What is heterodox economics?

New working paper published by the Centro di Ricerche e Documentazione Piero Sraffa. From the abstract:

 This paper critically analyzes Geoffrey Hodgson’s definition of heterodox economics as the refutation of the orthodox view that emphasizes utility maximization as its main theoretical core, and his view that it is the fragmentation of heterodox economics that explains its subsidiary role within the profession. Hodgson’s views led to a series of responses, that criticize his definition, but also present significant problems of their own. The limitations of Hodgson and his critics’ views are contrasted with an alternative definition that emphasizes the importance of conflictive distribution and the principle of effective demand in the long run. The idea of a broad tent, from a sociological point of view, does not preclude the need for a clear analytical definition of heterodoxy. The broad tent should be seen as part of a strategy of survival.

Link here.

Life among the Econ: fifty years on

By Thomas Palley (Guest blogger)

Almost fifty years ago, the Swedish econographer Axel Leijonhufvud (1973) wrote a seminal study on the Econ tribe titled “Life among the Econ”. This study revisits the Econ and reports on their current state. Life has gotten more complicated since those bygone days. The cult of math modl-ing has spread far and wide, so that even lay Econs practice it. Fifty years ago the Econ used to say “Modl-ing is everything”. Now they say “Modl-ing is the only thing”. The math priesthood has been joined by a priesthood of economagicians. The fundamental social divide between Micro and Macro sub-tribes persists, but it has been diluted by a new doctrine of micro foundations. The Econ remain a fractious and argumentative tribe.

Read paper here.

Inequality and Stagnation by Policy Design

By Thomas Palley (guest blogger)

This paper argues the mainstream economics profession is threatened by theories of the financial crisis and ensuing stagnation that attribute those events to the policies recommended and justified by the profession. Such theories are existentially threatening to the dominant point of view. Consequently, mainstream economists resist engaging them as doing so would legitimize those theories. That resistance has contributed to blocking the politics and policies needed to address stagnation, thereby contributing to a political vacuum which is being filled by odious forces. Those ugly political consequences are unintended, but they are still there and show the dangerous consequences of the death of pluralism in economics. The critique of mainstream economists is not about “values” or lack of “change”: it is about academic practice that suppresses ideas which are existentially threatening.

Read rest here.

The Unreal Basis of Neoclassical Economics

By Al Campbell, Ann Davis, David Fields, Paddy Quick, Jared Ragusett and Geoffrey Schneider

originally posted here

Introduction
Ten years after the financial crisis, we still find mainstream economists engaging in overly simplistic analysis that does not accurately capture the dynamics of the real world. People studying economics need to know that the principles of mainstream economics are hopelessly unrealistic. In this short article, we demonstrate that the ten principles of economics in Gregory Mankiw’s best-selling textbook are divorced from reality and reflect an extreme and unwarranted bias towards unregulated markets.[ii] Mankiw’s “Ten Principles of Economics” should more accurately be titled “Ten Principles of Unrealistic Neoclassical Theory.”

Mankiw’s Principle #1:  People Face Tradeoffs/There is no such thing as a free lunch.
Mankiw ignores the historical determination of the distribution of resources and the crucial distinction between those whose income comes almost entirely from the performance of labor and those whose income comes from their ownership of capital. As a result he is unable to recognize the political power that results from the concentration of wealth in the capitalist class, and to analyze the distributional impact of decisions in which those who gain are often significantly different from those who lose. In addition, history is full of accounts of forcible appropriation of resources that appeared to be “free” to those who acquired them.

Mankiw’s Principle #2:  The Cost of Something Is What You Give Up to Get It/Opportunity Cost
Insofar as individuals are able to make decisions, their choices can be described as “giving up” one opportunity in order to take up another. This tells us nothing about the determination of the choices that are available to them. The “choice” of a worker as to whether to take on a dangerous job or face eviction from a home requires a very different analysis than one suitable for a discussion of the choice between apples and oranges. On a different level, an analysis of the “trade-off” between income now and increased income in the future requires an understanding of ecological limits to the growth of material production.

Mankiw’s Principle #3:  Rational People Think at the Margin.
Neither consumers nor producers, nor humans in many other social roles, generally act on the margin. The assertion of marginal analysis that decisions must be such as to equate marginal benefit with marginal cost is simply a restatement of the first derivative condition resulting from maximization subject to a constraint, rather than a reflection of real human choice. Mainstream theory then defines behavior according to this mathematical construction even though it does not govern actual choice in the real world. But more important is the presumption that all decision-making is guided by the well-being of isolated individuals, and thus that “rationality” consists of behavior that maximizes the benefit of the individual decision–maker. This dismisses the fact that people are social animals whose decision-making recognizes the interaction between individuals, and it ignores how in the real world people make decisions considering their whole situation under possible alternatives, material restraints, imperfect information, their cognitive abilities, the existing power structures, and culture.

Mankiw’s Principle #4:  People Respond to Incentives.
This is tautological. Furthermore, models based on monetary incentives by selfish, isolated individuals and firms in perfectly competitive markets are unrealistic and ignore crucial real world issues. Monetary incentives are not all that matters. In the real world people make many decisions on the basis of their evaluation of the resulting well-being of many people beyond themselves, or on social and cultural norms.

Mankiw’s Principle #5:  Trade Can Make Everyone Better Off.
Trade can increase total production, but trade has distributional impacts, with winners and losers. Trade in modern capitalism tends to foster inequality while undermining wages and working conditions for many laborers. This principle promotes unregulated trade, but unregulated trade has not proven to be the best route to economic development, nor is it good for all people. In the real world, infant industries, immiserating growth, terms of trade shocks, and increasing inequality render this principle useless as a policy guide.

Mankiw’s Principle #6:  Markets Are Usually a Good Way to Organize Economic Activity.
As there are no measurable units by which one can classify all specific economic activities in the real world as “good” or not, principle #6 is nothing more than a neoclassical ideological declaration of faith. Markets are human creations that operate differently in various economic systems, and the various existing and potential economic systems themselves are human creations. The first real question then is if under an existing system private capitalist markets driven by the profit motive do better than possible alternative human creations for providing the good or service, potentially driven directly by the desire to meet specific human needs. Important examples providing evidence of the inferior performance (efficiency and effectivity) of private capitalist market-driven systems are well run social security systems and single-payer health care systems. Avoiding the error of accepting the system as given, a deeper question would be if under some different economic system, which was not built to favor capitalist accumulation, alternatives could outperform profit-driven markets operating in capitalist systems.

