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Reality Based Economics: Casting off Mythology Dr. Ken Blawatt, Professor Marketing & Entrepreneurship, University Canada

Abstract:

The education of students in neoclassical economics as currently taught in universities

promotes a false set of values that encourages in society the misapplication of resources and

economic effort. The “principles” that are used to give foundation to economic analysis and

explanations of the economy are no longer supportable. Lester Thurow 1makes the

observation that, “One of the peculiarities of economics is that it still rests on a behavioral

assumption -- rational utility maximization -- that has long since been rejected by sociologists

and psychologists who specialize in studying human behaviour.”

The linchpin of classical economics is the concept of demand and the ubiquitous

demand curve. This underpinning, based on utility maximization is flawed and as with other

notions does not reflect reality of the marketplace. The essence of economic activity is in the

transaction between buyer and seller. All else is supportive to this exchange. The paper

examines the source of economic activity and develops a paradigm that more accurately

defines the economic process. The model leads to the formulation of “marconomics,” or

market based economics that better explains the function of economic activity within a nation.

The results suggest a format leading to an education in real time market based economics.

Introduction

The curricula of all disciplines in the calendar of most universities are current to the state

of the times. Physics programs are developed from the most recent research in the field. In fact

the departments of all science faculties are urged to be contemporary with the latest studies and

publications in the discipline. Arts departments across the continent teach the modern works as

well as historical materials going back centuries. They expose students to modern day issues

along with those that were born in decades and centuries earlier. Engineering and technological

programs are current and build their subject studies on the foundations of the most recent

scientific thinking as well as the accepted principles of physics. Medicine, while obviously

conservative applies the most advanced procedures and treatments. Education continues to

improve its methods. Kinesiology works with the newest of exercises and Computer sciences

lead the field with efforts to duplicate neurological processes. It is the mark of a good

educational institution to be at the forefront in the research and the creation of new learning

schemas in all disciplines. But there is one that does not. Only economics continues to justify its

methods from the tableau of concepts and propositions that are more than a hundred years old.

1 Jerome and Dorothy Lemelson Professor of Management and Economics, former Dean and Emeritus at MIT’s Sloan School of

Management

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Inappropriate Assumptions

The problem with conventional economics is that its rationalization is grounded on

hypothetical approximations with no basis in fact. Not only that, the structure for the economy

has changed dramatically since the old notions were first introduced centuries ago. The concept

of work is radically different from the day of Ricardo and Marx. The concept of wealth has

moved from the purview of landowners to that of industrial barons, software titans and a large

middleclass. The old “laws” no longer have value and leading thinkers have been critical in their

observations of the discipline for some time now. Sidney Weintraubi for example, declared fifty

years ago that some of the classical elements of Keynesianism should be set aside as was the

case for the “cost theory of value, the subsistence theory of wages, the equation of exchange and

similar major ideas..." Others are less succinct; Hans-Herman Hoppeii for example is more

challenging. In a paper comparing Keynes to Ludwig von Mises (an early Austrian

"entrepreneurial" economist) Hoppe states that Keynesian economics, "like that 'underworld'

tradition is nothing but a tissue of logical falsehoods reached by means of obscure jargon,

shifting definitions, and logical inconsistencies intended to establish a statist, anti-free market

economy."

The inestimable Peter Drucker, one of America's seminal business thinkers and

consultant in management has a unique observation on the role that economists play in a

societyiii

. He wonders if the economic performance of western countries is inversely

proportionate to the number of economists in government service. "The more the economists and

the more attention paid to them...the worse the economy performs." David Saul's Massey lecture

is more graphic in its disapprovaliv

. He avers that if economists were medical doctors they

would be mired hip deep in medical malpractice suits.

John Sibley Butlerv quoting Jane Jacobs

vi observes, “We think of the experiments of particle

physics and the space explorers as being extraordinarily expensive, and so they are. But the costs are

as nothing compared with the incomprehensively huge resources that banks, industries,

governments and international institutions like the World Bank, the International Monetary Fund

and the United Nations have poured into tests of macro-economic theory. Never has a science, or a

supposed science, been so generously indulged. And never have experiments left in their wakes

more wreckage, unpleasant surprise, blasted hopes and confusion to the point that the question

seriously arises whether the wreckage is repairable.”

