What is Wrong with Mainstream Economics?
What is Wrong with Mainstream Economics?
“... the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher - in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of a man’s nature or his institutions must lie entirely outside his regard.” - John Maynard Keynes
"The reaction of over-specialism upon the student is closely analogous to its effects upon the industrial worker; by peering incessantly into one little group of facts, he blunts his intelligence and injures the focus of his mental eyesight. His abandonment of the wider survey of knowledge destroys his intellectual judgement. Every bit of new knowledge needs to be assayed by submission to the touchstone of the Universal before its value can be ascertained." - John Atkinson Hobson
“The attempt to isolate economics from other disciplines - notably politics, history, philosophy, finance, constitutional theory and sociology - has fatally disabled its power to explain what is happening in the world.” - Will Hutton
The differences between mainstream economics (in all its different ramifactions) and our broad and inclusive alternative approach (which could be described as “political economy” or “institutional and evolutionary economics”) are not always clear-cut and in some cases there are significant intermediate positions. Furthermore, there is significant disagreement among non-mainstream economists on many points. Nevertheless, it is hoped that the schematic presentation in the table below is instructive.
Why does all this matter?
Economics is the most influential and prestigious discipline in the social sciences. The ideas and advice of leading economists have enormous effects on politicians, journalists and business leaders. But the typical mainstream view of economic agents as amoral and entirely self-interested is both unrealistic and has damaging effects. In the last few decades, while remaining a powerful discipline, economics has narrowed in scope. Heterodox ideas have been pushed off the curriculum, and consequently mainstream economics has almost lost a key reserve of alternative thinking that can help to reinvigorate economics, especially in times of crisis or major institutional change.
"The reaction of over-specialism upon the student is closely analogous to its effects upon the industrial worker; by peering incessantly into one little group of facts, he blunts his intelligence and injures the focus of his mental eyesight. His abandonment of the wider survey of knowledge destroys his intellectual judgement. Every bit of new knowledge needs to be assayed by submission to the touchstone of the Universal before its value can be ascertained." - John Atkinson Hobson
“The attempt to isolate economics from other disciplines - notably politics, history, philosophy, finance, constitutional theory and sociology - has fatally disabled its power to explain what is happening in the world.” - Will Hutton
The differences between mainstream economics (in all its different ramifactions) and our broad and inclusive alternative approach (which could be described as “political economy” or “institutional and evolutionary economics”) are not always clear-cut and in some cases there are significant intermediate positions. Furthermore, there is significant disagreement among non-mainstream economists on many points. Nevertheless, it is hoped that the schematic presentation in the table below is instructive.
Why does all this matter?
Economics is the most influential and prestigious discipline in the social sciences. The ideas and advice of leading economists have enormous effects on politicians, journalists and business leaders. But the typical mainstream view of economic agents as amoral and entirely self-interested is both unrealistic and has damaging effects. In the last few decades, while remaining a powerful discipline, economics has narrowed in scope. Heterodox ideas have been pushed off the curriculum, and consequently mainstream economics has almost lost a key reserve of alternative thinking that can help to reinvigorate economics, especially in times of crisis or major institutional change.
Mainstream Economics
What Many Mainstream Economists Believe
As a discipline, economics is defined in terms of a set of specific core assumptions and analytical techniques. As the general "science of choice" (Robbins 1932), economics is applied to any living organism, and it is not restricted to human, market, monetary or business phenomena.
What Many Mainstream Economists Believe
As a discipline, economics is defined in terms of a set of specific core assumptions and analytical techniques. As the general "science of choice" (Robbins 1932), economics is applied to any living organism, and it is not restricted to human, market, monetary or business phenomena.
An Alternative Stance
Economics from an Alternative Perspective
Economics is defined in terms of the scientific study of a real object – the economy. The economy is that part of human society concerned with the production and distribution of wealth.
Economics from an Alternative Perspective
Economics is defined in terms of the scientific study of a real object – the economy. The economy is that part of human society concerned with the production and distribution of wealth.
What Many Mainstream Economists Believe
Because of the alleged power of its core assumptions and analytical techniques, economists do not need to learn much from other disciplines. Instead they apply these choice-theoretic assumptions and analytical techniques to other zones of enquiry, from rats to religion.
Because of the alleged power of its core assumptions and analytical techniques, economists do not need to learn much from other disciplines. Instead they apply these choice-theoretic assumptions and analytical techniques to other zones of enquiry, from rats to religion.