Mankiw’s Principle #7:  Governments Can Sometimes Improve Market Outcomes.
Behind this assertion is the idea that markets are natural and could run without any government intervention, and that such natural markets tend to be efficient but sometimes are not quite optimal. In those cases the efficiency of markets could be improved by government tweaks. To the contrary, in the real world all markets are created by governments, which both establish the rules of the game and enforce them, and thereby determine market outcomes. If the government passes laws requiring that food be safe, that changes the market for food, and yields different market outcomes than if those laws did not exist. With this understanding, principle #7 is reduced to the not very profound statement that because governments create markets, they have the ability to create them with better or worse outcomes. Further, the issue always ignored by neoclassical economics of social divisions is particularly important for considering “better market outcomes”: better for whom? Market rules are shaped by power structures to benefit some classes and other social groups more favorably than others (for example capitalists at the expense of workers, First World countries at the expense of Third World countries, etc.).

Mankiw’s Principle #8:  A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.
Higher GDP per capita does not necessarily result in a higher material standard of living for all people within, as well as between, countries. Furthermore, neoclassical economics operates with a definition of “standard of living” as the amount of goods and services consumed, so this principle reduces to the not quite tautological, but not very insightful, claim that the amount of goods and services consumed in a country depends on its ability to produce them. In the real world what people are concerned with is their quality of life, which includes social respect, power to act on one’s desires, conditions of work (and not just pay), social relations, and much more. Neoclassical economics does not address the extension of principle #8 to what people in the real world are actually concerned with, their quality of life, for which the goods and services produced are just one among many determinants.

Mankiw’s Principle #9:  Prices Rise When the Government Prints Too Much Money.
Since the neoclassical definition of “too much money” is the amount that makes prices rise, this is a tautology. In the real world the relationship between prices and the money supply is complex: expanding money might cause a jump in prices or it might cause no price increases at all, depending on many other things in the economy.  The applied policy transformation of this into the incorrect claim that “prices rise when the government prints more money” is an ideological artifice, used today to justify austerity policies and keeping wages low.

Mankiw’s Principle #10:  Society Faces a Short-Run Tradeoff between Inflation & Unemployment.
The relationship between inflation and unemployment is complex and does not follow a systematic pattern. By the 1970s data from the real world had caused textbooks to go from Phillips Curves to Shifting Phillips Curves to abandoning them entirely. In view of that experience, principle #10 of a short-term trade-off between inflation and unemployment has become a neoclassical ideological justification for challenging those who advocate policies that would reduce the rate of unemployment, by fostering fears of inflation that may never materialize.
In conclusion, Mankiw’s so-called “Ten Principles of Economics” ignore crucial realities of the economic world. In particular, Mankiw excludes power imbalances, inequality, social forces, development experiences, the realities of market behaviors, laws and outcomes, realistic measures of quality of life, and recent macroeconomic data from his principles. It is hard to imagine a less useful set of ideas to guide modern societies in designing a good economic system. Unfortunately, almost all other mainstream principles of economics textbooks parrot these same principles. Students of economics will have to look elsewhere for useful analysis of the economy and how to build a democratic economy and society that works for all.

References
Mankiw, Gregory. Principles of Economics, 7^th Edition. Stamford, Connecticut: Cengage. 2015.

End-notes
[i] In a subsequent article, we will offer a set of principles of radical political economy to provide a more realistic, alternative approach.
[ii] The authors are members of the steering committee of the Union for Radical Political Economics (URPE). The ideas presented in this article are those of the authors and not of URPE. The purpose of this article is to make readers aware that there are alternatives to the principles of economics put forth by mainstream economists. We synthesize the critiques of mainstream economics by radical political economists in order to give students and teachers ammunition to confront the unrealistic paradigm of neoclassical economics that currently dominates the profession.

On mainstream Keynesianism

Looking up to Galbraith

The ASSA Meeting was this last weekend in Philadelphia. It was the bomb... cyclone (Nate Cline's joke; I'm sure many others too came up with that one). I don't have much to report actually. I did participate in one section, and will post a link to a preliminary version of my paper soon. I was at the Economists for Peace and Security (EPS) dinner, that honored Jamie Galbraith. This blog was named Naked Keynesianism, as you may know, because years ago Fox News accused him of teaching naked Keynesianism, and I thought that was both funny and a reasonable name for the stuff I did.

Anwar Shaikh was at the dinner, and suggested that Jamie has one foot in each side of the heterodox/orthodox divide, as a result of his paternal influence (Richard Parker noted that as father/son duos come, the Galbraiths do much better than the Friedmans or Steins, and as well as the Gordons), and that for that reason at EPS (presided by Jamie for more than 20 years) we got accustomed to be less segregated from the rest of the profession. That seems about right.

And to prove Anwar right, Joseph Stiglitz was at hand to discuss Jamie's many achievements, and  the many battles, including the one on Greece's debt crisis, and that is far from over, that he fought with Jamie.* Yet, while on policy issues there have been many battles that reasonable, and progressive mainstream Keynesians have fought with heterodox economists (a topic discussed here before), there are important differences between heterodox Keynesians, and their mainstream counterparts. For example, check Stiglitz's new paper on the last issue of the Oxford Review of Economic Policy (OREP).

He acknowledges that: "the economy does not quickly return to full employment," and that "simple models have been constructed investigating how structural transformation can lead to a persistent high level of unemployment, and how, even then, standard Keynesian policies can restore full employment, but by contrast, increasing wage flexibility can increase unemployment." That is essentially correct, and I should add, that perhaps Stiglitz has gone further than most mainstream economists pushing the need for the limits of what he refers to as equilibrium models (mostly of the Monetarist and New Classical/RBC type). But essentially his critiques derive from information problems and limits to rationality, coming from behavioral economics insights.

