Pity the discipline of economics! It has tried so hard to win the respect of all as a “science.” It even gets an annual prize in Sweden mimicking the Nobel Prizes for natural sciences. That may assuage its “physics envy” for a while. For most of us, however, economics is the “Rain Man” of academia. It has an impressive command of models and facts, and yet seems to be strangely out of sync with the realities of economic life. How do we explain this?

Over at The Distributist Review, John Médaille offers a few suggestions on this in the course of his review of a new book by Robert E. Prasch, How Markets Work: Supply, Demand and the ‘Real World.’ I have not yet read Prasch’s book. If, however, Médaille’s review does it justice, then How Markets Work should be in every progressive’s library. The reason is that it seems to offer a paradigm shift in thinking about how supply and demand determine prices and, most importantly of all, wages.

It’s hard to overstate how important the theory of supply and demand is for economists. A standard supply and demand graph, showing a supply curve and a demand curve intersecting at a point of equilibrium, is for economists what a crucifix is for Catholics. It is the central symbol expressing their world-view. Likewise, the fundamental doctrines associated with them are held by their orthodox adherents to be beyond doubt.

Now, John Médaille is an orthodox Catholic, but a heterodox economist. (Which is logically consistent, since nowhere in the Bible does Jesus say to Milton Friedman, “I give unto thee the keys to the kingdom of supply and demand.”) Médaille’s review outlines some ways in which standard economics creates a distorted picture of the real world.

The first is abstracting from the social, cultural and political context of markets. Economists and pro-free market ideologues like to speak of “the market as if it were some Platonic entity,an ahistorical and ideal thing-in-itself existing apart from the legal institutions of a particular society. In fact, there is no such thing as a “market without law.” Although Adam Smith was right to say that people have a natural urge to “truck and barter,” it is through a legal system that defies and modifies property rights, contractual forms, and other presuppositions of a free market economy that give a market its shape and character. There are as many markets as there are legal systems.

Second, the standard supply and demand graph really works only for commodities such as wheat, grain, and pork bellies. They are least effective in plotting out the dynamics of wages. One of the elements that make the price of labor different from the price of a pork belly is that a workeris driven out of necessity to earn some kind of wage. For a worker to withdraw his or her “supply” from the market may mean starvation or death. The result is that there are two or three equilibrium points, not just one, for determining a wage.

I’ve only given a bare-bones account of Médaille’s review, and I recommend reading the whole thing. But the bottom line, so to speak, is that textbook economics is able to create a logically and mathematically rigorous model, but only at the expense of selecting out vital facts that leave its model more a caricature than a true portrait of real life. As G.K. Chesterton said: “The madman is not the man who has lost his reason. The madman is the man who has lost everything except his reason.”