Mainstream economics teaching in the late 20th Century
from Neva Goodwin
There are some true and useful things to be learned in standard 20th century economics, such as the basic concepts of supply and demand intersecting to create wages and prices. However if you ever took an economics course you may have since discovered that many other things also affect prices, such as advertising, or consumers’ lack of information. And wages involve even more complicated human interactions, habits and expectations. These complexities and exceptions don’t get much hearing in introductory courses – and, surprisingly, they get even less at the upper levels, where, instead, progressively more mathematics are imposed on a progressively more abstract picture of an economy. Meanwhile the students are also being taught a lot that is dangerous. Here are some of the take-aways from the standard economics course:
- We don’t need to worry about material resources – the price system and human ingenuity ensures that all resources are directed to their most valuable uses (with “value” determined by ability to pay).
- Concentration of economic power is not much of a problem. Its entanglement with political power doesn’t merit any attention at all.
- Increased consumption (regardless of the content) is the primary measure of wellbeing.
About 40% of college students in the United States take at least one economics course. Students who, two years later, have forgotten the diagrams and equations, are likely to still retain an impression that only selfishness is rational, that limitless greed is a universal human characteristic, and that economic success – of a nation, or an individual – can be assessed strictly in terms of the dollar value of consumption. Beliefs like this are the background for a culture that will accept as perfectly normal Ponzi schemes and cooked accounts, tax fraud and tax havens, the exploitation of children, women and immigrants, and corporate expenditures to get the most favorable political environment. Institutions – from governments and legal or banking systems, to the institutions of the family or formal education – are shaped by socio-cultural norms whose roots can be traced, in some significant part, to the standard teachings of economics – especially what it says about human psychology.
In recent decades the sorry state of the economic culture (e.g., on Wall Street) has repeatedly bubbled up into disasters. But the economic culture has not yet changed in significant ways – and neither has the economic theory beneath it. This poses a significant challenge. The economics profession is one of the most tightly closed in all of academia. Economists who write about different ways of understanding the economy don’t get published in the mainstream journals. Faculty who disagree with the mainstream generally don’t get tenure.
Fortunately, as the core of the profession has continued to marginalize those who disagree, there has come to be a growing outer circle of hyphenated economists: institutionalist-, Keynesian-, ecological-, feminist-, radical-, social, socio- economics, and many more. Some of the better known names associated with alternative views include John Kenneth Galbraith, E.F Schumacher, and Herman Daly, as well as Wassily Leontief, George Akerlof, Joseph Stiglitz, and Amartya Sen; the last four are among the Nobel prize winners who continue to pose serious challenges to the mainstream. The closed ranks of academic economists has been able – thus far – to keep out even those who have received such recognition in the world (creating, for example, Obama’s dilemma). However the alternative voices are increasingly being heard – especially the new group of behavioral economists. This paper aims to provide a summary, and a little additional forward motion, for some of these critical alternative ideas.
Neva Goodwin, “The human element in the new economics: a 60-year refresh for economic thinking and teaching”, real-world economics review, issue no. 68, 21 August 2014, pp. 98-118, http://www.paecon.net/PAEReview/issue68/Goodwin68.pdf
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Real-World Economics Review Blog 
Sharing the sentiments of Neva Goodwin, I have published an extensive survey of the empirical evidence against neolassical utility theory — available for download from
” The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature,” International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414
Copy available from: http://ssrn.com/abstract=2033641
I have circulated this to many leaders in the field and have been receiving very favorable comments. For example, Kenneth Arrow wrote back as follows:
Dear Dr. Zaman:
Thank you for the very complete and well-argued critique of the utility-maximization theory.
Of course, the remaining question is, what should take the place of that theory?
Yours truly
Kenneth J. Arrow
Kuhn has said that paradigms are not abandoned because of contradictions or empirical counterexamples, but only upon emergence of a new paradigm. Thus we do need to answer Arrow’s question — provide a coherent alternative. This is where heterodoxy has failed, in the sense that their are lots of one man churches out there, and no single unified alternative. I think the reason for this failure is deeplyrooted — the heterodoxy has not had the courage to reject the entire edifice of neoclassical thought and start from scratch from radically different origins. This is in effect what Frederic Lee and Stephen Keen have said in the introduction to their article entitled: THE INCOHERENT EMPEROR: A HETERODOX CRITIQUE OF NEOCLASSICAL MICROECONOMIC THEORY. They note that heterodox economists disagree with some small part,of neoclassical theory but generally defend the structure as a whole — this piecemeal attack is not enough.
A radically different methodology is available based on the work of Polanyi. I have provided an analysis of this methodology, which can be downloaded from:
http://ssrn.com/abstract=2457299
Polanyi’s work shows that the social, political, economic and environmental spheres are deeply interlinked and cannot be analyzed in isolation. This means that if we accept current discipline boundaries, we become seriously handicapped in our search for a viable alternative to conventional economics. Instead, if we start from the foundations created by Polanyi’s analysis, we can construct a genuine and viable alternative to current orthodoxy. Because it would re-integrate the political, social and economic spheres, it would provide insights not available from orthodox method, like Polanyi’s original analysis does. . .
