The purpose of modern economic theory
The purpose of modern economic theory
Mainstream modern economic theory brands itself as objective, value free research. This type of research is also called positive economics. In 1953, Milton Friedman, the most prominent proponent of positive economics, published the famous essay, The Methodology of Positive Economics, which largely defined positive economics and modern economic theory. In which, he wrote,
"I venture the judgment, however, that currently in the Western world, and especially in the United States, differences about economic policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action—differences that in principle can be eliminated by the progress of positive economics—rather than from fundamental differences in basic values, differences about which men can ultimately only fight.
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If this judgment is valid, it means that a consensus on 'correct' economic policy depends much less on the progress of normative economics proper than on the progress of a positive economics yielding conclusions that are, and deserve to be, widely accepted."( Friedman, 1953, p. 6)
The statement of "disinterested citizens" is logically inconsistent with the basic assumption in economic theory that all people are motivated by self interest.
Friedman’s argument is the classic defense of "value-free" positive economics:
The Assumption of Consensus: Friedman assumes that "disinterested citizens" already agree on normative goals (e.g., everyone wants poor people to earn a living wage, or everyone wants societal well-being).
Shift to Technical Prediction: Because the goals are assumed to be agreed upon, the only remaining work for the economist is the technical, positive task of predicting whether Policy X or Policy Y actually achieves that goal.
But is there truly a consensus on goals? When economic models prioritize market measures (like GDP or stock indices) over fundamental social health (like replacement fertility rates or family stability), economists are not simply evaluating neutral "means to an agreed-on end"—they are embedding a silent value judgment about which ends matter in the first place.
How “disinterested” is Friedman himself? Friedman and Hayek both are staunch supporters of Pinochet dictatorship. After visiting Chile, Friedrich Hayek wrote,
"I have not been able to find a single person even in much maligned Chile who did not agree that personal freedom was much greater under Pinochet than it had been under Allende."
Apparently, Hayek didn’t count many who were imprisoned or the families of those who were brutally murdered by the Pinochet regime even as “a single person”. He never bothers to listen what they have to say. How disinterested they are!
It is clear that there are winners and losers from every policy. To deal with this situation, a new term, Pareto optimality, was created to replace simple optimality. Pareto optimality does not require total utility to be at a maximum, but only that it be impossible to make one person better off without making some other person worse off. It is a very conservative criterion since it disapproves of all efforts to redistribute income or wealth, even if doing so would increase the total utility of the population. For example, in North Korea, the Kim family enjoys great power and privilege. Any change of the social system, even if highly beneficial to the North Korean people, will harm the Kim family. Thus, the North Korean system is Pareto optimal! In a world with eight billion people, a social system that benefits a single person at the cost of eight billion people is Pareto optimal. Indeed, any existing or once-existing social system benefits the ruling elite and is actively defended by the ruling elite. They are all Pareto optimal. Whatever the original intention for the early developers of the concept of Pareto optimality, it has become the defender of the most oppressive social systems in the world.
Because any social system is Pareto optimal, standard welfare economics relies instead on the Kaldor-Hicks Efficiency Criterion (or Cost-Benefit Analysis):
Kaldor-Hicks Efficiency: A change is efficient if those who gain could theoretically compensate those who lose, and still remain better off.
Suppose there are one billionaire and and a thousand workers in a society. A policy will increase the wealth of the billionaire by two million and reduce the wealth of each worker by a thousand. The total loss of all workers is one million, which is less than the two million gain by the billionaire. The policy is Kaldor-Hicks efficient.
This government policy makes the society more unequal, making the billionaire richer and the working class poorer. From the billionaire's and the government's perspective, the society will enjoy more of the low cost advantage by making the working class poorer. It is not surprising that many policies will make a society more unequal. This is a trend during the peace time, when the ruling class worry less about the rebellion by the working class, as pointed out by Walter Scheidel in his The Great Leveler.
Another theory to defend inequality is the Coase Theorem developed by Ronald Coase. It states that if property rights are well-defined, private parties can bargain to resolve spillovers (externalities) efficiently without government intervention. In other words, wealth distribution is irrelevant to economic efficiency. Coase Theorem is frequently invoked in the privatization process in Soviet Union and China to justify small number of powerful people controlling large amount wealth.
Mainstream economists often claimed that Coase theorem was misapplied during the process of privatization in Soviet Union. But the privatization process was advised by the most authoritative and most capable economists. During the 1990s, the US government (via USAID) funded the Harvard Institute for International Development (HIID) to oversee the restructuring of the Russian economy. The project was led by elite Harvard economist Andrei Shleifer. The families of Shleifer and other insiders profited greatly from their privileged positions. In 2000, the U.S. Department of Justice sued Harvard and Shleifer for fraud and breach of contract. In 2004, a federal judge found Harvard liable for breach of contract and Shleifer liable for conspiracy to defraud.In 2005, Harvard settled the lawsuit by paying $26.5 million—the largest settlement in the university’s history at the time—while Shleifer personally paid $2 million.HIID was permanently disbanded. The Soviet privatization project was advised by the most prominent mainstream economists. If they “misapply” Coase’s theory, who else could avoid the same problem?
Invoking Coase’s theory allowed economic advisors and political elites to dismiss moral, legal, and distributional concerns. It gave a veneer of scientific necessity to what was essentially a massive transfer of state wealth to political insiders and oligarchs. This is the real reason why Coase’ theory was “misapplied”, or applied.
Why is the mainstream economic theory so easily to be “misapplied”? In his famous 1953 essay, The Methodology of Positive Economics, Milton Friedman made a claim that has become the orthodoxy of modern neoclassical economics:
Truly important and significant hypotheses will be found to have "assumptions" that are wildly inaccurate descriptive representations of reality. (Friedman, 1953, p. 14)
By making assumptions detached from reality, they can justify any policies that benefit the ruling class.
Presenting economic policy as an objective, value-free "science"—devoid of class interest or distributional conflict—allowed mainstream economists to frame political choices as mathematical necessity rather than ideological preference.
By reducing all human friction, exploitation, state violence, and social struggle into the single, neutral phrase "transaction costs," Coase’s economic theory depoliticized human conflict. The fundamental asymmetry of power—who has the guns, who owns the capital, and who is starving—is subsumed under a clean administrative label.
When economics transforms structural oppression into a mere "market friction" to be optimized, it erases the central reality of political economy: that economic rules are chosen by the powerful to favor the powerful.
Mainstream economic theory is both a weapon and a product of selective suppression:
1. Friedman’s methodology allowed economics to pretend to be a pure science while promoting policies that served capital over labor.
2. Coase’s framework turned systemic power, coercion, and political struggle into sterile "transaction costs."
3. Realistic economic models—those that explicitly account for power, conflict, and flawed human institutions—were systematically pushed to the margins because an economic theory built on realistic assumptions about power makes elite exploitation far too visible.