Home > The Economics Profession > How to build a narrative linking the various heterodoxies: Part 2

How to build a narrative linking the various heterodoxies: Part 2

A month ago we began Part 1 of a discussion on how to build a narrative linking the various heterodoxies so as to have an alternative paradigm with which to challenge, both in the media and the classroom, the neoclassical/neoliberal mainstream.  To start Part 2, the geophysicist Geoff Davies has contributed the following short essay.  

The Nature of the Beast

Geoff Davies

The need for a new conception of economics is widely acknowledged in the wake of the global financial crisis[i], at least outside of diehard neoclassical circles.  However a common perception seems to be that no adequate and coherent general conception is in sight, though many loosely related or unrelated heterodoxies vie for attention, as noted by the Editor of this blog.  I argue here that when the subject is approached from the point of view of dynamical systems a broad new framework becomes evident.  Furthermore, once the nature of the beast is identified, some fundamental conclusions can immediately be drawn. 

To a natural scientist experienced in thinking about dynamical systems, the neoclassical claim of equilibrium is laughable.  Several kinds of instabilities can be readily identified, and mechanisms promoting instability are also readily apparent.  The observable pervasiveness of instability leads to the identification of the kind of system we are dealing with.

Financial market crashes are an obvious case of instability.  The so-called business cycle, of which crashes are a part, also strongly suggests destabilising mechanisms are at work.  The rapid growth to dominance of one or a few firms in new-technology areas is an obvious form of instability at the micro level.  Minsky’s financial instability hypothesis is also clearly describing an instability, at the macro level.  One might suspect that the long-term tendency of economies to grow exponentially is a result of an underlying instability, rather than just a result of policy, particularly given the tendency of shrinkage sometimes to be uncontrollably rapid.  A different kind of instability is evident in the pervasive tendency of income distribution to become extremely uneven – the rich get richer.

Several mechanisms that drive instabilities are also readily identifiable, and some are widely remarked upon.  Perhaps the one with the most direct implication, though it does not seem to be the most remarked, is economies of scale, or more rigorously increasing returns to scale.  The existence of economies of scale are well known in manufacturing, but they actually pervade the economy, operating strongly in service industries and in management and other components of business[ii].  Economies of scale commonly enable early entrants into a new market segment to grow exponentially until they gain an unassailable dominance, Microsoft being a classic example.

Exponential growth is a signature of instability.  It is caused by positive internal feedback:  in the case of economies of scale, the larger the firm the greater the profit margin, which allows the firm to grow even larger, and so on.

Another readily evident cause of instability is herding behaviour.  This is exhibited by financial market players and is also behind fashion and fads.  It is a manifestation of our social behaviour, something not possessed by homo economicus.  It is every marketer’s dream to induce the customer base to grow exponentially through the operation of our social responses.

Incomplete or delayed information can also lead to instability.  Physicists and engineers know that a dynamical system in which negative (damping) feedback is weakened or delayed can lead to the system becoming oscillatory or unstable.  Good and complete information is fundamental to the proper functioning of markets, since they underlie the evaluations that are needed to determine reliable prices.  Information thus contributes to a negative feedback that tends to stabilise the economic system, and delaying or losing information can allow instability to develop.  Currency traders, for example, can have only a minute fraction of the information relevant to their cavalier activities.

The charging of interest on new money is like a private tax that pumps wealth from the less wealthy to the very wealthy.  There are other such wealth pumps, among them being the easier access the wealthy have to credit, to political influence, to participation in financial market gambling, and so on.  These mechanisms operate to destabilise the distribution of income and exaggerate its extremes.

There are surely many other sources of instability in our complex modern economies, but these examples should convey the pervasiveness of instability, and the folly of the neoclassical theory, which excludes most of them a priori.

Systems in which internal feedbacks operate are forms of dynamical system, and typically are self-organising systems.  Positive feedbacks can cause the system to encounter external limits, and internal relationships then typically become nonlinear.  As the strength and/or multiplicity of interactions and feedbacks increases in such systems, behaviour tends to move from very simple, perhaps steady or oscillatory, through increasingly complicated and ultimately into the regime of deterministic chaos, in which the detailed behaviour is non-repeating and fundamentally unpredictable.

 Short of chaos is a regime of behaviour known as complexity, in which order and disorder wax and wane.  Systems in this regime are known as complex self-organising systems, or complex systems for short.  Living systems seem to be in this regime.  Complex systems typically have many possible quasi-stable states, but often undergo transitions between such states.  When they do they are hypersensitive to small disturbances, which renders their long-term behaviour also unpredictable in detail.

Although complex systems are unpredictable in detail, they typically have a recognisable style or character of behaviour.  Think of the difference between dog behaviour and cat behaviour.  Neoclassical theory portrays the economy as a gentle old cart horse that will convey a little old lady safely to church and home, never straying far from the righteous path.

If the economy is a complex system then it has astronomically-many possible states.  It is not practically possible to decide which of those states might be the most efficient (in whatever sense you wish to define).  If the system is time-dependent, then it is not even sensible to ask which state is the most efficient, because it may soon not be.  Thus there is no way of deciding which might be the globally optimal way to organise an economy.

The central neoclassical conclusion is thus lost.  There is no global equilibrium state, which is also the optimal state in the neoclassical theory.  Thus there is no reason in theory to expect free markets to deliver an optimal state, or even a desirable state.

On the other hand markets are clearly powerful.  They stimulate innovation and, as Hayek has observed[iii], they enable a vast amount of information processing, though not necessarily of a very rational kind.  Unfettered markets currently are generating profound dysfunctions.  For example, instabilities in financial markets nearly threw the global system into depression, and may yet.  As the system generates super-wealth, it also generates poverty.  The system is consuming the biosphere, upon which we are totally and intimately dependent for our food, water and our very breath.  Its health is our health and we are destroying it, our life support system.

If free markets are delivering dystopia, the implication is not necessarily to get rid of markets and all become socialists.  Rather, it is to learn to manage markets.  Rather than a gentle old cart horse, we should regard our market economy as a team of wild horses – powerful, but needing to be harnessed and guided.