Most economic problems of the last decade can be attributed to conventional economic

thinking. More recently for example economists supported the subprime concept and predicted

successful economic growth during the 2006 – 2008 period. They did not see the financial crisis of

2008. The concept of continuous growth, removal of regulations and total laissez-faire, free trade

and any number of nostrums in the past that have proven problematic and arguably detrimental to

sustainability are based on the opinions of economists and their believers. They must accept the

effects of the teachings that have produced the greedy and avaricious individuals in the senior

financial community.

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The “Science” of Economics

Classical economics attempts to follow a scientific approach in producing the

propositions it uses in the discipline. However the scientific method relies heavily on testing

hypotheses with empirical research to arrive at the principles used in the scientific world. When

we examine the process used by classical economists in contrast to the scientific world, Table

1.1, the methodologies do not compare. The results from scientific inquiry are subject to tests for

validity, consistency and reliability. They are quantified and replicated and when there is

sufficient evidence that substantiates the findings they become principles. Scientific researchers

do not usually establish a model directly but ascertain a hypothesis firstly and then proceed to

generalize the findings as a set of preliminary principles that are expected to lead to a model.

It is this fundamental characteristic of the scientific approach that neoclassical economics

has avoided; their approach does not produce valid principles. Instead they develop predictions

that are really speculations as to how things should be. Then they try to fit the data into an

assumed model, (test the model) where it is qualified with the ‘ceteris paribus’ declaration. What

then follows is their acceptance of these highly qualified results as guiding propositions or

“laws.” Whereas the scientist tests the hypotheses, the economist builds a model that is based on

assumptions. She or he then applies a number of predictions to test the model presumably against

real data or outcomes; in effect testing a fictional construct by applying hard data to subjective

estimates of reality. In either case there is nothing scientific about the procedure or the outcome.

The material presented in this paper does employ a scientific approach and uses

principles that are the results of empirical treatment. In the broader view there is a large body of

research into human behaviour and it has produced empirical descriptions, formulae and models

that can be used to effectively explain and predict future economic activity. Much of human

behaviour has been documented from observations taken of subjects in economic and decision-

making situations. These observations withstand the statistical tests for validity and reliability

and thus are sound representations.

Table 1.1 Comparing Classical Economics and Scientific Methodology

Classical Economics Procedure Scientific Methodology

Observe a phenomenon, Ask a question

Make simplifying assumptions and

develop a model (a set of one or more

hypotheses)

Do background research

Make predictions, and Construct a hypothesis

Test the model.

Test the hypothesis by doing an experiment (Empiricity)

Analyze the data and draw a conclusion leading to

principles

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So the fundamental omission in economic thinking is its avoidance of reality and the

scientific methodology. It produces postulates that cannot be tested to establish empirical

authority. Even with the use of mathematics to create a patina of scientific credibility it falls

short and at best it is inferential but hardly deterministic. Economics is considered to be a theory.

But in the general sense of the word it does not fit the description. Theoryvii

is taken to be “well-

substantiated explanation of some aspect of the natural world; an organized system of accepted

knowledge that applies in a variety of circumstances to explain a specific set of phenomena;

theories can incorporate facts and laws and tested hypotheses; true in fact and theory." While in a

historic sense some centuries ago economics may have taken on the appearance of a theory, by

today’s standards it does not.

An article in the Scientific American tells us that, “The 19th-century creators of

neoclassical economics—the theory that now serves as the basis for coordinating activities in the

global market system—are credited with transforming their field into a scientific discipline. But

what is not widely known is that these now legendary economists—William Stanley Jevons,

Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting

equations from 19th-century physics that eventually became obsolete. Unfortunately, it is clear

that neoclassical economics has also become outdated. The theory is based on unscientific

assumptions that are hindering the implementation of viable economic solutions.”viii

The Concept of Demand; a Legendary Foundation

The basis for most economic activity is economic demand and that is determined by

people. Demand is not reflected by a set of tables or a line drawn on paper that suggests the

possibility of changes in quantity with the variation of the cost of an item in question. One of the

difficulties with the concept of the demand curve is it infers there will be increased consumption

or purchasing as a correlation of two variables; quantity and cost. The inference is that at some

cost an individual will purchase a product but with a reduction they or others will automatically

purchase another. If a bottle of Cola sells for $2.00 then if it is reduced to $1.50 another will be

automatically purchased and that at $1.00 many more bottles will be sold. The notion sounds

logical but the reality is that cost alone is not a determination in the fulfillment of demand.

