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5Chapter 1PERPECTIVES ON MICROECONOMIC THEORYINTRODUCTIONEconomics is all about tradeoffs. The concept of “opportunity cost” reminds us that in order to make a purchase, or even to make use of a resource that you control (such as your time), you must give up other possible purchases or other pos-sible uses. Markets broaden the range of possible tradeoffs by facilitating exchange between people who do not know each other, and in many cases never meet at all. Think of buying a pair of athletic shoes in Atlanta from a company based in Los Angeles that manufactures shoes in Malaysia and has stockholders all over the world. As the idea of gains from trade suggests, markets allow many exchanges that make both parties better off.But markets have severe limitations as well. The economic crisis that began in 2008 has made those limitations all too clear. Even lifelong free-marketeers such as former Federal Reserve chair Alan Greenspan have been forced to question their belief in the “invisible hand.” In the chapter’s first article, economist Marty Wolfson critiques a mainstream “free market” ideology that views markets as delivering to each person their just rewards, based on their talent or effort. In fact, he argues, markets are often struc-tured in ways that stack the deck in favor of the wealthy and powerful (Article 1.1).Markets and price determination, in neoclassical economics, have been ideal-ized into an elegant, utility-maximizing perfection. Chris Tilly, in “Shaking the Invisible Hand” (Article 1.2), uncovers the curious assumptions necessary to allow for the market mechanism to be the most efficient allocator of scarce resources. He provides us with eight “Tilly Assumptions” underlying perfectly functioning mar-kets. If any of these assumptions is violated, then there is a possibility of “market failure,” or less-than-optimal market results. In “Pursuing Profits—Or Power?” (Article 1.3), James K. Boyce questions the assumption that the firm seeks to maximize profits alone. In Boyce’s view, a great deal of business behavior (especially political behavior) suggests that corporate deci-sion-makers often put the pursuit of power above profits.Alejandro Reuss provides us with a clear discussion of the idealized neoclassical view of exchange, with a particular focus on labor markets, in “Freedom, Equity,
6 | REAL WORLD MICROand Efficiency” (Article 1.4). Ideal neoclassical markets offer the promise of free-dom of choice, equity (fairness), and efficiency, but often fail to deliver on all three counts. Reuss walks us through these neoclassical standards and contrasts them to the not-so-rosy reality of unrestrained labor-market competition.In “(Economic) Freedom’s Just Another Word for ... Crisis Prone” (Article 1.5), John Miller provides us with another example of the rhetoric of “free mar-kets” not matching the reality of the claims. The annual Heritage Foundation Index of Economic Freedom for 2009 not only undermined the “efficiency” claims of