Guiding a complex, unpredictable, near-chaotic system may seem like a tall order, but we already do it in many ways, though not with any coherence.  The bluntest form of guidance is regulation, but the more elegant way is through incentives and disincentives.  These are the economic version of feedbacks, and feedbacks govern the behaviour of the system.  By intervening judiciously, and cautiously, to tweak the feedbacks, we can aspire to learn to manage the system.  If we approach the job without the crippling mental baggage of the neoclassical tradition we ought quickly to learn to manage it much better than have been doing.

Our guiding metaphor here might be of the bonsai master.  He does not try to force or stifle the impulses of his tree to grow, but rather closely observes them and intervenes minimally.  He aspires to work with the tree, as much as possible, rather than against it.  The complex dance between the master and the tree can satisfy both the tree’s urge to grow and the master’s aesthetic desires.

Three other fundamental conclusions emerge from this analysis.  First, if economies have multiple possible states, many of which are not obviously inferior to others, then we can tailor our economy to support the kind of society we choose to live in.  In other words we can restore economies to their proper role, of supporting our way of life rather than dictating it.

Second, each society and culture might choose differently, and tailor its economy accordingly.  Thus the present rush to a global monoculture might be reversed, and cultural diversity might flourish once again.

Third, if economies and living systems are both forms of complex systems, then there is no reason in principle why an economy cannot be made compatible with living systems.  At present our economies are highly incompatible, and are killing people and other living things as a consequence.  Thus we can aspire to create economies that allow the natural world to thrive around them.  Indeed we must, or we have no future.

The recognition of complexity in economies has been growing for some time.  There are many studies of particular parts of economies, using a variety of approaches including the use of interacting adaptive agents.  There are many instructive results and promising insights.  An excellent review is given by Eric Beinhocker in The Origin of Wealth[iv].  He covers many detailed studies, of management, behaviour and related fields as well as economic phenomena.

Whereas Beinhocker’s book reviews detailed studies, an overview that puts the complex system view in a broad context and draws the overarching conclusions can be found in my own Economia[v].  It is this overarching view that I have briefly summarised here.

I conclude with two observations.  First, there is a great deal of work to be done to understand key parts of the economic system, to transfer those practices and ideas that are useful into the new framework of what Beinhocker calls complexity economics, and to weed out false or unhelpful habits of thought and practice that hang over from neoclassicism.

Second, the process of taking these ideas into the policy realm need not await the development of sophisticated and detailed mathematical models.  Economists, even many heterodox economists, seem to feel an economic idea is not ready for application until someone has made a detailed quantitative model displaying it.  The whole neoclassical enterprise ought to be fair warning that making a mathematical model does not ensure the model, and its underlying idea, have any relevance to real economies.

Indeed neoclassicism seems to have totally missed the distinction between mathematics and science.  Mathematics is about developing logical structures (a noble and powerful activity in itself).  Science is about comparing ideas and their implications (theories, models, deductions) with what we can observe.  The test of a good scientific theory is that it is a useful guide to how the world works.  Even very simple, back-of-the-envelope estimates can, in situations where there is great uncertainty or ignorance, be very useful guides and therefore valid science.  This is more obvious in my own field of geophysics than it might be in laboratory physics where great precision may be justified.  Trying to figure out the state of the Earth during and “soon” after its formation does not require, or justify, great precision, but rather the art of finding ways to test ideas against the quite limited observational constraints available.  A rough estimate may show the idea is incompatible with what little we know.  If it seems to be compatible then it is worth exploring more carefully.

A similar spirit of exploration is required as we come to grips with a new way of looking at economies.  There are major phenomena still to understand, and great uncertainties in some areas, so rough estimates or very simplified models can play a very constructive role, so long as any interim success is not taken to mean further exploration is unnecessary.

In the meantime, a primary implication of the argument summarised above is that there is no justification in theory for believing that unfettered markets will deliver a desirable result.  Given abundant evidence of dysfunction, we can say there is also little justification in practice for unfettered markets.  Therefore we should throw off the neoclassical straightjacket and set about pragmatically and unapologetically managing markets to deliver the results we desire.

The ideas I have outlined here ought certainly to be debated, I don’t mean to pre-empt that.  The point I have just been making is that if this view is accepted, then some broad policy implications follow immediately, and need not await elaborate modelling.  Whether this view becomes accepted remains to be seen.

A reassuring feature of the complexity view is that it returns us closer to common sense, and we could do worse, in the short term, than bring the basic thinking of a shop keeper to our economic management.  For example we would, if we did so, immediately abandon the GDP as a guide to the well being of our societies, because it is like putting all our transactions in the credit column of the ledger and adding them up.


[i] See, for example: Review of David A. Westbrook’s Out of Crisis: Rethinking Our Financial Markets; Report from the 98th Dahlem Conference by Colander et al.;  Article by Paul Krugman, NYT Magazine, 2 Sept 2009;  Blame the Economists, Michael Hirsh in Newsweek, 13 April 2010;  Call to link heterodoxies, Editor RWER Blog, 30 June 2010;  Lament by Radford, What do we tell the students? RWER March 2010;  Sources of crisis, Harcourt, RWER June 2010.

[ii] Rothschild, M., Bionomics:  Economy as Ecosystem. 1990, New York: Henry Holt. 423 pp.

[iii] McKnight, D., Beyond Right and Left. 2005, Sydney: Allen & Unwin. 298 pp.

[iv] Beinhocker, E.D., The Origin of Wealth. 2006, Boston: Harvard Business School Press.

[v] Davies, G.F., Economia: New Economic Systems to Empower People and Support the Living World. 2004, Sydney: ABC Books.  Out of print:  pdf available at http://betternature.wordpress.com/economia/ .

  1. August 2, 2010 at 12:19 pm

    I ask you to consider this thought experiment.

    Current banking, accounting, competition and foundations, remain unchanged EXCEPT as follows:

    1. Sovereign government can spend and invest money that circulates without increasing the national debt. It is not initially borrowed. The amount of such money is limited by its effect on production and consumption of the necessities of life.

