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Foundations of Economics: Beginner's Companion by Yanis Varoufakis

Routledge • 1998 • 396 pages • $100.00 cloth; $32.99 paperback

This is an angry book. The administration of the University of Sydney, Australia, where Varoufakis is a senior lecturer in economics, did something in 1997 that “with a stroke of brilliance destroyed the atmosphere of collegiality and public spiritedness” that had previously characterized efforts to make the introductory economics course “a decent educational experience for the students.” The administration thereby released Varoufakis, he writes, “from any moral imperatives, namely teaching introductory economics passionately,” and led him to turn this book “into a kind of a testimonial.”

The author never discloses exactly what the University of Sydney did. But if he and his colleagues were introducing undergraduates to economics in the manner that this book recommends and exemplifies, I know what it ought to have done: It should have told them to choose between teaching introductory economics in a reasonable way or turning the course over to someone who would.

Varoufakis does not disclose whether he was required to teach general equilibrium theory in the introductory course or whether he (and his colleagues) decided on their own that general equilibrium theory was the best form in which to present it. And there is another possibility. Disliking standard economic theory intensely, they decided to teach it in a form that was most likely to repel college students encountering economics for the first time.

The author tells us that the book was designed to complement conventional introductory economics textbooks and to relieve the “monotony and austerity” that is usually associated with them. If Varoufakis is a charismatic teacher, he may be able to teach this book along with a standard text without inciting a student rebellion. However, for anyone who is not both charismatic and thoroughly committed to the author’s views on (1) the nature of economic theory, (2) the history of economics, (3) the insightful and illuminating character of very simple Marxian economic analysis, (4) the ideological nature of all social thought, and (5) the impossibility of testing any theory with reference to facts, I would counsel strongly against the attempt. No sensible economist who reads this book would assign it for an introductory course.

My comments will be directed to the first, third, and last of the views just listed. I have spent a little time in Australian universities and suspect that academic economists in Australia try harder than economists anywhere else to make the undergraduate degree a professional degree. But even they, so far as I know, don’t begin with formal general equilibrium theory and all the unrealizable conditions it assumes.

There are versions of introductory economics that owe more to F. A. Hayek, Ronald Coase, and Douglass North than to general equilibrium advocates like Leon Walras and Gerard Debreu. Whatever might be true of advanced economic theory texts, introductory ones do not have to be “monotonous and austere.” Textbooks modeled after the pioneering efforts of Armen Alchian and William Allen induce more students to go on to advanced work in economics than do books that confine themselves to technicalities remote from the students’ experience and without application to the issues of the day.

The Marxian perspective Varoufakis prefers to the “austere” theory he first presents is one that has the capitalist appropriating all the surplus value produced by the laborer and thereby causing every economic ill from business cycles through decreasing real wages and the stifling of economic progress. His Marxian outlook renders him oblivious to anything that has happened in the twentieth century except perhaps the Great Depression. But Varoufakis, because he does not believe that theories can be either confirmed or refuted by facts, allows himself to make sweeping assertions about what’s wrong with the world and what must be done to repair it on the basis of a theory that is far more melodramatic than plausible.

Varoufakis quotes none other than Ludwig von Mises in support of his claim that we cannot use facts to test economic theories. Mises maintained that the basic theorems of economics were a priori truths, not derived from experience and therefore incapable of empirical refutation. Whether or not one agrees with that position, Mises was decidedly not saying that the basic theorems of economics are arbitrary assertions grounded on nothing more than the political or ethical preferences of the economist. It is frightening to encounter people who, like Varoufakis, assert that there is no truth (which Mises never claimed), while vehemently demanding radical changes in long-established institutions.

Recall that the author intended this book as a testimonial. Its publication is an unintended testimonial to the fact that a significant number of economists are still unaware of all that has gone on in economics in the past quarter century to transform the mainstream from a “monotonous and austere” collection of theorems to a powerful framework for understanding society.

Paul Heyne is senior lecturer in economics at the University of Washington.

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