I often think of Olivier Blanchard when I have to discuss the inability of reasonable mainstream Keynesians incapacity to break with old ways of thinking. Perhaps because of his role until recently at the IMF (now that role was taken over by Maurice Obstfeld). Blanchard tells us in his new paper in the same issue of OREP that: "current DSGE models are flawed, but they contain the right foundations and must be improved rather than discarded."

This is essentially the point of Blanchard's paper on the natural rate too. He essentially suggests that not only the natural rate hypothesis is theoretically reasonable, but that it is relevant for policy makers. Not surprisingly the IMF has not changed its views on macro policy that much (on that see my previous post and the several links to older stuff).

Of course Jamie long ago suggested that the the concept of the natural rate itself should be abandoned. And he did it in the Journal of Economic Perspectives, a journal that was supposed to showcase alternative views in pluralist fashion, but that has failed in being inclusive of heterodox traditions. The inability to ditch the natural rate, even in the face of the last financial crisis (and something that Keynes suggested in the GT) is the main persistent failure of the mainstream.

* Stiglitz acknowledged that Jamie has been studying inequality since before Piketty made it a fashionable topic.

What economists do?

Nothing more profound here on the perils of being an economist. And nothing (not in this post, at least) on the interest rate hike (more on that later; it will be announced at 2pm). Just a table I came across from a paper by Card and DellaVigna (see here) on the fields of papers published in the five top mainstream journals.*

The authors suggest that "the relative shares of the different fields are fairly constant over time: theory is the largest field, accounting for about 30 percent of all articles; macro is next (about 20 percent of papers); labor and microeconomics are tied for third (16–17 percent each); and econometrics, IO, and international each account for about 10–12 percent of papers)." However, you can notice (or so it seems visually) that the Lab Experiment field now appears clearly, and that Development, Health, Finance and IO have grown over time. I would prefer to have the graph with the shares of fields.

Perhaps more interestingly the authors note that "papers in Development and International Economics published since 1990 are more highly cited than older (pre-1990) papers in these fields, whereas recent papers in Econometrics and Theory are less cited than older papers in these fields." More experiments, less citation of theory and more citations of development and and international. That's what mainstream economists have been doing. It would be interesting to see what the heterodox ones have been up to in the same period.

* The top five mainstream journals according to the authors are the American Economic Review, Econometrica, the Journal of Political Economy, the Quarterly Journal of Economics, and the Review of Economic Studies.

The World Health Organization warns of outbreak of virulent new ‘Economic Reality’ virus

New paper by Steve Keen. After Paul Romer accused mainstream colleagues of using phlogiston to explain phenomena they don't understand, now we have a better working hypothesis about what is happening with the mainstream. From the abstract:

A new virus, known as ‘Reality’, has started to afflict Mainstream Economists, causing them to reject the ‘as if’ arguments they used to use to justify their models. There is no known cure for the virus, and complete avoidance of ‘Reality’ is the only effective strategy to prevent infection.

Read full paper here.

Is there a new "new economics"?

INET has posted a piece by Eric Beinhocker on what he calls the “new economics” [sic]. That used to be Keynesian economics, back in the 1960s. Now it’s a mesh of New Institutionalism, Behavioral Economics, and Complexity Analysis. He argues that:

“New economics does not accept the orthodox theory that has dominated economics for the past several decades that humans are perfectly rational, markets are perfectly efficient, institutions are optimally designed and economies are self-correcting equilibrium systems that invariably find a state that maximises social welfare."

This new “new economics” should be more realistic than mainstream economics. And the author does explain that it’s not new, and that it builds on heterodox traditions. Again, in his words:

"It should also be emphasised that new economics is not necessarily new. Rather it builds on well-established heterodox traditions in economics such as behavioural economics, institutional economics, evolutionary economics, and studies of economic history, as well as newer streams such as complex systems studies, network theory, and experimental economics. Over the past several decades a number of Nobel prizes have been given to researchers working in what today might be called the new economics tradition, including Friedrich von Hayek, Herbert Simon, Douglass North, James Heckman, Amartya Sen, Daniel Kahneman, Thomas Schelling and Elinor Ostrom."*

The problem is that not even one of the authors cited above is heterodox (yes, not even Sen, what you guys expected North or Simon?). For the most part, all these authors and traditions accept mainstream marginalist theories as logically consistent, but incomplete and somewhat unrealistic. The problem with neoclassical economics, in this view, is that it’s not realistic. The heterodoxy is supposedly the result of more realistic and relevant theories. Fundamentally regarding individual behavior. Because the new “new economics” has a methodological individualist vein, or so it seems (see the chart Beinhocker provides for the differences with the mainstream, in the macro part, you won’t find a critique of the natural rate hypothesis, it’s all about heterogeneous agents, and some sort of path-dependency; the latter is closer to being relevant; on that go here). Note that in the policy discussion one of the key macro stories is the Geanokoplos et al. model on the possibilities of bubbles (and he does believe in the relevance of conventional overlapping generations and Arrow-Debreu model, of course).

Don’t get me wrong. I’m all for external critiques of mainstream economics. And I think there are important lessons from some of these fields. But they are all about imperfections. In my view, economics has to be rebuilt on the foundations of old economics. The old economics of the classical authors and Marx, that understood that distribution reflects social conflict, in particular, class conflict, and the old “new economics” of Keynes, that understood that causality implied that demand determines supply (and not vice versa as in Say’s Law). Sure you might add complexity, and heterogeneous agents, and institutions (perhaps more than property rights?), and that helps too. But complexity, heterogeneous agents and other 'imperfections' are there, as I noted in my debate with Colander et al. as a way of making the mainstream more reasonable, and not to bring down a theory with insurmountable logical problems. My two cents.

* As promised I'll discuss Hayek when I have the time to write a response to Mirowski. And yes, many authors that believe they have abandoned marginalism still use it. Keynes himself was not completely able to get rid of the old ideas. As he said: "The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds."