The derivation of the demand curve originates with a construct called “utility theory.”

This is a subjectively derived valuation that defies scientific scrutiny. In fact it is disproved in a

number of papersix

. There are many issues that will have an effect on the decision to purchase or

not and they tend to diminish the efficacy of the demand curve ideax.

The concepts of demand and consumption theory used by neoclassical economists are

vested in the “utility theory” that, when tested from a marketing perspective, is quite untenable.

The literaturexi

is divided … “and offers no little criticism of the application of utility and

expectancy theories, probability theory, marginalism and such in regard to economic behavior

and researchers have found them to be problematic at best with the market place.” Even when

economists have made the attempt to introduce an element of human behavior into the “theory”

it too falls short. The introduction of behavioural economicsxii

as “the new interdisciplinary study

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of the interface…. between economics and psychology,” does little to move the discipline toward

a realistic tableau that better defines individual economic behaviour. The effort by Kahneman

and Tverskyxiii

using a single psychological variable is considered a seminal work toward

resolving the ambiguities often found in prior research. But, according to Foxallxiv

the problem is

it little matters what variable is singled out for improvement of economic theory there is no one

measure; preference, utility, satisfaction, desire and so on, that can effectively represent

individual economic behaviour.

The Role of Human Behaviour and Buying Behaviour

Economic models of behaviour have a constrained allowance for the role of the

individual. The social sciences (i.e.: marketing discipline0 argues that human decision-making

process is not a one-dimension act but is seamed with emotions, motives, experiences as well as

the cognitive dimensions of “rationality.” The assumption that a chosen single mechanism,

touched by a hint of behaviour reflects the whole of human action in the acquisition of goods and

services is not a tenable concept. Any account of human behaviour must include measurement

of the full scale of the human experience in choice behaviourxv

. “Numerous studies into human

choice establish the importance of emotion and attention to the structure of individual

preferences, beliefs (expectations), and rationality.”

People do not process information in a purely cognitive manner but also include

emotional factors. In fact Hansonxvi

argues that “consumers do not use their cognitive and

affective skills independently, rather they affect each other.” Contrary to the utilitarian desire for

an ordered, rational behaviour, humans simply do not conform to that model and the expectation

that economic behaviour is defined by a single postulate is not realistic. It therefore holds that no

amount of tinkering or the “testing” of normative economic models will describe the market and

individual behaviour in it.

Consumer Decision-Making

An individual is compelled by needs, wants and desires to improve her or his “state of

satisfaction”, moderated by internal and exogenous variables such as economics, timeliness,

involvement level and so on. Generically the purchasing process is expressed in five steps: (a)

problem recognition, (b) search, (c) alternative evaluation, (d) choice and (e) post purchase

behaviour. Within this progression Hansen states that four elements have an effect on the final

buying decision. They are: price, quality, involvement and emotion; all of which are consistent

with most descriptive models of consumer decision-making. There is a general overlap of

personal, social and psychological variables with no clear indication that a single item is

accountable as an expression of economic behaviour. Zeithamlxvii

found there was a defining

relationship between price, perception and quality that establishes a consistency for buyers.

Thus the concept of perception as to price or value is a defining element in the

determination of economic behaviour. Further, there is the expectation of some performance or

utility in the buying decision that is confirmed in research. Consumer decision making is

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centered on two very specific contexts; one in which the consumer makes a judgment or is

motivated to do so on the basis of a functional, physical dimension and a second comparative

dimension that conveys a notion of the value of, or compensation for the first. In the former case

the buyer looks for a tangible item, one that induces or is expected to provide satisfaction of a

need as in an automobile for transport, cologne for pleasant odor and social acceptance or a fine

dining experience that may address both of those needs. The value one ascribes to these

experiences is dependent on what must be given up or paid for. If there is a minimal expectation

of physical satisfaction or utility, then the value is minimal or reduced to the level of a pure

monetary exchange. If the product offers a number of advantages and/or benefits of worth to the

purchaser then he or she accepts the consequence of a higher price or value that can go beyond a

specific monetary amount or cost.