    2. Based on 1, all taxes are ended EXCEPT if they are required by negative effects on production. It is expected that money will be saved by private people and firms–not used to violate anti-hoarding and anti-monopoly laws.

    3. Savings are protected from inflation by COLA’s — similar to the way TIPS bonds are.

    4. Using the current universal product code (as improved if necessary), price controls are implemented on “necessities” — but NOT on anything else.

    5. Production of necessities is, as necessary, subsidized by government when produced and/or when purchased. Government subsidy contracts help to make price control effective.

    6. Profits on NON-necessities are relied on to help keep demand for necessities consistent with their affordability– (helped along by price controls and subsidies).

    7. Thus accustomed great inequality in income and wealth does NOT reduce government power to raise the minimum standard of living to great heights.

    8. Labor markets and ordinary politics are ruled by democratic principles and common sense simplicity– more or less as usual– but with improvement always sought.

    9. The idea of all the above is to reconcile the interests of the richest with the interests of those protected by the creation of the highest minimum standard of living technology and productive genius, unfettered by monopoly, taxes, and under-funding, can achieve.

  2. August 2, 2010 at 6:33 pm

    Geoff said:
    “In the meantime, a primary implication of the argument summarised above is that there is no justification in theory for believing that unfettered markets will deliver a desirable result. Given abundant evidence of dysfunction, we can say there is also little justification in practice for unfettered markets. Therefore we should throw off the neoclassical straightjacket and set about pragmatically and unapologetically managing markets to deliver the results we desire.”

    The problem is that markets are already managed to produce net gains for a select
    minority of manipulators. There is no such thing as an unfettered market, apart from perhaps the downtown flea market.
    Therefore, we are not dealing with the problem of managing a complex natural phenomenon as happens in science and technology. Our problem is to wrestle control away from those that would use us for their own ends. And that is a political problem. Not a technical one.
    Helge

    • August 2, 2010 at 11:56 pm

      Helge, I certainly agree markets are manipulated and there is a political problem as well, but we still need to address the nature of market economies for two reasons. First, the neoclassical argument for free markets is a trojan horse for abdicating management of markets, so the manipulators can have free rein. This ‘free markets’ idea has become a dominant meme of our culture. Second, if/when we wrest control back we still need to know the nature of the beast we are dealing with.

      Also, if I detect a bit of resistance to a “scientific/technical” approach, good science does not have to be incompatible with sensitivity to people and living beings, it just means seeking a view of our world that is clear and useful. We are suffering, through neoclassicism, the consequences of a very limited nineteenth-century reductionist “technical” view of the world. Modern systems views are much more accommodating of the magnificent subtlety and complexity of real people.

  3. August 2, 2010 at 10:15 pm

    1. Collect all land rent for public benefit: corrects dysfunctional land market; tackles wealth inequality, stops boom/bust cycle, huge efficient revenue source.
    2. Govt creates all credit which banks then have to pay for: more revenue; with 1. stops boom/bust cycle.
    3. Convert businesses with 30+ employees into worker-owned co-operatives.
    4. Finance fixed assets from simple loans: no shareholdings; savings->loans mediated, without expropriation of others’ work efforts.
    5. The only reason to own land or business assets is to use them personally for working with or living on.

  4. August 3, 2010 at 12:09 am

    What I wrote above is substantially the same as the following version I have posted where I could:

    Topic: The fly in the oatmeal is under-funding both cooperative and competitive aspects of business in modern times.

    Finding fault with the following prescription for fully funding machines that think– that claims it is against ecological imperatives–is unfair and false: the first fully funded markets and government responsibilities will be those that deliver ecologic and social common sense to a world that’s lost its purpose and society that’s gone to seed.

    THE NEW MONETARY ACCOUNTABILITY (NMA)
    FOR NATIONAL AND GLOBAL SECURITY AND
    HUMANITARIAN GOALS AND OUTCOMES

    It is common enough to say it’s a world we never made. The heavy hand of history is blamed for disgraceful events that occur every day on our watch.

    No one is held accountable for the outcome of their consent to be governed by notorious belief. Everyone is appalled–but there is nothing they can do.

    Within a block or two of each other, some people live in splendor while far more are deprived. Instead of ending deprivation by positive means at hand, (that would protect the privileged even more than it did all others,) we ask to know how deprivation is self-imposed–and how the example of universal welfare is held to be a contagious disease.

    It is as though “free as the air we breathe” is the root of laziness– and of the failure to acquire the habit of work that defines people worth their salt.

    What follows is a book that asks you and those your love to consider if much of the above is due to erroneous acceptance of conventions that apply rules for the use of money whose primary purpose is less that security and prosperity within our reach.

    The rules we would substitute here–for those we already have– include incentive and reward that sets people apart–but protects them just the same.

    They encourage genuine genius–and seek excellence in all things. They accept inequality and are thankful for its gifts. They encourage successful people to save their profits. They take nothing in taxes away from people who account for so much progress, and nothing in taxes is taken away from anyone else.

    I ask you to consider this thought experiment:

    ==== begin TE =====

    Current banking, accounting, competition and foundations, remain unchanged EXCEPT as follows:

    1. Sovereign government can spend and invest money that circulates without increasing the national debt. It is not initially borrowed. The amount of such money is limited by its effect on production and consumption of the necessities of life. If high quality production of necessities declines, the experiment is ended.

    2. Based on 1, all taxes are ended EXCEPT if they are required by negative effects on production. It is expected that money will be saved by private people and firms– money shall not used to violate anti-hoarding and anti-monopoly laws.

    3. Savings are protected from inflation by COLA’s – similar to the way TIPS bonds are.

    4. Using the current universal product code (as improved if necessary), price controls are implemented on “necessities” – but NOT on anything else.

    5. Production of necessities is, as necessary, subsidized by government when produced and/or when purchased. Government subsidy contracts help to make price control effective.

    6. Profits on NON-necessities are relied on to help keep demand for necessities consistent with their affordability- (helped along by price controls and subsidies).