Economics from an Alternative Perspective
Understanding the economy requires an appreciation of the psychological and other mechanisms behind human decision-making. Other disciplines such as sociology, politics and history provide vital insights on how economic institutions work. It is particularly important to understand historically specific economic institutions. Generally, ideas from other disciplines should be adopted if they help our understanding of economic phenomena.
Understanding the economy requires an appreciation of the psychological and other mechanisms behind human decision-making. Other disciplines such as sociology, politics and history provide vital insights on how economic institutions work. It is particularly important to understand historically specific economic institutions. Generally, ideas from other disciplines should be adopted if they help our understanding of economic phenomena.
What Many Mainstream Economists Believe
The best way of understanding a phenomenon is to build a model of it, with kosher simplifying assumptions.
The best way of understanding a phenomenon is to build a model of it, with kosher simplifying assumptions.
Economics from an Alternative Perspective
Models can be useful but their value is limited, especially when the phenomena are highly complex. Appropriate simplification is a matter of critical enquiry and experiment. A rich knowledge and understanding of economic and institutional history is often of greater value than a mathematical model.
Models can be useful but their value is limited, especially when the phenomena are highly complex. Appropriate simplification is a matter of critical enquiry and experiment. A rich knowledge and understanding of economic and institutional history is often of greater value than a mathematical model.
What Many Mainstream Economists Believe
The principal purpose of any model is to make correct predictions (Friedman 1953).
The principal purpose of any model is to make correct predictions (Friedman 1953).
Economics from an Alternative Perspective
With complex phenomena and non-linear interactions, the possibilities for prediction are limited. The primary purpose of any science is causal explanation.
With complex phenomena and non-linear interactions, the possibilities for prediction are limited. The primary purpose of any science is causal explanation.
What Many Mainstream Economists Believe
Precision in a mathematical sense is a supreme virtue. But precision over central concepts such as “market” and “firm” is inessential.
Precision in a mathematical sense is a supreme virtue. But precision over central concepts such as “market” and “firm” is inessential.
Economics from an Alternative Perspective
Conceptual precision is no less important than mathematical precision. But no science can be absolutely precise. Being roughly right is better than being precisely wrong.
Conceptual precision is no less important than mathematical precision. But no science can be absolutely precise. Being roughly right is better than being precisely wrong.
What Many Mainstream Economists Believe
Economics has established and accepted disciplinary boundaries. Economics is what (good) economists do.
Economics has established and accepted disciplinary boundaries. Economics is what (good) economists do.
Economics from an Alternative Perspective
After the collapse of the Parsons-Robbins consensus in the 1980s, there is no widely accepted justification for the disciplinary divisions between economics, sociology, economic sociology and economic geography. Either a new and valid justification for their boundaries is found, or these social sciences should be unified in their pursuit of a common object of enquiry, and benefit from ongoing conversation concerning the value of different assumptions or methods.
After the collapse of the Parsons-Robbins consensus in the 1980s, there is no widely accepted justification for the disciplinary divisions between economics, sociology, economic sociology and economic geography. Either a new and valid justification for their boundaries is found, or these social sciences should be unified in their pursuit of a common object of enquiry, and benefit from ongoing conversation concerning the value of different assumptions or methods.
How Mainstream Economics are Trained
The training of economists is principally a matter of learning and developing mathematical models and techniques.
The training of economists is principally a matter of learning and developing mathematical models and techniques.
The Need for a Broader Agenda
An understanding of economic history, the history of economics, and the philosophy of economics are essential. There has also to be some appreciation of relevant allied work in other academic disciplines.
An understanding of economic history, the history of economics, and the philosophy of economics are essential. There has also to be some appreciation of relevant allied work in other academic disciplines.
How Mainstream Economics are Trained
The history of economics is regarded as inessential because all valid past theories are incorporated into existing theory. The history of economics adds nothing more than a narrative of mistakes.
The history of economics is regarded as inessential because all valid past theories are incorporated into existing theory. The history of economics adds nothing more than a narrative of mistakes.
The Need for a Broader Agenda
Without the history of economics we cannot understand the meaning and limitations of existing theory. Much “new” theory replicates past theories without acknowledging them. We can often learn from the errors and critiques of the past.
Without the history of economics we cannot understand the meaning and limitations of existing theory. Much “new” theory replicates past theories without acknowledging them. We can often learn from the errors and critiques of the past.