The decision criteria and motivations in purchasing a product or service are then seen to

center on two aspects: a physical characterization that implies a promise of performance and a

dimension that addresses the perceived value of the item. In the first issue the consumer has an

expectation the product has the ability to function as expected to do. Will it fit comfortably if it is

a dress? Will it shape steel if it is a manufacturing tool? On the one hand there is the need for an

item to perform a simple utility function. On the other hand there may be a desire that the item

embodies a number of features and benefits that supersede a single, parsimonious function.

The second criterion is the acknowledgement of the investment that has been made in

creating the product or service and the acceptance by the buyer of having to compensate for that

worth; that is to pay for the product or service. At one extreme one can appreciate the desire to

pay as little as possible, the lowest possible cost to the buyer for an item. Commensurately there

is the realization that an item may embody a value that is beyond the cost level. In this there is

the anticipation of accommodating needs beyond the physical plain to the more intangible level

where value is a purely subjective perception, matched by a willingness to pay for that prospect

at a level well beyond cost. To conclude then, there is an expectation as to a product or service in

what it will provide to the buyer even as there is a perception as to the worth or value of the

transaction.

Establishing the Hypotheses

The “irrational behaviour’ that is noted in Kahneman and Tversky’s Prospect Theoryxviii

is perceived as consumer activity that is inconsistent with their position on economic behaviour.

These elements, including cues in decision making, (incomplete knowledge) judgment by

heuristics (perceptions, motives, experiences) and framing, (different choices-different

circumstances) are regarded as anomalies to what otherwise should be a prescriptive theory of

buying behaviour. But rather than being irregularities these items are more consistent with

marketing theory which incorporates them as an accounting of consumer behaviour.

Consequently the hypotheses of this research do in fact address the issue. The first

hypothesis posits the final decision criteria in product/service selection, (following on the

exposures to advertising, promotions, word of mouth and social communications that encourages

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the use of one product over another) finally settles on two aspects; the expectations an individual

has about that product/service and secondly, the perception of worth applied to the acquisition.

Thus the first hypothesis is:

H1: Individual economic behaviour is defined by two variables; one representing the

physical aspects of a product/service and one that defines its worth.

Two conjoined hypotheses expand on the variables in the first hypothesis and posit:

H2a: The expectation an individual has of a product/service performance is not discrete

but rather is comprised of a range from some minimal expectation to a multifaceted

expectation of benefits and performance.

H2b: The perception an individual has of the worth of a product/service is not set nor

purely numeric but varies from a base cost to a discernment of subjective value.

A final hypothesis holds there is a relationship between expectations and perceptions

inclusive of the gradient within each that confirms the buying behaviour economic paradigm.

H3: an individual’s perception of worth, taken as a range from parsimonious to

appreciated value for a product/service is directly associated with the expectation of its

performance from a purely utilitarian or utility level to one of multiple benefits.

Research Method

The research format developed a short eleven point questionnaire that was administered

to a random selection of 112 adult shoppers drawn from an urban population in Canada. The

questionnaire used a general approach that included the objectives intrinsic to the stated

hypotheses. Data was then processed using SPSS to establish frequencies and correlation output.

The study is taken as a continuing work and the expectation is that ongoing research will refine

the inquiry and sharpen the results.

The terms in the research are couched more in a consumer behaviour context. Unlike the

word ‘utility’ used as the abstract concept in economics that indicates how much ‘happiness’ a

person might have from buying and owning a thing, utility in this discussion is a functional term.

Further, a product or service may be comprised of a number of utility functions in the form of

benefits that would represent a higher order of performance to the buyer. Thus a product or

service can be described as having a single worth or utility or any number of attributes, each of

which ostensibly provides an advantage or number of benefits to the buyer.