Competing Visions in Economics as a Social Science: A Primer

The following was posted here - I had originally written it for students in one of my intermediate courses:

Economics (indeed every discipline of the social sciences) has never been, and never will be, value-free. Social scientists have always relied, and will continue to rely, on sets of elaborate positions, perceptions, and views about the ultimate nature of reality; essentially, it is the reliance on preconceived notions of how the world works, and how it should work, when analyzing manifest phenomena. Aspects of conscientiousness precede investigation and thus one cannot separate the knowing mind from the object inquiry. What constitutes a fact perceives the observation and hence the conception of what is determined as socially significant; the mind is active in constructing and determining the lens through which observation deciphers what of social phenomena is worthy of factuality.

All theorizing is based on first order principles (Lawson, 1989). Thus, what underlie all theories of human behavior are general apperceptions and ideological convictions of the relationship between the individual and society. They are epistemological foundations-what Joseph Schumpeter labeled as 'preanalytical visions'-which dictate modes of examination and inquisition. Hence, different pre-analytical visions predispose the focusing on different social and economic problems and lead to entirely different attitudes towards social settings and human actions within those settings. Preanalytical visions have pertinent implications for normative assessments of the human condition.

The neoclassical, or mainstream, if you will, preanalytical conception of the human being is that of the single-minded seeker of maximum utility (pleasure with respect to cost-benefit analysis and bounded rationality). This perspective perceives that the nature of individual preference orderings, with respect to consumption, is taken as given (more like taken for granted) and primary, without regard to agency and the social institutions and processes within which likes and dislikes are formed. The surrounding within which individual actions take place is conceived as an endless array of opportunity costs for the attainment of constrained optimization.

Categorical positions such as class, gender, and race are systematically negated in favor of centering attention on the (rather fictitious) assumption that society is based upon isolated exchangers/producers maximizing pleasure with initial endowments given by the Malthusian notion of the natural lottery of life. The only way in which human sociality appears is in individual needs for other entities with whom to exchange. In this sense, all economic theory is exchange theory.

Neoclassical economics determines the value of a commodity on the basis of utility derived from it. The more utility that one derives from consuming a commodity, the higher would be its value. Utilitarianism is the underpinning of the theory, which holds this value to be the true value despite the fact that pleasure, is an entirely subjective feeling that varies from consumer to consumer. The theory holds that when commodity A is exchanged for commodity B, the ratio in which the exchange occurs is determined by marginal utility (MU) derived by consuming the last units of commodity A and B. The crucial point is that the origin of value lies essentially in the institution of the market since this is the arena where isolated individual exchanges occur. Hence, the successful functioning of markets reveals how the values of commodities reflect their true values because free market exchanges are seen as complete contracts.

This ideation of utilitarianism does not question the social origins of conscious human desires. The Benthamite dictum that nature places mankind under the governance of two sovereign masters-pain and pleasure-reigns supreme. The issue of whether or not desires are exclusively metaphysically given is completely ignored. Human beings are simply assumed to be sophisticated calculating maximizers of utility. Hence, it is understood that exertions of work by individuals are never undertaken without the promise (with respect to consumption) of greater pleasure or the avoidance of greater pain (Hunt, 2001: 132). Differing social and cultural contexts make no difference whatsoever.

In this sense, neoclassical economics rests on the notion that Robison Crusoe is the natural, universal, pervasive unalterable characteristic of all human beings in all societies. The aim is to demonstrate how the competitive capitalist economy automatically obtains efficient situations in which it is impossible to make one person better off without necessarily making someone else worse off whereby unique organizations of production, exchange and distribution lead to maximum attainable social welfare.

Situations of conflict are defined away; situations where improving the lot of one unit is not opposed by other naturally antagonistic units are rare within this view. Since the level of analysis is on rational calculating individual units and not social units, how can changes that might make some better off without making others worse be discerned? It precludes the scientific evaluation of the degree to which existing desires reflect underlying universal human needs and the particular sets of social institutions that enhance the necessary capabilities for which these human needs can be met.

In addition, the most essential differentiating feature of capitalism-private property-is viewed as eternal, universal, and inherently just. It absolves capitalism of all the exploitation that is undertaken to produce and make profits. Total income of society is produced and distributed simply by some sort of 'natural law'. Thus, if workers have appropriate moral virtues and exercise responsibility, jurisprudence, self-control, and unremitting hard work, they can easily become entrepreneurs and accumulate capital.

Heterodox economics, on the other hand, examines the welfare of human beings through a lens that accentuates and exhibits interconnections. Within this preanalytical vision, it is appropriate to speak of systems of human behavior and visualize modes of productions that govern how human beings relate each other at historically specific times in the process of extracting from nature the means for human survival.

Starting with an analytical framework that invokes recognition of specific modes of production, we have the capacity elucidate the underlying processes that actually govern how the products of labor are distributed and how labor in general is assigned to specific technical processes. From this perspective, we can visualize historically specific modes of political power gives us the means that detail the apparent characteristics of social decision-making and the ordering of rights, privileges and responsibilities.

In contrast to utilitarianism of neoclassical economics, heterodox economics understands human beings distinctly as producers and focuses on the fact that the starting point of any theory is the recognition that that in all societies the process of production can be reduced to series of human exertions. It is ascertained that humans, unlike animals, generally cannot survive without exerting effort transforming natural environments into more suitable living spaces. Where utilitarianism sees humans in individualistic terms where there is no difference between exchanging with nature and exchanging with other human beings, heterodox economics sees human beings as cooperative social beings dependent on each other for human survival.

Since capitalism directs production solely for the impersonal institution of the market, interdependent labor is indirectly social. To illustrate this, Karl Marx noted:

Under the rural patriarchal system of production, when spinner and weaver lived under the same roof-the women of the family spinning and the men weaving, say for the requirements of the family-yarn and linen were social products, and spinning and weaving social labor within the framework of the family. But their social character did not appear in the form of yarn becoming a universal character exchanged for linen as a universal equivalent, i.e., of two products exchanging for each other as equal and equally valid expressions of the same universal labor time [as it w would be the case under capitalism]. On the contrary, the product of labor bore the specific social imprint of the family relationship with its naturally evolved division of labor. Or let us take the services and dues in kind of the Middle Ages. It was the distinct labor of the individual in its original form, the particular features of his labor and not its universal aspect that formed the social ties at that time. Or finally let us take communal labor in its spontaneously evolved form as we find it among all civilized nations at the dawn of their history. In this case the social character of labor is evidently not affected by the labor of the individual assuming the abstract form of universal labor…The communal system on which this mode of production is based prevents the labor of an individual from becoming private labor and his product the private product of a individual; it causes individual labor to appear rather as the direct function of a member of the social organization (cited in Hunt, 1991).