Do you really think that “the basic concepts of supply and demand intersecting to create wages and prices” are “true and useful things to be learned” ? I don’t. I think that they are totally misleading – those curves exist only in the imagination of economists.
All decisions about wages and prices are made by people – the decision makers.
In the labor market for example employer usually decises wage level of the offer, and lets job seeker to decide between taking the job or walking away. Corporate managers have lots of power to deal the income, if not all the power in the absence of unions. So it is not surprising that they are doing well, and people immediately around them too.
I, like Neva Goodwin have quite a few bones to pick with neoclasicalists in economics. But the other parts of my concerns relate to economics as a whole. I read the comment of Kenneth Arrow back to Asad Zaman’s paper on the empirical evidence against neoclassical economics, “Of course, the remaining question is, what should take the place of that theory?” and it prompts an immediate and primal response. Why is economics needed at all, with or without any particular theory? Karl Polanyi is frequently mentioned on this and related blogs. I like many admire Polanyi and his work. But he does not follow a set theory or methodology. He follows the action and the actors. Sometimes this fits one theory, sometimes another. He also never claimed to be anything other that a student of the history of the events of the 19th and 20th centuries. Yet all sorts of scholars and interested laypersons find his work insightful and inspiring. The invention of the social sciences, including economics has been in my view of little benefit and much harm. It’s time in my view to end the entire experiment of the social sciences.
Why don’t you nice people quit quoting economists and start studying some history. Start with the historical question. How did neoclassical economics take over economics, but don’t ask economists why? They’ll send you on a wild goose chase like Arrow did Assad.
Ask somebody who knows how to dig in the archives and place the question in historical contexts.
What Ken Zimmerman is saying is exactly what I have argued at length in my paper entitled “Deification of Science and its Disastrous Consequences.” downloadable from http://ssrn.com/abstract=2260052
In it I argue that a hypthetico-deductive methodology is suitable for math but not for science, which requires an inductive methodology. Because of the essential freedom of humans, an entirely different methodology is suitable for the humanities. The attempt to apply scientific methodology to study of a human beings is a failure on many fronts. In fact in the late nineteenth century, there was a battle of methodologies — Methodenstreit – where by a historical accident, the proposed mathematical and quantitative methodology won out over the natural qualitative and historical methodology for humanities. This has been documented in detail in Hodgson: How Economics Forgot History? The point is that the wrong methodology won the battle, and we have been suffering the consequences ever since in terms of loss of and decline in knowledge about humanities. The term “social science” represents the idea that we can apply scientific methodology to study of human beings and society — this idea itself is mistaken — methods appropriate for inanimate objects subject to physical laws are not suitable for studying human being who are free to shape their societies according to preferred social norms. This issue and a few other essential reforms required to bring the economics curricula into the twenty first century have been discussed in my earlier post: Three Goals for Pedagogical Change:
Surely we can admit that this subject is a science and therefore it should be examined and built up in the same theoretical maner that all other sciences are developed. Yet the experts on macroeconomics prefer to be anything but scientific and are more intuitive in their arguements. To construct such a science in macroeconomics one needs a suitable model showing how all the parts of this confusing subject together,
Allow me to propose such a model as DiagFuncMacroSyst.pdf
which may be found on Wikimedia, ommons, Macroeconomics.
Unlike almost every other model this one does not omit one of the 3 factors of production nor their 3 effects, and for this reason it is more likely to succeed.
Asad (first response), I’ve tried to download your paper on Polanyi, but when I try to open it get the message “the file is damaged and could not be repaired”.
To answer Arrow’s question, it is not enough to provide a coherent Kuhnian alternative: other people have to engage with it, or the heterodoxy will remain un-united.
Your (second response) on the wrong scientific methodology winning out gets close to the reason the heterodox don’t agree on economics: they don’t agree on scientific method, not least because they aren’t aware enough of its history to understand Kuhnian paradigm changes wrought by Aristotle (categorial analysis and deductive logic); Francis Bacon (taking things to bits to see how they work; induction as quality control); David Hume (statistical quantification of [mental] experience; reduction); and C S Peirce’s abduction or retroduction (abstracting from what we have now to generalise at a more primitive stage of evolution). Hence the four different types of logic (often supplied by different people) now recognised in the Critical Realist scientific methodology of Roy Bhaskar’s “Dialectic”, i.e. DREI(c) and [R]RREI(c) phases of pure and applied science. It is interesting to compare Aristotle’s schema (http://plato.stanford.edu/entries/aristotle-categories/) with Chs. 21-23/Figure 22.1 of Hodgson’s “How Economics Forgot History”.