The concept of value requires some discussion. It suffers a number of uses, not all of

them consonant or comparable to economic treatment. The economist looks on value in

providing an economic statement as in ‘the value of an asset deriving from its ability to generate

income.’ Schumpeterxix

states “That it is society as a whole which sets values on things …. It is

evidently true, moreover, that form utility, the paper subscribes to the fact that marketing creates

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and provides further utility (usefulness or performance value) for the consumer. Utility is the

attribute in an item that makes it capable of satisfying wants. At the opposite end of the spectrum

a product, if value means "exchange-value," it is, of course, not fixed by any single individual,

but only by the action of all.”

Value is found in the association of benefits and costs. In this paper it is an expression of

the investment a buyer makes in time, effort and money in order to obtain a particular bundle of

benefits. It is the sum of all expectations an individual has about an item and goes beyond the

notion of pure monetary considerations.

Thus there are two principal dimensions that summate the motivations to purchase goods

and service in the exercise of economic behaviour, a utility – benefits expression and a cost –

value expression. These are the consequence of decisions arrived at through, and inclusive of

personal, psychological and social issues. They are also the consequence of market influences,

perceptions and experiences of the buyer. They constitute a paradigm that identifies consumer

choice and forms the basis for the behavioural economic model.

Statistical Testing and Reliability

The data was subjected to non-parametric asymmetric testing using Kolmogorov-

Smirnoff one sample test for distribution. All variables used were significant at the 0.00 level.

Testing for reliability using split-half samples established strong correlations at the 0.05 or less

significance level.

Results and Findings

The research shows that individuals in their search for a product/service are directed by a

number of expectations and perceptions. These were organized within the questionnaire as to

develop information supporting, or not, the individual buying behaviour expressed in the

theoretical paper.

The First Hypothesis

As to the first hypothesis respondents were asked to declare the two most important

factors guiding their

selection of a product or

service. The question was

posed following seven

prior questions that

exposed them to a number

of concepts and

statements that comprised

the general list of criteria

that might constitute

selection criteria.

Table 1.0 Primary Selection Criterion

Item Weighted

Rank*

First

Importance

Second

Importance

Product Performance 1 56.6% 17.4%

Product Cost 2 12.2% 38.4%

Advertised Special 0.9%

Brand Name 3.5% 7.8%

Product on Sale 7.0% 11.3%

Product Availability 1.7% 1.7%

Perceived Value of Product 3 18.3% 22.6%

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The results show product cost is a major factor, (91.5%) of a purchase decision and

product expectation of performance (74.0%) is the second major consideration in purchase

decision criteria. In determining what the worth of an item might be the concept of value is a

component of the estimation of worth and so this criterion which is the third factor as a key

selection criteria is therefore grouped with cost. Other variables in the selection of options

included “brand name” which is associated with product performance since there is the

expectation that a brand lends credibility to a product’s efficacy. On the other side the idea that a

product is “on sale” goes to the issue of cost or at least cost saving. In any case the data generally

establishes the two variable paradigm of the first hypothesis and generally confirms the

existence of a bi-variable parameter in the selection decision and not the simple “cost”

variable used in neoclassical economics...

The Second Hypotheses

The concept of variation within each of the two principle variables that individuals are

said to use in making a selection is also established in the research. Figure 1.0 was developed

from a scrambled arrangement of boxes and respondents were asked to join the most likely

response from each box that contained a product performance inference to a box that contained a

cost or value statement. The results indicate the linkage between product expectations and value

perceptions. As was anticipated the concept of a high value is associated with multiple benefits

and at the other end of the scale low prices or cost are tied to bare bones (utility) performance.

Combining first choice and second choices there is a value of 90.4% that conjoins value

with multiple benefits. High prices are associated with multiple benefits (85.2%) and negotiable

prices or costs were associated with average expectations, (93.0%). Bare bones performance

expectations or utility showed an 85.2% association with low price or cost.

This establishes the second hypotheses and sets the scene for variation in the two main variables.