How Mainstream Economics are Trained
Despite ritual genuflections to (vaguely and variedly defined*) “methodological individualism”, there is little attention to the ontological and philosophical foundations of analysis.
Despite ritual genuflections to (vaguely and variedly defined*) “methodological individualism”, there is little attention to the ontological and philosophical foundations of analysis.
The Need for a Broader Agenda
Understanding and questioning of basic assumptions is vital – hence the philosophy and history of economics are essential for the development of the discipline.
Understanding and questioning of basic assumptions is vital – hence the philosophy and history of economics are essential for the development of the discipline.
The Individual in Mainstream Economics
Rhetorically the individual is taken as the centre of analysis, often with ceremonial declarations of (vaguely and variedly defined*) “methodological individualism”.
Rhetorically the individual is taken as the centre of analysis, often with ceremonial declarations of (vaguely and variedly defined*) “methodological individualism”.
The Individual in an Alternative Approach
All analysis in social science must start from individuals and relations between individuals. In practice, even mainstream economists do not start from individuals alone (Arrow 1994).
All analysis in social science must start from individuals and relations between individuals. In practice, even mainstream economists do not start from individuals alone (Arrow 1994).
The Individual in Mainstream Economics
Rationality is a foundation stone of economics. It is typically defined in terms of consistency of behaviour, and often more narrowly in terms of self-interested behaviour.
Rationality is a foundation stone of economics. It is typically defined in terms of consistency of behaviour, and often more narrowly in terms of self-interested behaviour.
The Individual in an Alternative Approach
There is abundant evidence that humans are not entirely self-interested, even in the business sphere. Generally, the rhetoric of rationality is a diversion from the complex analysis of the psychological and other dispositions and mechanisms that drive human behaviour (Sen 1977).
There is abundant evidence that humans are not entirely self-interested, even in the business sphere. Generally, the rhetoric of rationality is a diversion from the complex analysis of the psychological and other dispositions and mechanisms that drive human behaviour (Sen 1977).
The Individual in Mainstream Economics
Preferences are often taken as given. Learning is treated as an individual reaction to new information with a given (meta-) preference function.
Preferences are often taken as given. Learning is treated as an individual reaction to new information with a given (meta-) preference function.
The Individual in an Alternative Approach
The idea that we are born with a fixed (meta-) preference function at birth, or act as if we had one, is unwarranted. It is difficult to reconcile with the real processes of human development and learning, which always occur through interactions with others.
The idea that we are born with a fixed (meta-) preference function at birth, or act as if we had one, is unwarranted. It is difficult to reconcile with the real processes of human development and learning, which always occur through interactions with others.
The Individual in Mainstream Economics
Despite the rhetorical (and sometimes political) emphasis on individualism, for reasons of mathematical tractability individuals are mostly treated as similar or identical.
Despite the rhetorical (and sometimes political) emphasis on individualism, for reasons of mathematical tractability individuals are mostly treated as similar or identical.
The Individual in an Alternative Approach
We cannot understand economic phenomena adequately without taking into account the diversity within populations of human characteristics and dispositions (Kirman 1992).
We cannot understand economic phenomena adequately without taking into account the diversity within populations of human characteristics and dispositions (Kirman 1992).
The Individual in Mainstream Economics
Information problems are sometimes recognised, but confined to probabilistic risk. Uncertainty (being irreducible to probabilities) is excluded because it does not fit into mathematical models.
Information problems are sometimes recognised, but confined to probabilistic risk. Uncertainty (being irreducible to probabilities) is excluded because it does not fit into mathematical models.
The Individual in an Alternative Approach
Many human decisions concern future events for which there are no calculable probabilities – they are thus uncertain by definition (Knight 1921, Keynes 1937). This puts limits on the use of mathematical modelling.
Many human decisions concern future events for which there are no calculable probabilities – they are thus uncertain by definition (Knight 1921, Keynes 1937). This puts limits on the use of mathematical modelling.
The Individual in Mainstream Economics
Despite adopting scarcity as a central concept, human decision-making and computational capacities are regarded as massive or infinite.
Despite adopting scarcity as a central concept, human decision-making and computational capacities are regarded as massive or infinite.
The Individual in an Alternative Approach
In dealing with the complexity of the world, human decision-making and computational capacities are highly limited. Faced with this complexity, humans use intuition and rules of thumb, and they know that others do likewise (Simon 1957).