In addition,

As a general rule, articles of utility become commodities only because they are products of the labor of private individuals or groups of individuals who carry on their work independently of each other [in capitalism]. The sum total of the entire labor of these private individuals forms the aggregate labor of society. Since the producers do not come into social contact with each other until they exchange their products, the specific social character of each producer's labor does not show itself except in the act of exchange. In other words, the labor of the individual asserts itself as a part of the labor of society, only by means of the relations which the act of exchange establishes directly between the products, and indirectly, through them, between the producers. To the latter, therefore, the relations connecting the labor of one individual with that of the rest appear, not as direct social relations between individuals at work, but as…social relations between things (cited in Hunt, 1991).

Heterodox economics exposes the true nature of social organization under capitalism that leads to extraordinarily pernicious effects on workers. The capitalist market systematically prevents many from developing real conscious desires that reflect potentialities for self-realization and self-appreciation, i.e. become "emotionally, intellectually, esthetically developed human beings" (Hunt, 2002:242). Human senses are shaped and refined through working and transforming nature into useful things. It is through one's relations with what one produces that an individual achieves pleasure and satisfaction. Through visible direct interdependent social production, recognitions of one's ability, dexterity, and talent are palpable. Under capitalism, however, the scenario is quite different:

The bourgeoisie, wherever it has got the upper hand, has put an end to all […] idyllic relations. It has pitilessly torn asunder the motley […] ties […], and has left remaining no other nexus between man and man than naked self-interest, than callous cash payment. It has drowned the most heavenly ecstasies of religious fervor, of chivalrous enthusiasm, of philosophical sentimentalism, in the icy water of egoistical calculation. It has resolved personal worth into exchange value (cited in Hunt, 2002: 242).

This social organization of production is not oriented to human needs and aspirations, but rather by profit calculations estimated by legally protected extortionists (capitalists, or the bourgeoisie). The effects are total and degradation and total dehumanization of working-class people where they are reduced to nothing but disconnected brutes engaged in simple animal functions, not developing freely their physical and mental capacities. Capitalism, as such, is the accumulation of wealth at one pole, and the accumulation of misery, agony of toil, slavery, ignorance, brutality, and mental degradation at the opposite pole (Cited in Hunt, 2002: 244).

Heterodox economic analysis make it apparent whether or not society meets basic human needs and are translated into realized conscious desires for higher stages of human development. It shows that with a materialist approach to the study how humans relate to each other and organize to produce what is necessary for survival one can justifiably assert whether certain systems of human behavior do, in fact, generate the conditions for social harmony.

In hindsight, it is nearly impossible (if not completely impossible) to formulate egalitarian economic and social policies based on neoclassical ontology and epistemology. Perspectives that only consider market exchange, with a reductionist sense of human desire, systematically disregard the social nature of production; in the final instance, they effectively negate clear understandings of the totality of socioeconomic inequity (Campbell, 2010).

***NOTE - This neither covers the social nature of money nor the heterodox Post-Keynesian/Sraffian perspective, which are quite pertinent; as such, it is worthwhile for the student to refer to the following:

Aspromourgos, Tony. 1960. “Sraffa’s System in Relation to Some Main Currents in Unorthodox Economics.” Pp. 2–4 in Conference on Sraffa’s Production of Commodities by Means of Commodities, vol. 2010. Retrieved September 21, 2014 (http://host.uniroma3.it/eventi/sraffaconference2010/abstracts/pp_aspromourgos2.pdf).

Bellino, Enrico. 2004. “On Sraffa’s Standard Commodity.” Cambridge Journal of Economics 28(1):121–32.

Bellofiore, R. 1989. "A Monetary Labor Theory of Value." Review of Radical Political Economics 21(1-2):1-25.

Bortis, Heinrich. 2002. “Piero Sraffa and the Revival of Classical Political Economy.” Journal of Economic Studies 29(1):74–89.

Bortis, Heinrich. 2003. “Keynes and the Classics: Notes on the Monetary Theory of Production.” Modern Theories of Money: The nature and role of money in capitalist economies 411–75.

Hein, Eckhard. 2006. "Money, Interest and Capital Accumulation in Karl Marx's Economics: A Monetary Interpretation and Some Similarities to Post-Keynesian Approaches *." The European Journal of the History of Economic Thought 13(1):113-40.

Hein, E. 2008. "Marxian and Post-Keynesian Theory-Similarities and Differences Part 2: Monetary Analysis in Marx and Similarities to Post-Keynesian Approaches." Berlin, Germany. Retrieved June 9, 2014 ( http://www.boeckler.de/pdf/v_2008_07_27_hein_lecture.pdf).

Ingham, G. 1996. "Money Is a Social Relation." Review of Social Economy 54(4):507-29.

Ingham, G. 1996. "Some Recent Changes in the Relationship between Economics and Sociology."Cambridge Journal of Economics 20(2):243-75.

Ingham, G. 1999. "Capitalism, Money and Banking: A Critique of Recent Historical Sociology." The British Journal of Sociology 50(1):76-96.

Kurz, Heinz D. and Neri Salvadori. 1998. Understanding “Classical” Economics Studies in Long-Period Theory. London; New York: Routledge.

Kurz, Heinz D. and Neri Salvadori. 2005. “Representing the Production and Circulation of Commodities in Material Terms: On Sraffa’s Objectivism.” Review of Political Economy 17(3):413–41.

Screpanti, Ernesto and Stefano Zamagni. 2005. An Outline of the History of Economic Thought. Oxford; New York: Oxford University Press.

Signorino, Rodolfo. 2005. “Piero Sraffa’s Lectures on the Advanced Theory of Value 1928–31 and the Rediscovery of the Classical Approach.” Review of Political Economy 17(3):359–80.