The Third Hypothesis

Negotiable

Price

High

Price

Low

Price

High Perceived

Value Many

Benefits

Many

Features

Average

Performance

Bare Bones

Performance

90.4%

85.2%

93.0%

85.2%

Figure 1.0 Criterion

Variation

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The third hypothesis is generally established from the data output in Figure 2.0 using a

simple McQuittyxx

linkage analysis.

Figure 2.0 McQuitty Linkage Analyses of Criteria

The data was analyzed using Spearman correlations and the results at the 0.01 and less

significance level were included in Figure 2.0. Cluster One establishes a general relationship

between value perception and expectation of product performance. A negative correlation (-.305

between the ranking of buying on Brand or Label identification and making a decision to buy

selection based on Cost is All Important tends to confirm the hypothesis. This is further

established with the negative association (-.352) between ranking on the Decision to Buy based

on Performing Well and Cost is All Important. Here we see the perception that cost decision

likely means a lesser expectation of performance. The data is validated with the correlation of

Always Looking for the Best Bargain and Cost is all Important (.273) and Best Price Regardless

at .250.

Rank Buy on

Decision

Performs

Well 5

Rank Expect

Will Perform

Well 5

Cost is All

Important

Rank Buy on

Label/Brand Best Price

Regardless 7

Always look

for Best

Bargain 6

Perception of

Value 7 Perception of

Value 9

Value Based

on Benefits

.247 -.305

-.233

-.352

-.265

.280

.273

.366

ELA Cluster One

Rank What

Others Say

Rank

Brand/Label

Must Be a

Good Deal

Rank Basic

Performance

(Utility)

Rank

Number of

Benefits

-.414

-.405

-.259 ELA Cluster Two

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Cluster Two furthers the hypothesis with a negative value (-.405) between Rank Basic

Performance or Utility and the expectation of receiving a Number of Benefits from a product.

We also note negative correlation between Must be a Good Deal and the Rank of Brand/Label

which infers quality and good performance is not expected at a lower cost. Given these data the

third hypothesis is established. These correlations and others which are not included encourage

the creation of a new paradigm concerning economic behaviour based on market performance or

as might be inferred by market-economics, the “marconomics”of commercial activity.

Mythology of Supply and Demand

The research included an examination of purchasing activity when motivated by the idea

of supply and demand. When asked if they have ever purchased a product or service on the basis

of supply and demand most people did not or did not recall doing so, (61%). One –quarter (24%)

suggest they may have done so while 13% claimed they did. However when tested further as to

responding to utility maximization (See Question 13) most (94%) did not agree. When asked at

what price they would purchase a second item, having already purchased one item the majority

indicated that at one-third the value of the first purchase would they buy a second identical item.

The finding generally disproves the utility maximization principle. What it does tell us is

that at some very low price for an item, about the one-third cost level people would be persuaded

to take advantage of a bargain.

The Argument for Embracing Reality

There is a need to reappraise the concept of a demand curve with a more suitable

construct that is vested in human behaviour rather than imputed calculations from subjective

estimates of economic activity. It is suggested that in the structure of a product life cycle there is

a price curve that varies over time with volume. This representation is an historical reflection of

how a product or service performs in reality in the marketplace. A number of papers have

explored the linkage between price levels or demand configuration and the product life cyclexxi

and have generally found an association.xxii

In an examination of pricing levels and demand

configuration in the high tech industry, (computers, chips etc.), Li and Huexxiii

found that “the

timing of price changes and prices are strongly influenced by the demand diffusion pattern and

the change in the price-elasticity of demand over time. Specifically, inter-temporal price-

elasticity change causes the prices to decrease over time, and the duration of each price to

increase over time.”

Simon’s earlier study based on an “empirical study of 35 products reveals typical changes

in price elasticity over the life cycle gives support to the conclusion that the magnitude of price

elasticity decreases over the introduction and growth stage, reaches its minimum at the maturity

stage, and again increases during the decline stage.” In an examination of high tech and

supermarket goods Melser and Seyid (2007) found the behaviour of prices for these goods over

their life cycle generally declined with time or the maturation of the product. This was more

emphatically the case with high tech items in contrast to more prosaic consumer goods. They

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were unable to associate whether there was a relationship between price behaviour and

extraneous factors such as “declining costs, increased competition, customer segmentation or

other reasons. One interesting feature of the results was that in the initial months of a good's

introduction they often appear to be discounted. This `pricing lip' is then followed by a more

protracted and significant decline in prices.” Their key empirical finding was that the age of a

product was directly tied to its price level with a decline over time to final discount at the end of

the cycle.

