The impact Ideology has on Economic analysis

In order to assess the way in which ideology influences economic analysis we must first have an understanding of the difference between Tautology and Economic Theory. Tautology is said to be a statement that is true by necessity or by virtue of its logical form, whereas Economic Theory allows us to go from a definition to a scientific theory in whereby one must postulate a certain structure of causality. The choice of variables – constants, endogenous, exogenous – is often influenced by one’s ideological perspective.

An example of an economic theory that is said to ideologically influenced would be the marginal productivity theory of income distribution that refers to the idea that every factor of production that is sold in a factor market is paid its equilibrium value of the marginal product, or the additional value generated by employing the last unit of that factor in the factor market as a whole. In a perfectly competitive market for labor, for example, wherein the wage rate is exogenously determined, a firm will hire workers up until the point at which the value of the marginal product of the final worker employed is equal to the wage rate. All workers employed are paid the value of the marginal product of the final worker, not their own. Major criticism of this theory is that the labour market is often subject to imperfect competition. Joan Robinson in her article “What is wrong with economics?” wrote

“The very essence of the theory is bound up with a particular institution — wage labour. Obviously this has no meaning for a peasant household where all share the work and the income of their holding according to the rules of family life; nor does it apply in a [co-operative] where, the workers council has to decide what part of net proceeds to allot to investment, what part to a welfare fund and what part to distribute as wage.”

Second, we need to understand the difficulty of distinguishing the “positive” from the “normative” analysis when attempting to gain an understanding of how ideology can and does influence economic analysis. Positive analysis is based on being objective and it must be able to be tested and proved or disproved. While normative economics is subjective and value or opinion based, so they cannot be proved or disproved. An example of this is the theory of a perfect competitive system. Adam Smith author of The Wealth of Nations, Leon Walras, French Mathematical Economist, and Frank Knight author of Risk, Uncertainty and Profit; all were major proponents for the perfect competitive market structure. Perfect competitive system is a market structure in which the following five criteria are met: 1) All firms sell an identical product; 2) All firms are price takers - they cannot control the market price of their product; 3) All firms have a relatively small market share; 4) Buyers have complete information about the product being sold and the prices charged by each firm; and 5) The industry is characterized by freedom of entry and exit.

Additionally, perfect competition is sometimes referred to as "pure competition".  You can see how words like “perfect” or “pure” can lead some to think that this economic analysis might lean more subjective than objective with an implication that it is heavily influenced by ideology. It has been argued that saying something was “perfect” was akin to saying it couldn’t be done any better. However, in the real word the stated five requirements seldom exist together in any one industry. We know that products have varying degrees of differentiation and when they don’t they typically belong in an industry that is consolidated into a small number of large firms or an oligopoly. Many industries also have significant barriers to entry such as a high startup costs or even strict government regulations. Another reason is that there are few industries where the buyer remains aware of all the available products and prices. So it’s easy to understand why there are convincing hurdles preventing perfect competition from appearing in today’s economy. Neoclassical economists on the other hand still argue that perfect competition can be useful and most of their analysis stems from its principles. However, there are still some who argue that perfect competition is not even an attractive or even valid theoretically because it wasn’t competitive at all. They suggest that the model itself removed all competitive activities and reduced all buyers and sellers to unintelligent price takers.

By,

Kaha Haji-Mohamed