Sinha, Ajit. 2002. “Reading Sraffa: The Philosophical Underpinnings of Production of Commodities by Means of Commodities.” Retrieved April 2, 2015 (http://www.gipe.ac.in/pdfs/working%20papers/wp2.pdf).

Vianello, Fernando. 1985. “The Pace of Accumulation.” Political Economy: Studies in the Suplus Approach 1(1):69–88.


Works Cited:

Arge, R. C. and E.K. Hunt. 1971. "Environmental Pollution, Externalities, and Conventional Economic Wisdom: A Critique." Envtl. Aff. 1:266.

Campbell, Al. 2010. "Marx and Engels' Vision of a Better Society." Forum for Social Economics39(3):269-78.

Foley, Duncan. 2004. "Rationality and Ideology in Economics." Social Research: An International Quarterly 71(2):329-42.

Hunt, E. K. 2005. "The Normative Foundations of Social Theory: An Essay on the Criteria Defining Social Economics." Review of Social Economy 63(3):423-45.

Hunt, E.K. 2002. History of Economic Thought. 2nd Ed., Armonk, NY: M.E Sharpe.

Hunt, E.K. 1991."The Role of Value Theory in the History of Thought," in Hunt, E.K and Rajani K. Kanth.Explorations in Political Economy. Savage, MD: Rowman & Littlefield Publishers, Inc.

Hunt, E. K. 1983. "Joan Robinson and the Labour Theory of Value." Cambridge Journal of Economics7:331-42.

Lawson, Tony. 1989. "Abstraction, Tendencies and Stylised Facts: A Realist Approach to Economic Analysis." Cambridge Journal of Economics 13:59-78.

Krugman is not a real Keynesian

From The Boston Globe:

Keynes’s insights have enormous practical importance, according to Lance Taylor and Duncan Foley of the New School. Temperamentally opposite — Foley a brilliant theorist, Taylor a pragmatist influential in developing nations — they jointly received the Leontief Prize for Advancing the Frontiers of Economic Thought at Tufts University’s Global Development and Environment Institute on Monday. But isn’t Keynes now mainstream? No, say Foley and Taylor. The mainstream still sees economies as inherently moving to an optimal equilibrium, as Wicksell did. It still says demand causes short-run fluctuations, but only supply factors, such as the capital stock and technology, can affect long-run growth.

Read rest here. Not a surprise for the readers of this blog.

Academic Freedom Watch: University of Manitoba

Based on an investigation conducted by the Canadian Association of University Teachers (CAUT), mainstream economists in the department of economics at the University of Manitoba, including the dean of faculty, have systematically marginalized heterodox professors. Robert Chernomas, a heterodox economics professor at the U of M, filed a grievance with university administration in 2009 claiming that the process for selecting a chair was “contrary to the collective agreement, unfair, unreasonable, and biased in relation to Dr. Chernomas.” Professor Chernomas had applied for the job but was not shortlisted by the committee. The committee eventually selected Pinaki Bose, an economics professor from the University of Memphis, in 2010. Since this appointment, according to Chernomos, heterodox professors have been "suppressed and isolated" to such an extent that they no longer hold any positions of authority or influence in the department.

Read rest here.

The rise of vulgar economics and the end of dissent

Funny thing, the rise of vulgar economics, which I discussed before (here, here, and here; see also this and this papers for more on the topic) didn't just lead to the ostracism of heterodox approaches to economics. It also led to a significant decrease in the debate within the mainstream. Or at least is what the figure below, from the interesting blog post by Joe Francis, seems to indicate. At some point in the 1960s, more than 20% of the papers in the main journals were a reply, a comment or a rejoinder to the work of someone else. Not anymore.

It is clear that the Great Depression and the Keynesian Revolution seemed to increase debate within the mainstream, and that, as Joe says, the: "decline in debate... appears to have been associated with the emergence of a ‘neoliberal’ hegemony from the 1970s onwards." That's essentially correct.

And the decline in debate explains why Lucas could say in the early 1980s that: "at research seminars, people don't take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another." And also why if you wanted to publish you basically had to accept the crazy New Classical models. Krugman admitted to that before, as I've already noticed. He argued that: “the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable.” You must remember, you don't publish, you don't get tenure. So crazy models became the norm.

Not only heterodox economists were kicked out of mainstream departments, and had to create their own journals in the 1970s, but also the pressure within the mainstream to conform and silence dissent was strong indeed. Note that many, like Blanchard and Woodford for example, in the mainstream continue to suggest that there is a lot of consensus between New Keynesians, and Real Business Cycles types. In fact, they say there is more agreement now than in the 1970s. How is the consensus methodology in macroeconomics, you ask. From Blanchard's paper above:

"To caricature, but only slightly: A macroeconomic article today often follows strict, haiku-like, rules: It starts from a general equilibrium structure, in which individuals maximize the expected present value of utility, firms maximize their value, and markets clear. Then, it introduces a twist, be it an imperfection or the closing of a particular set of markets, and works out the general equilibrium implications. It then performs a numerical simulation, based on calibration, showing that the model performs well. It ends with a welfare assessment."

And yes that is also the basis of New Keynesian models. The haiku basically describes the crazy models in which reasonable results must be disguised if you're to be taken seriously in academia. When everybody agrees, there is little need for debate. And you get stuck with crazy models. The lack of debate within the mainstream to this day is also, in part, what provides support for austerity policies around the globe, even when it is clear that they have failed.

The Chutzpah of The Economics Profession

New discussion paper by Marion Fourcade, Etienne Ollion, and Yann Algan

From the abstract

In this essay, we investigate the dominant position of economics within the network of the social sciences in the United States. We begin by documenting the relative insularity of economics, using bibliometric data. Next we analyze the tight management of the field from the top down, which gives economics its characteristic hierarchical structure. Economists also distinguish themselves from other social scientists through their much better material situation (many teach in business schools, have external consulting activities), their more individualist worldviews, and in the confidence they have in their discipline’s ability to fix the world’s problems. Taken together, these traits constitute what we call the superiority of economists, where economists’ objective supremacy is intimately linked with their subjective sense of authority and entitlement. While this superiority has certainly fueled economists’ practical involvement and their considerable influence over the economy, it has also exposed them more to conflicts of interests, political critique, even derision.