The product life cycle is a response to the socially determined adoption of innovation

curve first expressed by Everett Rogers.xxiv

It establishes a relationship between behaviour of

individuals in accepting new products and services which essentially drives the product life cycle

and develops a distinctive price pattern. The implication is that the classical determination of a

demand curve, which is not adequate as a reflection of human economic behaviour could instead

use the platform of the anticipated form a product might well take as it matures and reaches a

decline stage. Recently research has begun using varying techniques to establish a demand curve

figurationxxv

. The author proposes a method for estimating a demand curve using available data

sources and statistical methods that can be applied to produce strategies for firms struggling to

gain competitive advantages in the market place. The methodology is not based on subjective

estimates surrounded by questionable assumptions but a technique that scans relevant data and

uses it for analyses focusing on marketing interests.

Conclusion from the Research

There is much work to be done in examining the potentiality of marketing precepts or

consumer behaviour factors in establishing a relationship between consumption of goods and

services and price levels. For decades the discipline has ignored the potential from such reality.

As T. Leonardxxvi

points out in his review of Schumpeter it is no accident. Schumpeterian

subjects – innovation, entrepreneurship, business strategy – form the very heart of business

school curricula. And Schumpeterian ideas remain influential decades after his death, in

departments of politics, sociology and history to which one would add business and managerial

studies. But they are mostly ignored in Economics departments, in large part because they have

proven too difficult to formalize – to fit into the maximization cum equilibrium method that still

defines academic economics. Perhaps things may change and when faced with reality there may

be some shift to embracing the reality of the marketplace and incorporating live data to direct

market forces and economic or marconomic thinking.

Inference in Regard to Future Curricula in Economics

The proposed new direction would be to offer a rationally ordered discussion that is a

more contemporary explanation of economic behaviour. It would establish the genesis of

economics as the outcome of human behaviour when engaged in the process of improving

her/his well being. It should also look into the creation and dissemination of wealth within a

region and globally by entrepreneurial individuals.

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Marconomics

The notion of neoclassical demand is redundant and can be replaced by the Performance-

Worth Paradigm that represents actual purchasing behaviour. The field presents the opportunity

to pursue a field of study of behaviour as to increase, change and perhaps stimulate economic

activity. The paradigm explains a range of

economic behaviours. Firstly the validity is

established in the correlation of worth with

performance. Both of these are real variables that

explain the decision making process in economic

selection. Secondly we find we are dealing with a

variable that allows for the range of estimates for

both the performance and the valuation process and

this more easily lends itself to accommodating

human variability and any number of causal effects as one would expect in basic economic

activity.

The two variables can be used to form a macroeconomic model that categorizes purchase

activity into four quadrants; each reflecting different motivations and consequences in economic

activity.

The Economic Activity Grid

By arranging the abscissa and the ordinate lines at the intersection point we develop a

four quadrant figure; a Market Forces Modelxxvii

that explains the behaviour of products/services

and businesses in the economy. Products are born

in the alpha () quadrant which is the domain of

the entrepreneur and as it proceeds through a life

cycle transit the firm moves to the beta ()

quadrant, the realm of price-cost leadership and

eventually into decline.

The Model presents four quadrants each of

which occupy a definable sector of the economy in

the context of marketing concepts. The initiation

of a new product is seen to occur in response to the needs/wants/desires of some portion of a

population for newer goods that are either technologically or socially innovative. Here we find

the genesis of all business and economic activity. It reflects an alpha economy where the

demand is for goods and services that are perceived as having significant value and command a

strong price position.

On the other hand the beta economy sector is taken at a product demand position where

there are now competitors, all vying for a market share with similar products, little discernible

differentiation and relying on competitive pricing. In most cases the strategy is to maintain price

14

leadership through cost reductions and smaller margins; hopeful of volume sales to generate

adequate profit. Failure to maintain a position in this sector leads directly to sales decline and

possible failure.