    7. Thus accustomed great inequality in income and wealth does NOT reduce government’s economic power to raise the minimum standard of living to great heights. This will, incidentally, further enrich the super rich who will enjoy a free market in the sale of and profit on luxuries–to an ever growing universe of buyers.

    8. Labor markets and ordinary politics are to be ruled by democratic principles and common sense simplicity- more or less as usual- but with improvement always sought.

    9. The idea of all the above is to reconcile the interests of the richest with the interests of those protected by the creation of the highest minimum standard of living that technology and productive genius, unfettered by monopoly, taxes, and under-funding, can achieve.

    ================================

    Obviously, my emphasis is on the political contest between haves and have-nots.

    I want both sides to join hands and get richer– more or less like communist China is trying to do– but with a foundation based on human rights more than on party domination of all thought.

    It is no accident that technology has made it foreseeable that China and India will become rich nations. The right balance is being sought between decentralized production and centralized strategic logistical thought to prevent the contradictions of profit and loss accounting (with no real purpose) from gumming up the works.

    I know we have to respect history, psychology, military science and the rest. All is not accounting and accountability. But the errors in law and economics and in profit and loss accounting accounting, compared with the “perfection” of “Functional Finance” in the writings of Abba Lerner, leaves me optimistic over furure outcomes.

  5. August 3, 2010 at 12:25 am

    http://ustaxreform.us is home to my thoughts on a New Monetary Accountability; a debt-free money supplement to capital investment and liquidity as we know them; and reconciliation of opposing interests as exponential growth in artificial intelligence applications in the field of logistical science makes itself felt in banks and treasuries of democratic nations. But the current sate of its content suffers a deficit in finished product, diagrams and viral quality that rests on brevity and accuracy.

  6. Keith Wilde
    August 3, 2010 at 11:33 am

    It seems to me that the editor has already provided the key to building a narrative that links the various heterodoxies. That is, the element that unites them is their common disdain for neoclassical orthodoxy. I recently made a requested conference presentation on “appropriate economics” (in which I made abundant use of quotations from this site) which concluded that the function of neoclassical orthodoxy is “propaganda for the ruling class”.

    Each brand of heterodoxy has as its favorite whipping boy a particular aspect of reality that is missing from the neoclassical model of perfection. This defect becomes especially acute when orthodoxy is invoked to support an issue of policy. That is, each of the missing elements of reality is linked to an implicit policy orientation and favorite prescriptions. It is a situation captured in verse about the six blind men of Hindustan who encountered an elephant and each described the full beast according to the particular part that he had happened to touch. With the consequence that each was partly in the right but all were in the wrong.

    I fantasize that if, during two decades as a dissident policy analyst in government agencies, I had had a handbook consisting entirely of authoritative refutations of orthodoxy from each of many heterodox disciplines, my life would have been much simpler and more satisfying. When policy proposals were shown to be defective by first one and then another of the heterodox arguments, policy development would be forced to become sane and focused on relevant aspects of reality as they bear on frankly acknowledged value priorities.

    Could not the construction of such a handbook provide the desired “narrative”?

    • Peter Radford
      August 3, 2010 at 4:57 pm

      Exactly Keith.

      The key observation to make is that it is entirely within the power of heterodox economists to create such an integration. No one else can.

      The question becomes how?

      But this is not new. It has been the case for decades. I see several problems:

      One, is that heterodox economists are not as well acquainted with each other as they seem to be with the problems of neoclassicism. To extend your metaphor we have many more than six alternative versions in our particular Hindustan.

      Second, there seems to be resistance to achieving coherence in heterodoxy. I think this stems from a misunderstanding, and possibly a fear, that each particular heterodox strand might lose its identity within a larger, more comprehensive, ‘meta heterodoxy’. I see it differently: each strand could become a vital part of an organic whole. This should provide vibrancy and an expanded context for development and research. After all if the economy is a giant complex system then economics is likely complex as well.

      Third, economics is highly resistant to the importation of new ideas from outside disciplines. We all know this is especially true of neoclassicism, but I suspect it is also true of heterodoxy as well. Geoff’s essay above is a good case in point. One of the most well worn books on my bookshelf is a compendium of essays from the Santa Fe Institute entitled “The Economy As An Evolving Complex System”. It is a mine of new thinking and gives economists insight into the power and use of complex systems analysis. That work was published in 1997. Another example is the work of Georgescu-Roegen on entropy and economics. His work was first published in 1971. We all have plenty of similar examples of well established by still largely ignored useful modes of thinking yet to make a central impact on economics. The opportunity is huge if we can venture outside our own box.

      Fourth, following from the above, another form of resistance comes from the reaction many heterodox economists have to ‘scientism’. They appear to conflate science with the elimination of humanity from analysis. That is a legacy of neoclassical analysis, but should not necessarily preclude the importation of analytical techniques from outside to provide our real world efforts with both a rigor and a human face. In my opinion one of the reasons for the failure of economics – as a whole – is the atrophy of its analytical toolkit.

      Fifth, heterodoxy is rich with traditions studying the impact of institutions, geography, gender, class, knowledge and so on, all of which were discarded as irrelevant when neoclassicism disappeared down its constrained allocation hole. But those traditions are not stitched together any more than neoclassicism is. Which is why your desired handbook is still missing.

      My larger point speaks to your issue of policy impact. We are trying to combat a prevailing worldview that is far too well entrenched in the policy making elites, whether they be in government, business, or academia. Free market dogma is dangerous, hegemonic, and downright false. It needs to be overturned. Not by ‘six blind men’, but by one determined group.

      The satisfaction of your desire for an alternative narrative depends on our ability to set aside our differences and become that group.

      • Keith Wilde
        August 4, 2010 at 1:21 pm

        Peter, my suggestion is much less ambitious than the integration you propose, but I think it would be a useful beginning. And there does seem to be pretty widespread agreement with the editor’s observation that the one common element among the varieties of heterodoxy is their disagreement with policy implications of the neoclassical model.