So, Ken, we agree the application of Hume’s 1740 methods to social science were a disaster, but I would argue that social science needs to be restarted by taking it to the more fundamental levels of understanding people in terms of their physiology, and that in terms of fundamental physics, at which level fundamental patterns emerge which show Hume’s philosophical decision to reject causality to rest upon an ambiguity in the word ‘nothing’. (If things are formed by polarised energy circulating, the word ‘nothing’ applies to radiant energy not so circulating but still capable of energising things – which Hume’s quantitative mathematics can’t).
Hi, Robert; was that historical enough for you? Answering your historical question as a non-economist, I suspect John Stuart Mill had been taking Adam Smith’s criticisms of commerce a bit close to social responsibility for the Ricardo and Manchester schools, so they gave Jevon’s steam engine mathematics some weight by jumping on his bandwagon.
By the way, T R Well’s short paper on Smith (at PAER 68 p.90) is well worth reading.
Macrocompassion, macroeconomics ought to be a science, but that doesn’t mean to say it is, as of now. Which of the four types of logic is missing from its scientific method: [statistical] reduction, [intuitive] retroduction, [formal] deduction and [experimental] induction? I’d have said all of them. They lump together dissimilars when collating statistics, don’t attempt to understand humans and their systematic interactions, deduce nonsense from garbage and are too fearful of being wrong to admit the facts and attempt to learn from their mistakes. So yes, the so-called ‘experts’ on macroeconomics prefer to be anything but scientific, but I deny their looking at the economy imaginatively and often enough to intuit anything they haven’t been taught.
Thanks Dave
So I have a new question. In historiography we once had the great man view of history, which claimed that history amounted to the sum of the lives of the great men/women. We seem to have adopted this view when we discuss economics, economics is defined by the great thinkers, which we continuously trot out for inspection. Why not make doers not analyzers matter when studying economics?
Good question. As a Catholic conscious of Christ in the setting of his own time I don’t think I’ve ever had the “great man” view; I’ve been aware of a time line set by influential teachers and the need to see them in their context. Perhaps that’s the point. Information is broadcast so that many people can have enough in common to exchange mutually intelligible views, whereas doing tends to be localised and great doers (I’m thinking of the builders of the cathedrals) are known primarily by their achievements and not in context as people. The exception I see to this are the great improvers of communication, like Thomas Telford who pioneered bridge building and left great works all over the place, great railway pioneers like the Stephensons and Brunel, Marconi with wireless and IBM (an organisation rather than a person) who opened up PCs. But there you are. I’m biassed.
Doers as opposed to analyzers.
The only economist who paid much attention to doers was Schumpeter. But he had real trouble dealing with the entrepreneurs in a rational manner. So Schumpeter started off with the entrepreneur as an individual and then turned firm’ in their research creativity into the dynamos of doing. There was certainly more to it than that.
Nietzsche, according to Carl Pletsch in Young Nietzsche, 1991, made a distinction between Apollonian and Dionysian Man. Apollonian is the principle of clearly delineated images, permanence, optimism, individuation, and rationality. It thrives on clarity. This is the essence of classical American management and neoclassical economics. Dionysian expresses the principle of flux, impermanence, suffering, and pessimism, an irrational force, impulsive, wild and instinctive.
Accordingly, whereas the Apollonian vision is timeless and responsible for the constant formulation and reformulation of the forms of knowledge and rationality that order our everyday life, the Dionysian urge which is momentary, exceptional, and counter-intuitive is dangerous to any structure of reality. It contains the death wish and every other destructive instinct. It is the maelstrom of every impulse caught in the flux of time. It characterizes precisely the behavior of the great entrepreneurs, the doer.
I think that economists are examples of Apollonian man. I’m asking them to concentrate on the doers , the Dionysian.
They do talk, those who speak of entrepreneurialism, of creative-destruction, but they don’t talk about destruction that ends only in destruction. It doesn’t fit their Apollonian vision.
Robert, interesting that you are focussing on a Neitzschean view of personality differences, myself on a Chesterton-physiological/Jung psychological view of the same, and Neva Goodwin, in the title of her PAER68 paper as against that of this blog extract, is focussed on “The human element in the new economics”, which is of course conspicuous by its absense. Her focus, though, is on behavioural economics, in social and ethical contexts rather than mere history. (I agree with most of her analysis, but not with her interpretation of John Kay’s discarding universally applicable models as “a looser set of statements”. He logically wants something other – like alternatives and non-equal relationships? – than “the variables and equations with which economists are familiar”).
On history, a recent episode of Britain’s cult science fiction soap opera “Dr Who” could be read as dramatising the current political-economic mania as a fault in the brain of a Dalek. When the Doctor’s assistant is shrunk and sent into the Dalek to effect a repair, she finds herself being attacked by the equivalent of our antibodies. Is this perhaps the point of needing history in economic education: to immunise economists by helping them learn from the mistakes of their predecessors?