Ideal Theory Versus Reality in the Real-World of a Capitalist Market Economy

The following passage is taken from Kate Raworth's book, Doughnut Economics (2017: 122-3), from the chapter on 'mechanical equilibrium' and 'dynamic complexity':

... equilibrium economics... get[s] the results it seeks by imposing severely restrictive assumptions about how market systems behave – assumptions including perfect competition, diminishing returns, full information, and rational actors – so that no errant effects get in the way of the price mechanism’s ability to act as the balancing feedback loop that restores market equilibrium. Think of it in terms of starlings: what restrictions would you have to impose on a large flock of these birds if you wanted to make sure that they all stayed still? You could place each bird in its own narrow little coop and shut them all away in a dark, quiet room: that should encourage them to stay put. But don’t expect the flock to behave like that once you remove these unnatural confines and release them into the air. They will twist and turn, putting on an extraordinary aerial display of a complex system in action. So it is with economic actors trapped in the narrow confines of an equilibrium model: when all the restrictive assumptions are in place, they will indeed behave as required. But remove those assumptions – enter the real world – and all havoc could break loose. It often does, of course...

This passage of Raworth's sums up brilliantly how the ideal Platonist theory of modern orthodox neoclassical economics - the Walrasian general equilibrium theory of a perfectly competitive market economy - completely diverges from the reality of an actual market economy like capitalism. Rather than producing a theoretical picture of a real capitalist market economy as being dynamic and complex in nature, it instead reduces it to a static state. Drawing an analogy with a flock of starlings (birds) illustrates this point quite well - ie, the divergence between economic theory and economic reality.

But the root cause of this divergence between economic theory and economic reality, on the part of modern orthodox neoclassical economics, is to be found in its use of some very restrictive assumptions like 'perfect information' and 'rational actors' (the sorts of 'unrealistic assumptions' which Milton Friedman defends in his methodology essay). These sorts of assumptions are, as is well noted both within the philosophy and methodology of economics and economics itself, the wrong ones to use if the genuine scientific aim is to produce as practical as possible a fairly accurate representation of a real capitalist market economy. They should, therefore, be abandoned if that's the aim.

However, as argued within the Marxist tradition, these sorts of assumptions are designed (whether insincerely or not, or unconsciously or not) to derive the theoretical conclusions that modern orthodox neoclassical economists seek in their effort to either establish their picture of reality and/or to justify the kind of world a real capitalist market economy is with all its class inequalities in income and wealth and economic problems like unemployment and poverty.

At any rate, what this passage of Raworth's highlights then is how out of touch with reality the core theory of modern orthodox neoclassical economics is because of its underlying assumptions. This is reason enough to reject such an economic theory of a real-world market economy like capitalism.

Addendum

Raworth's above framing of the equilibrium models of neoclassical economics aptly captures their static nature. Their equilibrium models are like frozen pieces of a make-believe picture of a market economy devoid of any capitalistic elements, even though it's the capitalist economic system they're overly-abstracting from - ie, their model of a market economy is what they arrive at by leaving out the other essential features (apart from the market) which make up an actual capitalist economic system, viz, concentrated private property in the hands of the capitalist class (the class which monopolises the means of wealth creation) and the class of propertyless wage-workers (the class which owns nothing but their labour-power).