        The handbook I have in mind would not knit them all together into a new whole, but it could, I think, be a step toward uniting the various groups into one that is united against the free market dogma that claims economic theory as a foundation. They don’t have to be integrated beyond that minimal degree in order to be useful in a resistance movement.

        Think of it as an encyclopedia rather than a textbook. It would consist of articles that reduce each brand of heterodoxy to the essence of its disagreement with the “adversary”. Not an impossible job, I think. Your mention of Georgescu-Roegen reminds me of my collaboration with others to bring him to Ottawa in the late seventies. He did a pretty good job of presenting the essence (minus the physics) in a couple of lectures.

        The product is not a textbook. It is a tool for policy analysts and advisers; no more than a reading list item for teachers. When the government analyst is asked to evaluate a proposal, he can leaf through its contents for the most relevant and authoritative arguments that refute whatever it is in the text on his desk that turns his stomach.

        This kind of application does not mean that the analyst/adviser then turns around to endorse the full program of the heterodox variety that was most useful to him in a critical evaluation of the proposal. He may have used more than one of them. His evaluation will (may) mean that the issue is thrown back into the pot for further committee-built policy development, with the prospect that it might emerge in a more benign version, i.e. less anchored to the free market dogma.

        Keith

  7. August 3, 2010 at 2:41 pm

    Policy toward– Islamist ambitions; peace between the largest nuclear powers; unemployment anywhere; low wages; physical hyper-growth as in China; trade; global warming; etc, begs for narrative justification without jargon or algebra.

    There is always need of good historical narratives of intellectual movements such as the economic development of today’s major nations and major property owning organizations — corporate, religious, and unique in form and function.

    As to a narrative to explain, join together, or promote, heterodox economic schools in general or any of them in particular, that seems to be our purpose– but I think if we had one or many of these, we would still be at the beginning of our quest for humanitarian reform of systems and conditions as they are in fact.

  8. August 3, 2010 at 2:50 pm

    I am interested to see that John Gelles presenting some interesting ideas inspired mainly by Abba Lerner, and his Functional Finance which in turn drew its original light from Chartalism. However, such ideas are incomplete in relation to my work in progress project of Transfinancial Economics.. some basics of which are expressed below. Hopefully, a book will result probably entitled Towards Super Economics, Financial Reform, and Global Justice.

    i) TFE is a transitional system towards the ultimate aim of a moneyless world.

    ii) Phase I TFE could be undertaken very quickly by special banks concerned with sustainability, and green products/services. These banks are called Facilitator Banks, or FBs (term not yet used in the entry on this subject at the p2pfoundation).With so-called grant interest as an incentive they would be able to electronically create new non-repayable money (like governments but be tracked, and monitored by the Central Bank, or some other body to prevent fraud) for some project which could in part also include investors using earned money ofcourse. It is similiar to the concept of Advanced Market Commitment, or AMC. FBs would have powers to create subsidies, and other ways to ease finance in some project (especially those with little, or no obvious commercial incentive but have high humanitarian, environmental, and sustainable value so to speak). Objective checks on the capacity of the relevant suppliers of products, and services would be undertaken to ensure that there is no disallocation of resources which could lead to serious rises in the free market price as well as shortages. If necessary investment by FBs could be made to increase capacity where, and when necessary.

    iii) Phase II TFE involves the gradual introduction of new, or upgraded computers, and new computer programming into the banking system. FBs (and the normal banking sector) would start to in part to monitor the volume, and sales of products,and services directly from the real economy. If there is any serious problems of inflation these could be subject to an instant electronic price controls. Moreover, if this leads to a serious loss in profit to a business this would be instantly compensated by new non-repayable money created electronically to the relevant bank account(s). However, every attempt would be made to avoid serious price distortions.

    Taxes, and interest would also be gradually phased out altogether. Interest would be paid for by an independent public body.

    iv) Phase III TFE is the full global introduction of electronic monitoring of goods, and services. The key aim of this is not only to keep inflation in check if necessary but also to have highly accurate data of how much in the way of real resources are being used up on our “small” planet. Such knowledge will become increasingly important as this will give growing green businesses (subsidised mainly by FBs rather than by governments) to make the best use of limited resources. Furthermore, we would unlike now have a far more adbvanced understanding of the mechanics of the economy itself.

    At this stage, taxes, and interest would no longer exist.

    v) During Phase II, and Phase III TFE there would be a huge increase in automation. This would ultimately end the need for wage slavery. With the help of carefully targeted subsidies virtually all businesses would have become responsible as far as the environment, and sustainability is concerned. At the same time, there would be unemployment on a huge scale. But people would be able to indulge in “leisure-like” pursuits, and receive a form of financial benefit created by new non-repayable money. NGOs would become far more poweful, and influential in society, and would spearhead changes on a mass scale to create a new, saner world no longer based on greed, and money. They would be able to challenge centralized power structures as never before, and will find getting grants alot easier to come by. The upshot of all this is a moneyless world but one in which open democracy, and respect for universal human rights acts as the basis of an evolved technocratic world..

  9. August 3, 2010 at 10:20 pm

    — A narrative that links heterodox economic thought (contrary to the current race to lowest wages and most impotent ecological rules–which is also currently opposed by nationally ambitious soft entities, which we may call Japan Inc., China Inc., USA Inc., etc.,) is here proposed on this RW blog/forum.–

    Associated with this narrative is the current hot topic:

    ….. ….. Stimulus versus Austerity.

    Top scholars and others get hot under the collar when they model in their head the wartime growth under the fear of defeat that made America the arsenal of democracy: in that model deficits do not matter. Only production matters. Money is made to match output. Debt is managed by government via low enough rates of interest to keep the action outside the system’s courts of bankruptcy.

    Their opponents model in their head debt that is allowed to paralyze democratic capitalism. Debt was severed from debtors prison with none but good effect. Bankruptcy and insolvency allow debt to severed from money by write-off to real value–often zero. But this is not nearly as simple as kicking prisoners out on the street. Some debt supports innocent owners of bonds, including those who pay pensions; pay for universities and other endowed services we cannot live without; and keep banks and governments solvent. So debt cannot be put on the street like debtors. It must be rationally reduced to real value with some holders of debt protected from such reductions.