In dealing with the complexity of the world, human decision-making and computational capacities are highly limited. Faced with this complexity, humans use intuition and rules of thumb, and they know that others do likewise (Simon 1957).
The Individual in Mainstream Economics
Individual decision-makers interpret the same information in a similar or identical manner.
Individual decision-makers interpret the same information in a similar or identical manner.
The Individual in an Alternative Approach
The way individual decision-makers interpret information depends on their cognitive frames, their history and their enculturation in institutional settings. These vary from individual to individual (Veblen 1919).
The way individual decision-makers interpret information depends on their cognitive frames, their history and their enculturation in institutional settings. These vary from individual to individual (Veblen 1919).
Institutions, Technology and Markets in Mainstream Economics
Institutions are taken as given, or as emerging spontaneously from interactions of rational individuals.
Institutions are taken as given, or as emerging spontaneously from interactions of rational individuals.
Institutions, Technology and Markets in an Alternative Approach
Whether spontaneous or designed, the creation or development of institutions is difficult and costly in terms of time and resources.
Whether spontaneous or designed, the creation or development of institutions is difficult and costly in terms of time and resources.
Institutions, Technology and Markets in Mainstream Economics
Technology is often taken as given.
Technology is often taken as given.
Institutions, Technology and Markets in an Alternative Approach
Innovation and the evolution of technology are important drivers of economic change (Veblen 1904, Schumpeter 1934, 1942) and vital matters for investigation by economists.
Innovation and the evolution of technology are important drivers of economic change (Veblen 1904, Schumpeter 1934, 1942) and vital matters for investigation by economists.
Institutions, Technology and Markets in Mainstream Economics
There is a focus on equilibrium outcomes or on convergences towards equilibrium (involving negative feedback). To model equilibriating processes, diminishing returns are often assumed, irrespective of their frequency in reality.
There is a focus on equilibrium outcomes or on convergences towards equilibrium (involving negative feedback). To model equilibriating processes, diminishing returns are often assumed, irrespective of their frequency in reality.
Institutions, Technology and Markets in an Alternative Approach
Much greater attention is given to positive feedback, increasing returns, disequilibrium and cumulative causation. Path dependence is possible. Generally, history matters (Myrdal 1957, Kaldor 1985, Arthur 1989, 1990).
Much greater attention is given to positive feedback, increasing returns, disequilibrium and cumulative causation. Path dependence is possible. Generally, history matters (Myrdal 1957, Kaldor 1985, Arthur 1989, 1990).
Institutions, Technology and Markets in Mainstream Economics
The market is the universal context of all human interaction. It has existed at least since humans swapped nuts and berries in the savannah.
The market is the universal context of all human interaction. It has existed at least since humans swapped nuts and berries in the savannah.
Institutions, Technology and Markets in an Alternative Approach
Markets are historically specific social institutions that organise ongoing exchange. Markets differ in terms of their trading rules and outcomes. Although episodic trade is much older, markets first emerged about 5000 years ago in China and much later (circa 600 BC) elsewhere. Rarely do markets emerge spontaneously in their entirety. Like all institutions they are difficult and costly to create. They require a number of cultural and other major institutional preconditions.
Markets are historically specific social institutions that organise ongoing exchange. Markets differ in terms of their trading rules and outcomes. Although episodic trade is much older, markets first emerged about 5000 years ago in China and much later (circa 600 BC) elsewhere. Rarely do markets emerge spontaneously in their entirety. Like all institutions they are difficult and costly to create. They require a number of cultural and other major institutional preconditions.
Institutions, Technology and Markets in Mainstream Economics
Financial markets are generally self-regulating and efficient.
Financial markets are generally self-regulating and efficient.
Institutions, Technology and Markets in an Alternative Approach
Partly because of problems of uncertainty and bounded rationality, financial markets are prone to instability unless regulated judiciously (Minsky 1985).
Partly because of problems of uncertainty and bounded rationality, financial markets are prone to instability unless regulated judiciously (Minsky 1985).
Mainstream Welfare and Policy Approaches
Free trade is generally beneficial for both developing and developed countries.
Free trade is generally beneficial for both developing and developed countries.
Alternative Welfare and Policy Approaches
When the now-developed countries were developing they did not practice free trade (Chang 2002, Reinert 2007). At least without adequate national and market institutions, free trade in practice may mean the commercial swamping of nascent enterprise by big foreign corporations.