Read rest here.

And for an excellent piece on the imperialism of mainstream economics in the social sciences, see this paper by Ben Fine (subscription required).

Amitava Dutt on Pluralism (or lack thereof) in Economics

The recent issue of ROPE is an excellent symposium on nature of pluralism (or lack thereof) in contemporary economics. This following article by Amitava Dutt is quite insightful.

From the abstract:

Recent debates about the nature and desirability of pluralism in economics suffer from a lack of clarity about the meaning of pluralism. This paper attempts to remedy some aspects of this problem by distinguishing between different dimensions of pluralism, that is, epistemological, ontological, methodological, normative and prescriptive dimensions. Although, in principle, these dimensions are distinct, they are difficult to keep apart because of the relations that exist in terms of choices made in the different dimensions. It is argued that the recognition of these distinctions and relations allows for a resolution of some of the debates about pluralism.

Read rest here (subscription required), and for an introduction to the symposium by John Davis, see here (subscription required).

Foster and Yates on Piketty & The Crisis of Neoclassical Economics

Michael D. Yates kindly asked me to post a link to his new MR article, co-authored with John Bellamy Foster, on Piketty & the current state of mainstream economics; comments & feedback are welcomed.

Not since the Great Depression of the 1930s has it been so apparent that the core capitalist economies are experiencing secular stagnation, characterized by slow growth, rising unemployment and underemployment, and idle productive capacity. Consequently, mainstream economics is finally beginning to recognize the economic stagnation tendency that has long been a focus in these pages, although it has yet to develop a coherent analysis of the phenomenon. Accompanying the long-term decline in the growth trend has been an extraordinary increase in economic inequality, which one of us labeled “The Great Inequality,” and which has recently been dramatized by the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century. Taken together, these two realities of deepening stagnation and growing inequality have created a severe crisis for orthodox (or neoclassical) economics.

Read rest here.

For other posts on Piketty, see here, here, here, here, here, and here.

Mundell-Fleming, Independent Central Banks, Inflation and Openness

Bucknell's Academic West (Bertrand Library in the background)

Teaching international finance this semester, after a long while. At Utah I taught mostly intermediate macro and Latin American Development for undergrads (and macro and history of thought for graduate students), and the eventual elective. But here the course was up for grabs, so to speak. Decided to use Peter Montiel's International Macroeconomics, since his books always provide competent presentations of the mainstream views, plus having worked at the IMF and World Bank, he always tries to cover real problems with plenty of developing country examples.

The limitation of the book is, as it should be expected, that the mainstream analytical view is, as Montiel's (p. x) says: "a generalized and modernized [sic] version of the original Mundell-Fleming model." The book does present in the last chapter the 'modern' intertemporal approach to the current account. In a later post I'll discuss the limitations of the Mundell-Fleming model, but for those interested check this paper by Serrano and Summa. In other words, Montiel's book can present the mainstream views, but lacks any critical perspective, which is not uncommon, but certainly problematic given the poor state of the mainstream understanding of how the economy works.

It is illustrative of the lack of alternatives in the book, the presentation of the relation between openness and inflation. Montiel's follows the evidence on an inverse relation between openness (that can be measured in many ways: import share, imports plus exports over GDP, etc.) and inflation presented in David Romer's well-known paper (see here). Montiel argues that in closed economies governments might tend to run fiscal deficits, that if monetized, would lead to inflation. In a more open economy, the higher deficits and inflation would lead to higher rates of interest, since international creditors faced with a risky government would demand a higher premium. In this context, "the higher interest rates that the government has to pay would tend to discourage excessively expansionary fiscal policies, thus reducing pressures on central banks to expand the money supply." If the central bank is more autonomous or independent from the Treasury then you should expect also less inflation (that would be Bernanke's explanation for the Great Moderation; here).

Many problems, as you can see. Yes, for Montiel inflation is caused by excess demand (fiscal deficits) and by increasing money supply, which seems to be what the central bank controls (let alone that all central banks control really the rate of interest). Worse, in a sense, is the notion that fiscal deficits in domestic currency (presumably, since nothing is said), may cause foreign investors to punish the government. Note that what should have investors concerned would be the current account surplus (which provides foreign reserves) and the amount of foreign reserves held by the central bank. The evidence on interest rates and fiscal deficits, by the way, is less than forthcoming for Montiel's story (see here).

A simple alternative suggests that inflation more often than not is caused by cost pressures, rather than excess demand, and that two of the main sources of cost pressures are the prices of imported goods and wage pressures. In a more open economy, in which firms are faced with competition from foreign firms, and workers might be afraid of losing their jobs, then wage resistance might be subdued. Note that over the last few decades unionization rates have declined and that also constrains the ability of workers to demand higher wages (see here). In this case, lower inflation in the globalized economy has been predicated on a weaker labor force that faces more international competition, and is more willing to accept stagnant wages. Inequality and stagnant wages, rather then well-behaved governments and independent central banks are behind the Great Moderation in this story.

Two ex-graduate students of mine, Perry and Cline (yes, someone was paying attention after all), teamed up and provided some empirical evidence in favor of the alternative story (go here). If you want to see alternative views on inflation, implicit in this discussion, go to the linked posts and papers here.

The theory of global imbalances: mainstream economics vs. structural Keynesianism

By Tom Palley

Prior to the 2008 financial crisis there was much debate about global trade imbalances. Prima facie, the imbalances seem a significant problem. However, acknowledging that would question mainstream economics’ celebratory stance toward globalization. That tension prompted an array of explanations which explained the imbalances while retaining the claim that globalization is economically beneficial. This paper surveys those new theories. It contrasts them with the structural Keynesian explanation that views the imbalances as an inevitable consequence of neoliberal globalization. The paper also describes how globalization created a political economy that supported the system despite its proclivity to generate trade imbalances.

Read more here.