    These facts, as it were, mean we cannot allow debt to make a farce of business. Nor can we allow deficits to contract business when fiat money costs nothing more than vigilance. Vigilance to prevent hyperinflation via more green production, more inflation protected cash savings, and more avoidance of wasted labor and materials– and wasted lives of people whose identities require a job and whose obligations require income.

    ….. ….. End Stimulus versus Austerity.

    In addition to this hot topic are other excellent thoughts relative to the quest for narrative–which I will not enumerate.

    In addition to all the above is Robert Searle and John Gelles– amateur thinkers of out of the box solutions to poverty, pollution and war, which all economists oppose in their own words.

    In my view, Searle and I have the same ideas: we see the problems of production and trade as essentially problems for information science and technology.

    I want the ESA, an economic security agency born as we kill the IRS. It is engaged in logistical science — which is economics before we add money.

    I would hope we add money for the foreseeable future. But not money based on debt. I like money based on money. Robert says that’s chartalism. I think he’s right.

    I also want to enlist as our supporters all the richest people alive — the one’s some communists put out of business. I see them as helping– no matter how little they resemble good guys like Warren Buffet. Let them have all they can honestly earn under fair criminal law as we know it. They only help us live with luxury that replaces taxes in a world flush with money not debt.

    I listened to Wilbur Ross, the foremost contrarian I know of, explain the function of bankruptcy and the fear he has that our engineers will be too few in number to keep us ahead of all comers.

    I want us to lead until a candidate in the tradition of Abraham Lincoln is offered by some other nation. And, if that happens, say in Australia, Japan or Brazil, etc., I want us to all be partners.

    I cannot imagine America declining below such partnership level — although everything is possible on earth– we could have lost the Civil War and today be the bad guys some in our government would make of us.

  10. August 4, 2010 at 2:16 am

    Peter Radford makes some useful points, though my perspective may be somewhat different. It does make sense to me that heterodox economists refer more to neoclassicism than to each other, and that they have some resistance to ideas from other heterodoxies or other disciplines.

    I would expand point Four – other disciplines can supply not only analytical toolkits and methodologies but different conceptions.

    This gets to the core of our topic. The requirement is not just for a collection of heterodoxies, with or without handbook, but for coherence. It has to be, because economies will only be usefully understood through a framework large enough to accommodate everything about economies, rather than just an aspect of economies.

    There are many crucial things missing from neoclassicism, like social interaction, the way real people make choices, the way real firms are managed, our inability to foretell the future (!), economies of scale, that the economy is a subset of the biosphere and subject to physical and biological constraints, money (amazingly), marketing, people’s need to belong, and so on. We won’t get a useful replacement by focussing on only one of these aspects. A useful framework has to accommodate them all.

    My contention is that complexity does provide such an overarching framework. There is no reason why it can’t accommodate each of the factors I just mentioned. I don’t know how to include them all – that is the program for the future – though there are likely to be some conclusions that emerge fairly quickly. As more aspects of real economies and real people are included, so the character of the beast will come into sharper focus.

    On the other hand “complexity economics” will not accommodate other conceptions that aspire to frame the whole subject (neoclassicism, Marxism?). So there will be some incompatibilities among heterodoxies.

    You may agree or disagree that complexity provides a general framework, but the need is there for a general framework, not for a collection of heterodoxies. Of course my summary is very brief, and it is not too surprising if the central conception doesn’t immediately take hold of readers (as evidenced by the comments so far). But is there a curiosity to explore this path further … ?

    Peter mentions a book from the Santa Fe Institute, and I referred to Beinhocker’s The Origin of Wealth, both of which provide many stimulating analyses and ideas. My own introduction to complexity was through Mitchell Waldrop’s Complexity (Touchstone, NY 1992) which was also based around the Santa Fe Institute. I highly recommend it as a good read with many insights.

    Another word on science (scientism?). What excited me when reading about complexity is that it can accommodate living things. It becomes apparent that old reductionist science is brilliantly successful for studying the inanimate world, but hopeless for studying life. Because of the phenomenon of emergence, the reductionist approach of breaking a system into pieces (e.g. asocial agents with static and identical preferences) fails. A holistic view is (also) required if the full behaviour of the system is to be understood.

    The notion of complexity has emerged only in the past few decades. You can still do good science with complex systems, but you must be holistic and humble, as we must also be when studying people. So reactions against old-style ‘scientism’ may not be relevant.

  11. August 5, 2010 at 5:46 am

    Geoff Davies offers —

    “My contention is that complexity does provide such an overarching framework. There is no reason why it can’t accommodate each of the factors I just mentioned. I don’t know how to include them all – that is the program for the future – though there are likely to be some conclusions that emerge fairly quickly. As more aspects of real economies and real people are included, so the character of the beast will come into sharper focus.”

    This invitation to the forum, profession, nation and all concerned, to frame useful reform (that may turn the study of political economy from a dismal art, with pretensions to science if you insist, into a recognizable pursuit of virtue and reward for the whole human race,) is accepted by me–and may be accepted by us all, one at a time.

    Then what?

    Perhaps some of the conclusions we hope will quickly emerge.

    I conclude that the enemy is not the rich and not the radical. The enemy is not us, either.

    The enemy is failure to move completely away from taxes in this era of Nixonian fiat money power.

    We could do this, if we were willing to create a real dichotomy in production between strategic spending using cost accounting and markets that accepted profit and loss accounting for luxury sales and their role as protector of the dollar and other hard currencies.

    Strategic spending and courts of equity would be dominant–luxury would be envied but remain second to strategy and ultimate security in a dangerous world.

    This may be reductionist and playing with totalitarian fire. And we would have to include all that recognition of complexity asks of people who would not fail.

    So much for a beginning.