When the now-developed countries were developing they did not practice free trade (Chang 2002, Reinert 2007). At least without adequate national and market institutions, free trade in practice may mean the commercial swamping of nascent enterprise by big foreign corporations.
Mainstream Welfare and Policy Approaches
Economic development is principally a consequence of the spread of free markets.
Economic development is principally a consequence of the spread of free markets.
Alternative Welfare and Policy Approaches
Without a robust system of national administration, and without state-backed monetary and legal institutions, no significant market system is possible (Coase 1992). Economic development requires national and other institutions as foundations for economic activity.
Without a robust system of national administration, and without state-backed monetary and legal institutions, no significant market system is possible (Coase 1992). Economic development requires national and other institutions as foundations for economic activity.
Mainstream Welfare and Policy Approaches
The individual is always the best judge of his or her interests.
The individual is always the best judge of his or her interests.
Alternative Welfare and Policy Approaches
Because of limited access to information, and limited cognitive capacities, the individual is not always the best judge of his or her interests. Furthermore, there is a difference between subjective wants and objective needs (Doyal and Gough 1991), even if needs are often difficult to ascertain. While recognising the value of individual autonomy, other real needs must be taken into account. Neither the individual nor the state should be the uncontested judge of individual welfare. Democratic processes are essential to the ongoing identification and evaluation of real needs (Dewey 1929, 1939).
Because of limited access to information, and limited cognitive capacities, the individual is not always the best judge of his or her interests. Furthermore, there is a difference between subjective wants and objective needs (Doyal and Gough 1991), even if needs are often difficult to ascertain. While recognising the value of individual autonomy, other real needs must be taken into account. Neither the individual nor the state should be the uncontested judge of individual welfare. Democratic processes are essential to the ongoing identification and evaluation of real needs (Dewey 1929, 1939).
Mainstream Welfare and Policy Approaches
All welfare recommendations must be Pareto efficient.
All welfare recommendations must be Pareto efficient.
Alternative Welfare and Policy Approaches
The Pareto criterion is not the only standard of welfare. Today even some mainstream economists advocate the maximisation of the sum total of human happiness, which would rarely be Pareto efficient. We emphasise the importance of human needs.
The Pareto criterion is not the only standard of welfare. Today even some mainstream economists advocate the maximisation of the sum total of human happiness, which would rarely be Pareto efficient. We emphasise the importance of human needs.
Mainstream Welfare and Policy Approaches
All relevant moral issues are reducible to matters of individual preference or utility.
All relevant moral issues are reducible to matters of individual preference or utility.
Alternative Welfare and Policy Approaches
Moral judgements differ from matters of individual preference in part because they purport to be universal and are not merely matters of convention or advice. Some morality in this sense is essential for the functioning of institutions and the cohesion of society. In particular, and for good reason, all societies have moral imperatives that limit rampant individualism (Arrow 1987, Etzioni 1988, Schultz 2001, Hodgson 2013).
Moral judgements differ from matters of individual preference in part because they purport to be universal and are not merely matters of convention or advice. Some morality in this sense is essential for the functioning of institutions and the cohesion of society. In particular, and for good reason, all societies have moral imperatives that limit rampant individualism (Arrow 1987, Etzioni 1988, Schultz 2001, Hodgson 2013).
Mainstream Welfare and Policy Approaches
Utility-based welfare analysis has universal or near-universal applicability. In particular, it applies to matters of ecological stainability, education and health.
Utility-based welfare analysis has universal or near-universal applicability. In particular, it applies to matters of ecological stainability, education and health.
Alternative Welfare and Policy Approaches
The limits of utility-based welfare analysis are especially apparent in regard to the natural environment, where utility-based models do not provide adequate evaluations of ecological sustainability (Daly and Townsend 1993, Sagoff 2004). Basic needs, egalitarian concerns and problems of limited information are especially important in areas such as health and education. Such considerations challenge utility-based and Paretian norms.
The limits of utility-based welfare analysis are especially apparent in regard to the natural environment, where utility-based models do not provide adequate evaluations of ecological sustainability (Daly and Townsend 1993, Sagoff 2004). Basic needs, egalitarian concerns and problems of limited information are especially important in areas such as health and education. Such considerations challenge utility-based and Paretian norms.
* For a critical comparison of different proposed definitions of methodological individualism see Hodgson (2007).
Originally drafted December 2008. Last amended March 2014.
Originally drafted December 2008. Last amended March 2014.
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