The beta sector is governed by economies of scale and productivity issues.

Products in this sector take on the nature of a commodity where the determinant of purchase is

generally on price. The low cost leader in any market gains competitive advantage in being able

to produce at the lowest cost. Factories are built and maintained, labor is recruited and trained to

deliver the lowest possible costs of production; 'cost advantage' is the focus. Costs are shaved

from every element in the value chain. Products tend to be 'no frills.' However, low cost does not

always lead to low price. Producers can price at competitive parity, exploiting the benefits of a

bigger margin than competitors. Some organization, such as Toyota, are very good not only at

producing high quality autos at a low price, but have the brand and marketing skills to use a

premium pricing policy.

The business requirement is to constantly innovate and improve the product/service mix.

In the case of small firms in small economies the need to improve is vital to their survival in the

global marketplace. Stronger and larger firms are easily able to replace the product mix of the

smaller firm and drive them out of business. So if they are to survive they must either improve

their products through innovation or seek newer responsive niches. Either way smaller firms find

it difficult if not impossible to survive in the beta sector.

These quadrants set the scene for business competition and establish an entirely different

approach to economic analysis. It is not the purview of this paper to elaborate on the direction of

the new marconomic direction. It does allow some discussion at least for an alternate economic

examination.

The Need to Revise Instruction in Economics

The research challenges conventional thinking. It verifies the critiques from countless

academics and economic thinkers who have declared the present material in economics is

redundant. In fact there is strong argumentation that most of the nostrums or dogmas are

redundant. Consequently it is proposed that a new program in economics be created. The

development of a program would examine nine traditional accepted beliefs that are used in the

development of classical economics followed by an alternative market oriented theory for that

title, in italics. Each of the following conventions can be examined in contrast to what is now

more appropriate as a descriptor of economic or marconomic activity. Demand theory is no

longer acceptable so can be replaced by a new set of principles based on market behaviour.

Equilibrium is no longer relevant and is replaced by a study of `creative destruction. The

fictional construct of comparative advantage is best seen in the principles of the Porter

diamond2xxviii

. The new program of study would present the classical position of each belief or

“law” and then replace it with a more realistic economic thesis which is based on the social

sciences. The nine major beliefs are:

1. Land, capital and labour – augmented by entrepreneurship & knowledge

2

15

2. Demand theory – replaced by the market forces paradigm

3. Equilibrium - entrepreneurial disequilibrium, innovation & creative destruction

4. The Theory of the Firm – the role of creative entrepreneurial management

5. Comparative advantage – replaced by competitive forces governing trade

6. Economies of Scale – in perspective with social cost and technology

7. Market systems – conscious and sustainable free enterprise

8. Consumption – replaced by production metrics

9. Capitalism – compared to enlightened self interest and conscious capitalism

An additional section would be included that examines a school of economic thinking

that is entrepreneurial and market or consumer oriented; the -

10. Austrian School of Economics.

Endnotes

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Drucker, Peter F., The Age of Discontinuity: Guidelines to Our Changing Society, Harper’s Row, Publishers, N.Y.,

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Saul, David, Lectures on the Massey Series, 1996. v Butler, John Sibley, “The Science and Practice of New Business Ventures: Wealth Creation and Prosperity through

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June 7th – 8th

, 2008. xBlawatt, Ken R. Efficacy Of The Ubiquitous Demand Curve: Argument For Its Replacement Using Product Life

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Paradigms and Practices in Business Management & Technology ;Review of Business and Technology Research

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xvi Hansen, Torbin, “Consumer Decision-Making: A Research Note,” unpublished paper, Associate Professor, Ph.D.,

Department of Marketing, Copenhagen Business School, Solbjerg Plads 3, 2000, Frederiksberg, Denmark. E-mail:

th.marktg@cbs.dk

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xvii

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www.princeton.edu/~tleonard/papers/McCraw.pdf xxvii

Blawatt, Ken R., “A Market Forces Model of Economic Behaviour: Defining Entrepreneurship and

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Sweden, June 7th – 8th

, 2008. xxviii

Porter, M.E. The Competitive Advantage of Nations. New York: Free Press. (1990)