  12. August 5, 2010 at 11:00 am

    The question has been raised — why do we, who live in the “Real World”, and who recognize that in the “unreal world” of free trade proponents, laissez-faire activists, neo-liberal consensus advocates, etc., there a constant belief in TNA (there is no alternative– to competitive corrupt capitalism– if you would void modern tyranny by statist socialists, communists and fascists) — and that anti-TNA feelings ought to spontaneously unite us as into a PAC (political action committee,) and create some small strength in numbers, higher than number 1.

    The question was raised in comment, and is always present in our heads. WHY DON’T WE UNITE? It even fits the melody for WHY CAN’T YOU BEHAVE? or some similar song I don’t well remember.

    The answer is related to NIH (not invented here). We each have invented the anti-TNA program we know would work the best. Other programs are our real enemy–because they rob us of the role of Don Quixote — famous fighter of plain old windmills. It makes of us nothing at all, while Don and someone else do battle on center stage.

    Why were communists and socialists more hateful to each other that to their common adversary? Same reason — no?

  13. Kevin Cox
    August 13, 2010 at 7:41 pm

    A solution to the instability can be found by allowing the capital money market to operate as a market is meant to operate.

    Markets are places where we have suppliers and consumers and where price is the regulator. When the demand goes up the price increases that signals the suppliers to increase supply. When demand drops the price drops and suppliers reduce supply.

    In modern money markets the supply of money (credit) does not react to price signals to increase or decrease demand. Supply of money is determined by the willingness of banks to create new money tokens by taking a lien on unencumbered assets and giving borrowers loans. Thus the supply of money is determined by there being assets available against which credit can be given.

    As loans themselves are counted as assets we have a classic positive feedback system. The more loans we make the more assets there are against which we can make loans. Derivatives are examples of loans on top of loans. We have the ludicrous situation where there are several times more loans in existence than there are productive assets backing the loans.

    A solution to this instability is to change the way we create new money tokens. Rather than the Reserve Bank trying to influence the rate of money creation by changing interest rates we stop creating new money through interest bearing loans and we create new money with interest free loans that must be used for investment in building new assets.

    Banks can continue to make mortgages but they only lend money they have on deposit. Banks are given permission to create new money tokens but only as interest free loans to be used to build new assets.

    Interest free loans are created for areas of the economy where asset bubbles start to appear or areas where the capital market is not supplying investment funds in sufficient quantity for the needs of society. The obvious case is for renewable energy investments and for investments in ways to reduce energy consumption.

    If the new interest free credit for investment is given to those who currently contribute the least to the levels of greenhouse gas in the atmosphere we will get a feedback loop that will work towards sustainability. The less greenhouse gas an individual produces the more investment funds they get to further reduce the level of greenhouse gas.

    Interest free loans paid off over the life of the investment makes almost all renewable energy investments profitable at today’s energy prices.

    The system will put downward pressure on the price of energy and rapidly make fossil burning energy sources unprofitable. It is estimated that an average of $2,000 interest free credit per person per year for ten years will result in Australia having zero net emissions. If we continue the program then we can start to decrease the level of ghg in the atmosphere and continue to whatever level we deem necessary to create a stable heat in/ heat out system.

    So to decrease the level of green house gases in the atmosphere we reduce the cost of investment in ways to reduce greenhouse gases. This will reduce the price of energy, reduce the level of ghg and make us all wealthier with less consumption of finite resources. That is we will do more with less which is the path to sustainability.

    • August 18, 2010 at 5:05 am

      Kevin-

      I agree with your point that credit built on credit comprises an instability, and a very destructive one too.

      I think your idea of creating money through interest-free loans is interesting but there’s a basic point about it I’ve never understood. How does the bank get a return? On the other hand, perhaps the loans can be granted by a non-profit agency.

      I actually prefer a related but more general idea, mutual credit (though your system might run in parallel). In a mutual credit union you can withdraw money as you would from a line of credit or a credit card. You don’t pay interest but you do pay fees on both positive and negative balances. In this way money is channelled into its fundamental role, which is to promote exchange, and away from dysfunctional roles, such as hoarding or borrowing from the future (as most current bank credit does). Investment is done mainly from savings (as you also advocate), thereby eliminating the mountains of debt that have repeatedly destabilised economies.

      A longer account of this form of money and investment is at
      http://stableproductivemoney.wordpress.com/2009/03/18/properties-of-token-money/

  14. Merijn Knibbe
    August 16, 2010 at 8:57 am

    We will need some catchy phrases, as well as precise definitions.

    A. One catchy phrase might be: ‘evidence based economics’ (EBE).

    – evidence based economics does not make use of fuzzy or even unmeasurable concepts, like ‘utilility’ of ‘General Equilibrium’ or ‘Pareto optimality’.
    – students have to learn how to construct evidence (eisting statistics, new statistics, interviews, observation of behaviour etc.). To be clear: in for instanve business economics and marketing this has been done for quite some time. Many of you won’t like Taylorim, but Taylor did measure things – and his methods are still widely used in business. It does work. And Engels ‘Die lage der arbeitende klasse” is still palatable today as it is grounded in observation. If more economists would have had a better grasp of accounting, Enron like scandals would have been less common.

    – evidence based economics learns students how to scrutinize data as well as concepts: what do the data actually measure? What kind of anomalies or patterns are, inductively, visible in the data? Are there any cross checks possible? Economists can learn how to do this from historians, and physicians, and biologists, sociologists, engineers, people studying Sanskrite, Polar Bears and, well, almost all other scientists. A nice example for students might be the constructing and discussion on the size of economies. Economists still often state that the Chinese economy is about as large as the Japanese – while it’s size is, in reality, abouot two thirds of that of the USA economy. This difference of opinion is of course grounded in differences in observation. The former economists use exchange rates to compare economies, the latter (based in the IMF, by the way) use the flawed and still imperfectly but much better yardstick of Purchasing Power Parity measurements (the CIA, which of course does not need neo classical but accurate knowledge, also uses the PPP measurements, see: http://www.CIA. gov). My stance will be clear, but for students it is a real nice example of how different kinds of measurement as well as the quality of data can influence our view of the world (who is in doubt of the size of the Chinese economy: just check the use of coal, oil, concrete and the production and sales of cars in Chine relative to Japan and the USA).

