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Posted: May 3, 2025
We must end our intimidation by economic arguments against the capitalist class. The Working Class University series gives workers the tools to independently analyze economic developments. Each post will look at an economic field or concept, so you can get familiar with academic economics. These topics are not taught to the working class, so workers either adopt the junk economics forced upon us, or ignore economics altogether. Our lives are shaped by economic forces, like going to work, or choosing what goods and services to buy, all within an ever-changing global economy. Becoming a working class economist means pursuing a scientific understanding of these forces. As an army of working class economists, we can refute junk economics in our minds, struggle against exploitation in our workplaces, and build socialism for the benefit of the world’s toiling masses.
Our first post in this series is about microeconomics, which is typically the first economics class taken by university undergraduates. Microeconomics is the study of how individuals or individual firms make decisions on the use or allocation of scarce resources. Examples of these choices and patterns of economic behaviour include how a family spends their household income; how a business decides how much of a product to produce; or what price at which companies sell their products.
Microeconomists assume that actors make choices based on maximization, either of profits (for businesses), or ‘utility’ (for consumers, of which workers are the vast majority). We’ve already analyzed the profit motive in the past, but utility is a new concept, defined as the ‘total satisfaction or benefit derived from consuming a good or service.’ We will get deeper into the problems with utility in a moment. For now, understand that it is debated, even doubtful, that we can quantify individual ‘satisfaction/benefit’ in the same way as profit measured in a currency.
Supply and demand are also central to microeconomics. Supply is the amount of a good or service that a business is willing to produce at a certain price. Demand is the amount of a good or service that customers are willing to purchase at a certain price. Additionally, we must understand equilibrium, which is the price at which supply and demand equal one another. By mapping these equilibrium points on graphs, we get supply and demand curves, as explained further in this guide. Typically, supply increases and demand decreases as prices increase. While companies want to produce more at higher prices, people can afford less as things get more expensive.
These maximization choices are not always straightforward, particularly because choosing one option always means giving up another. This is another key concept called opportunity cost. For example, you have $20 and the choice between buying $1 bananas and $5 shovels. Buying one shovel means you have an opportunity cost of five bananas, because that’s how many bananas you could buy with the shovel’s $5 cost. Buying one banana means you have an opportunity cost of ⅕ of a shovel, because that’s how many shovels you could buy with the banana’s $1 cost. Once again, these options can be mapped to a curve, outlining all of your possible consumption options.
Behind the concepts, there are some fundamental assumptions microeconomists make that we must scrutinize, to better understand how microeconomic analysis functions.
Assumption #1 - Perfectly Rational Actors: This assumption means that, in a given study or model, the individual consumer or firm will behave in a predictable ‘perfectly rational’ way. To economists, rationality means that an individual’s preferences are ‘stable, total, and transitive.’ ‘Stable’ means that their preferences don’t change across different times and scenarios. ‘Total’ means that their preferences are perfectly informed, and apply to all available goods choices. ‘Transitive’ means that, if they prefer A to B and B to C, then they prefer A to C.
Assumption #2 - Individual Utility Maximization: This assumption means that the utility of an individual’s preferences are both known and measurable. While they are constrained by a budget, they will spend to the limits of that budget in order to maximize their utility. Combining this with the first assumption basically means that ‘rational’ behaviour involves always pursuing maximum utility. An individual’s utility curve shows all the combinations they can purchase on a certain budget. These curves shift based on the budget and relative prices of the goods involved in the utility calculation.
Assumption #3 - Perfect Markets: While microeconomists study different types of markets (including monopoly, oligopoly, monopsony, oligopsony, etc.), in supply and demand analyses, they assume that markets are perfect. This means there are a large number of buyers and sellers, with none having the power to significantly influence prices. However, in most real world markets, this assumption fails, as huge buyers or sellers do have the power to affect prices.
To best understand the purpose of these assumptions, we need to face the fact that economics balances science and psychology. Economists utilize mathematical modelling to study isolated subjects, as you would in physics, chemistry, or biology. Yet, economics always plays out psychologically, through human actors in irreducible historical and political contexts. The above assumptions are the ‘natural’ laws that frame microeconomics. They abstract its conclusions from the real, historical world, which can mean failing to account for the historical and political factors that shaped an outcome.
Take someone’s Coca-Cola consumption. They may enjoy the taste, but where does sugar addiction factor in? They may consume two bottles each day, but only because it’s as cheap as bottled water in a town lacking potable water. And for microeconomics’ focus on individuals and their preferences, our preferences are under constant duress from the manipulation of advertising. Socialist economics cannot ignore these factors.
We can also critique microeconomics with the Marxist economics we’ve learned before. ‘Utility’ can seem like a fuzzy concept, because it’s an attempt to smooth over the use value versus exchange value contradiction Marx analyzed in the commodity. Five bananas might have the same exchange value of one shovel, but we simply cannot scientifically measure the pleasure/sustenance of eating a banana against the usefulness/reliability of digging with a shovel. This contradiction can only be overcome by collective political and economic solutions.
In our next post, we will take a similar look at macroeconomics, the study of how whole regional, national, or global economies perform, including how different actors use power within them, and how decisions are made in pursuit of different economic outcomes.
If you're interested in these ideas, don't hesitate to reach out. This project is a conversation, not a lecture, so all good faith feedback is encouraged, especially from trained economists.