Paul Davidson on The Gross Substitution Axiom, Heart of Mainstream Economics

By Paul Davidson, [h/t] Lars P. Syll

The gross substitution axiom assumes that if the demand for good x goes up, its relative price will rise, inducing demand to spill over to the now relatively cheaper substitute good y. For an economist to deny this ‘universal truth’ of gross substitutability between objects of demand is revolutionary heresy – and as in the days of the Inquisition, the modern-day College of Cardinals of mainstream economics destroys all non-believers, if not by burning them at the stake, then by banishing them from the mainstream professional journals. Yet in Keynes’s (1936, ch. 17) analysis ‘The Essential Properties of Interest and Money’ require that:

1. The elasticity of production of liquid assets including money is approximately zero. This means that private entrepreneurs cannot produce more of these assets by hiring more workers if the demand for liquid assets increases. In other words, liquid assets are not producible by private entrepreneurs’ hiring of additional workers; this means that money (and other liquid assets) do not grow on trees.

2. The elasticity of substitution between all liquid assets, including money (which are not reproducible by labour in the private sector) and producibles (in the private sector), is zero or negligible. Accordingly, when the price of money increases, people will not substitute the purchase of the products of industry for their demand for money for liquidity (savings) purposes.

Read rest here.

Steve Keen on why Krugman needs a new school of thought

Professor Steve Keen on Krugman's brush-off of heterodox economics. 

In his latest blog, Paul Krugman slings off at non-mainstream economists -- and the students at Manchester University campaigning for change to the economics curriculum -- for wanting fundamental change in economics. The status quo is fine, he reckons: move along folks, nothing to see here. Says Krugman in his latest post, Frustrations of the Heterodox:

“Here’s the story they tell themselves: the failure of economists to predict the global economic crisis (and the poor policy response thereto), plus the surge in inequality, show the failure of conventional economic analysis. So it’s time to dethrone the whole thing -- basically, the whole edifice dating back to Samuelson’s 1948 textbook -- and give other schools of thought equal time.

“Unfortunately for the heterodox (and arguably for the world), this gets the story of what actually happened almost completely wrong.

“It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasn’t because economics lacked the tools to understand such things -- we’ve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation -- failure to notice the rising importance of shadow banking.

“Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realise that more than half the de facto banking system didn’t look like that anymore. This was a case of myopia -- but it wasn’t a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis…

“Events have also reflected very badly on the style of economics that prizes 'microfoundations' based on ultra-rational behavior over evidence, and rules any kind of ad hockery out of bounds. But the heterodox want more than that; they want to interpret recent events as a refutation of the kind of economics Simon Wren-Lewis, or Janet Yellen, or Larry Summers (as economist, not public official), or yours truly does. And that interpretation just doesn’t work. By all means, advance heterodox ideas if you believe they’re right. But don’t claim vindication from events that didn’t actually follow the script you wish they did.”

Thus does Krugman trash what he accurately sees as “an upwelling of frustration on the part of heterodox economists” like Tom Palley, and students at the University of Manchester (A post-crash manifesto to rebuild economics) about the failure of economics to change after the financial crisis. No need for change, boys and girls: mainstream economics has everything under control. We missed the crisis just because we failed to observe the shenanigans in the shadow banking system. Once we realised our observational errors, we had all the necessary tools and knew what to do. (Oh, and what the rebels said would happen didn't anyway, so there!)

Read the rest here.

A Taxonomy of Piketty's reviews

Brad DeLong wrote a lengthy review of Piketty's Capital, paraphrasing in the title the famous ISLM (ISLL in Hick's original terminology) paper by John Hicks, which deserves a review by itself. In particular the discussion of Piketty's analytical model, which is, as noted before, incredibly problematic. It is worth noticing that Brad argues somehow that there two kind of reviews, namely: those that are useful and worth reading, in which he includes Tyler Cowen's review (which I've only indirectly alluded to here and here), and the ones that are wrong and are 'distracted by irrelevances,' which include Galbraith and Palley's reviews.*

Brad's idea is not bad, I mean of a taxonomy of the reviews of Piketty, but his take is neither useful to understand the differences, nor constructive for dialogue. So here is my very brief taxonomy.

There are only a few that I included, not because these are the more important necessarily, but because they seem to be representative. I made two analytical distinctions. Mainstream and Heterodox, which is based on the theoretical background, and whether the authors accept the Neoclassical paradigm or not (Murphy and Austrians do, in a confused way). Also, reviews are classified as favorable or critical of the policy prescriptions in Piketty's book. Basically, one distinction is theoretical and the other is policy oriented.

Note that the interesting thing that emerges is that there are NO, at least to my knowledge, Critical Heterodox views, that is, heterodox authors that are against higher taxes and wealth taxes.

The basis for the mainstream critiques (Cowen and Murphy) is that taxes create distortions and lead to lower growth making things worse. After all greed is good, or something like that. This comes from the more radical fringe of the pro-markets are efficient wing of the profession. The conventional defense of Piketty is basically based on New Keynesian (or old in the case of Solow) views, and it suggests that market imperfections are sufficiently large that there is space for redistribution, and tax policy is the main way to go to redress the increase in inequality of the last 30 years.

Finally the Heterodox views (Galbraith, Palley and Lance Taylor), and here I included a non-economist, David Harvey that follows a distinctly Marxist view,** which all suggest that Piketty raises and important point, which has been discussed by heterodox economists forever, that the empirical analysis is also an addition to our understanding of inequality, but that there are theoretical flaws, which both mainstream groups (Piketty would be closer to a New Keynesian, and he is a Socialist, or at least supported Holland in the last election) share, and that this limits, but does NOT disqualify the argument for redistribution.

This illustrates also a point made in this blog for a while. On the one hand, heterodox groups are politically closer to some New Keynesian authors, which, however, remain firmly based on the orthodox notion that markets unimpeded by imperfections produce optimal outcomes. Once, the New Keynesians get rid of some of the limitations of their theoretical framework, the essential being the natural rate (of interest or unemployment), their political argument would be more coherent and stronger.

* The ones that are wrong or distract point to the logical flaws in Piketty's theoretical model, by the way.

** I didn't include Cassidy's good review, simply because as a journalist the mainstream/heterodox distinction doesn't quite apply, but his views are fundamentally favorable. By the way, the Financial Times, also would not fit that dichotomy, but it certainly fits more clearly the political one, and has come clearly against Piketty for his empirical mistakes (here). For a response see Branko Milanovic here (h/t Daniele Tavani).