    – evidence based economics learns students that, sometimes, it is good to look at data first and at theory later: in a real science, there is continous feed back between theory and data (do the high prices of oil, grain, metals indicate that, while the (USA)labor market is clearly depressed, the global market for oil etc. is in a state of overspending? Does that mean that the classical business cycle is going to the ropes?)

    B. All of us (scientific economists as well as neo classical economists) are in dire need of a good definition of ‘the market’ (and, I fully agree with Geoff Davies, of money).

    – As there are no historical examples of barter economies (in non monetary economies, barter is a small sideshow at best), any definition of ‘the market’ has to contain a definition of money, and vice versa. Also (again I agree with Davies), without people, there are no markets. As any human interaction always contains at least some social aspects (including (perceived) knowledge of the other or others), no market transaction is without social aspect, the commercial side of it might sometimes be overriding, but sometimes the social aspect might be overriding. A common phrase among Dutch tradesman is: “Handel is gunnen”, or, to make a precise translation, “In the always small world of BtB trade, you only buy something from somebody when you ‘accept, trust, look favourably upon’ that somebody”. A non optimizing topological description of the commercial as well as the social aspect of trade which describes a space with more or less social aspects can be found in: Stobbe, P.S., ‘The room for commerce’ (Rotterdam, 1988). Amazingly, this heterodox mathematical economist urgently favours the same thing which I consider to be highly important, independent professors of scientific economic data gathering – which is completely in line with this discussion. Maybe there is more rock bottom agreement between heterodox economists than we assume.

    – Let’s use some Hayek (an explicit opponent of the concept of rational man, by the way): the outcome of market processes is decidedly influenced by rules and institutions, there is no ‘ideal’ or ‘perfect’ market. This (institutionalist) idea has to be incorporated by any definition of the market. The commercial behaviour of man is decidedly influenced by his or her surroundings – and even by his or her knowledge of these sourroundings and others. This is of course rather obvious and even banal – but neo classical economists do suppose rationality as well as perfect information and the insignificance of history – just read some DSGE articles (I’ve stated this before – it’s not the scientific economics, but the ‘sillynomics’ of Lucas and his disciples which are extreem. Intellectually, this does not make you proud to be an economist. More important is that this state of affairs is ‘outright dangerous’, to quote Keen. A severe slump of an economy of the size of Japan might be manageable. A severe slump of an economy of the size of China is not manageable anymore. We do have to know how large this Chinese economy is. In fact, we do now this. The CIA knows this. Mercedes, Volksagen and Audu now this very well. Dutch banks and other companies now this, it seems, when I read the Dutch newspapers. Sadly, many economists are, thanks to their own flawed concepts, not aware of this.

    That’s why we need ‘Evidence Based Economics’

    Merijn Knibbe

    P.S. a comparison of economies based upon exchange rates can of course be usefull – but not to compare the relative sizes of these economies.

    • Peter Radford
      August 16, 2010 at 5:40 pm

      You emphasize an extremely important point: not only do we need good definitions of things such as markets and money, we need to know which objects we need definitions of. In other words what is it that falls within the range of economics. It is remarkable that so few economists think through what it is they are setting out to explain or study, and how the things they want to pay attention to fit in the overall scheme.

      A good example of the problem raised by this lack of ontological preparation is the way in which neoclassical economists are forced to describe common features of an economy as exceptions. Other times they ignore them altogether. Had they thought through what objects populate an economy ahead of time, perhaps they would not have arrived at the odd place they are where only the mechanics of a market constitutes the be all and end all of the discipline.

  15. August 16, 2010 at 9:37 am

    There is evidence all round, ignored by economists, of the role that land plays in the economy. For instance, observe where buskers position themselves; onsider why a house price explosion took place simultaneously in Ireland, Spain, US and UK et al. The conventional view is that the UK is different because we have a severe shortage of housing, which is certainly not the case in the other countries mentioned.

    Martin Wolf recently posed the question ‘Why were resources expunged from neo-classical economics?’ I’d say that they’ve been expunged from the heterodox world also.

  16. Ken Zimmerman
    August 18, 2010 at 2:49 am

    I hate (okay, actually love) being a killjoy here but feel I must. Participants, critics, attackers, and outsiders of all sorts were creating economies (markets and otherwise) long before there were economists. Economists pushed themselves into that creative work and then took over. Then one particular version of economist took over (or almost so). Anyone who couldn’t see the suicide in that history is brain dead. Whenever any one version of anything takes over failure isn’t far away. The arrangement of elements that make up any economic transaction and certainly a network of such transactions are simply too heterogenous, too jagged, too disparate to fit together easily or permanently. Keeping them together is hard work. And more than that it reqires being quick on one’s feet, flexible, and creative with new tools and solutions to old and new problems. Neoclassical economics long ago reached its breaking point in providing these. Now this economics has become so inflexible that its solutions almost never work even in those rare instances when these economists actually perceive the problems that need resolution. But being a political creation (in the broadest sense) neoclassical economics and its enrollees require a new political discussion and movement to displace it. (Note: all such structures are politcally derived so neoclassical economcis is not unique in this respect.). I just don’t see this political discussion, let alone the movement anywhere right now. I see lots of whinning and name calling but I see no efforts to take the reins of power in academic departments, foundations, think tanks, etc., to push neoclassists out of controlling roles at journals and other publications. I see little effort to take control of the content of conferences and symposiums and to place those who carry your DNA in positions of power in government and policy institutes. I see no effort to take over the content of textbooks and the study projects of laboratories. No political battle can be won from the sidelines and this will be one hell-of-a- political-battle when and if it finally begins.

  17. August 18, 2010 at 4:44 am

    Carol –
    I haven’t yet delved far into the subject of capturing the community value of land for the community (as in your comment of 2 August), but it does seem to be fundamental, and still widely overlooked.
    Another good thinker in this is Shann Turnbull, for example his Building Sustainable Communities, paper #58 at http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=26239#show1128862

    I think your other comments in that post are spot on too.

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