and considers them to be sovereign since they have the freedom to choose. The consumers are rational since they are aware of what they prefer, can maximize their own well-being, and are able to make correct choices, their preferences do not change much and finally do not act impulsively (Lecture 04). Consumer preferences remain consistent at a point in time and over time and the production and consumption of goods have no external effects such as pollution.             

The other difference between mainstream economics and heterodox economics is marginal utility which is one of the main concepts of mainstream economics is opposed to labor value, a major factor in Marxism. Marginal utility refers to the theory of choices guided by the utility principle in the context of scarcity. It is essential in explaining how consumers make choices in order to benefit from their limited budget. It explains the benefit that is accrued from consuming an additional unit of a good. The Marxists who strongly agree with the concept of Karl Marx believe in labor value in contrast to marginal utility. The labor theory attempted to explain why goods were exchanged at specific market prices and proposed that the value of a commodity is largely decided by and can be objectively measured by the labor hours invested in producing it.  Mainstream economics also focuses on the capitalist and managers as opposed to heterodox economics which mainly focuses on the less privileged social groups. It is from the labor value theory that Marx was able to explain how the capitalist exploited the workers. 

Finally, mainstream economics uses mathematical methods and formal rationality as opposed to realistic rationality used by heterodox economics. Mainstream economics uses scientific methods in order to carry out an analysis. In this analysis, hypotheses are formed, assumptions are made and mathematical models are used in data representations. On the other hand, Heterodox economics are not based heavily on mathematics but rather on the declaration of opinion as facts, reading, and interpretations of history which is a major concept in Institutionalism. the analysis is informal and not scientific. The Institutionalist perspective associated with Thorstein Veblen and John R. Commons implies that the historization of economic life is part of a broader understanding of the evolution of societies. It takes into account six assumptions. The first assumption states that the market is characterized by competition and conflict, and the second states that individual economic behavior is shaped by the institutional environment of the individual, the next states that history is evolutionary, and thus economics is evolutionary as well, the fourth assumption states that technological development is a crucial consideration when analyzing the nature of the economy, the fifth states that institutions can be shaped and altered to better serve the needs of people in society and the last one states that economic analysis depends upon other disciplines such as psychology, anthropology, and law in order to fully understand human economic behavior. The main concept under this concept is conspicuous consumption e.g., fashion, trendiness are driving forces in individual choices (Lesson 04). 

In conclusion, mainstream economics is different from the heterodox methods since it mainly focuses on individualism as opposed to the holistic framework, microeconomics as opposed to macroeconomics, consumption as opposed to production, use of mathematical methods, and formal rationality as opposed to realistic rationality used by heterodox economics based on history and opinions.  Mainstream economics views individuals as completely rational while heterodox economics views individuals as social beings influenced by the environment, they are in including their social class and culture.  It also strongly supports marginal utility which is in contrast with the labor value. 

References

From Classical Political Economy to Neoclassical and Heterodox Economic Approaches. Lecture 04.