Home > Uncategorized > Fundamental Flaws of Conventional Economics

Fundamental Flaws of Conventional Economics

from Asad Zaman

My recent post on RWER Blog asks if there is a “CORE of heterodox economics” which we can all believe in? From the responses to my previous post on whether or not there was a core set of heterodox beliefs, it became clear to me that I have started in the wrong place. Before starting the task of constructing an alternative paradigm, we must clear away the debris of the ruins of the conventional paradigm. Frederic Lee & Steve Keen remarked in the introduction to their article on the “The incoherent emperor: a heterodox critique of neoclassical microeconomic theory” that heterodox economists often come to the defense of conventional economics, because they are ignorant of the vast range of devastating critiques against these theories. To create a revolution, we must change from lukewarm heterodoxy (a partial rejection combined with a partial acceptance of the errors of conventional theories) to a genuinely radical approach requiring a complete rejection. When the errors of the conventional approach become as obvious as the error in “2+2=5”. we will not waste time coming up with new proofs that this is a fallacious calculation.

I would like to put forth a few propositions which provide a clear demonstration of the errors of conventional economic theory. I am hoping that disagreements about these central propositions can be cleared away by discussion, so that we can create consensus about complete rejection of conventional economic theories. After this step is completed, we could move forward to thinking about how to construct alternative foundations.

Propositions: Methodological Mistakes

  1. Logical Positivism is a theory of knowledge. It describes scientific knowledge as being based on observations (facts) and logic. It also excludes huge chunks of human experiential knowledge (such as morality) from the domain of knowledge. As one its early and enthusiastic proponents A J Ayer put it, moral statements are as meaningless as a cry of pain.
  2. In the early twentieth century, foundations of economic theory were revised to put them in line with the ideas of logical positivists about science, in an effort to make economics a “science”. Cooter and Rappoport showed how Lionel Robbins’ definition of scarcity, in line with positivist ideas, drove out earlier definitions of economics based on “material welfare”.
  3. Logical Positivism had a spectacular crash. Even its most enthusiastic exponents admitted to having been wrong. HOWEVER, the foundations of economics (and econometrics) were never revisited. Thus the foundations continue to be based on ideas which have been proven wrong. In my paper Methodological Mistakes and Econometric Consequences, I have shown how positivist foundations for econometrics have led to a seriously defective methodology currently in use.
  4. In my paper on The Normative Foundations of Scarcity, I have explicitly shown that apparently objective concept of “scarcity” conceals within it at least three normative principles. Thus, contrary to a central claim of conventional economic theory, it is a normative theory, and not a positive one.

The above critique is deep and philosophical. There are more obvious and direct approaches to a complete rejection.

Proposition: Empirical Failures of Conventional Economics

  1. Economic theory of consumer behavior is completely wrong as a descriptive theory. The massive amount of evidence is gathered in my paper: Empirical Evidence Against Utility Theory: A Survey of the Literature.
  2. Economic theory of the firm is completely wrong as a description of firm behavior. A massive amount of evidence is gathered in “Debunking the Theory of the Firm” by Steve Keen and Russell Standish
  3. The economic theory of price determination via equilibrium between supply and demand is completely wrong. I have provided a simple example and explanation of its failure in my paper on “Conflict Between General Equilibrium and the Marshallian Cross”. This shows that partial equilibrium supply and demand analysis in one market is in conflict with general equilibrium results, so both cannot be right. Steve Keen and Russell Standish, and perhaps others as well, have gone much further, and provided an alternative theory of price determination.
  4. Once we see that consumer theory, producer theory, and equilibrium theory of price determination are all clearly and obviously wrong, does there remain any further issue to discuss about errors of conventional economic theory? Why should we waste time discussing theories which take all three of these basic building blocks for granted and then construct more complex arguments?

In practice, I have found that to create the courage of conviction required to launch a revolution, it is not enough to just provide a logical argument, or an empirical demonstration, of the fallacies of conventional economic theories. It is so hard to believe that highly intelligent people, capable of mastering the complexities of technical mathematics required for general equilibrium, could go so seriously astray. Thus, in order to make plausible the idea that massive amounts of effort are being poured into completely fallacious theories, one must study the story of the rise and fall of logical positivism. This is the key to understanding why current economic theories are so seriously defective, and also how we can avoid making the same errors which led to this disaster. Instead of answers, I pose the following questions which we must learn the answers to, in order to understand HOW an intellectual tradition became corrupted by logical positivism.

  1. What is the theory of logical positivism? More importantly, why did it become so wildly popular? How is it that some of the most intelligent people in the twentieth century came to believe in its central propositions? It must be the case that the defect in logical positivism is a subtle one, to take in so many innocents into its trap.
  2. Interestingly, a recent survey by Hands, cited in my paper on Normative Foundations of Scarcity, shows that most economists continue to believe in some the key propositions of logical positivism, even though it has been thoroughly refuted by philosophers. Here is the key to the failure of heterodoxy: most heterodox economists also continue to believe in some key propositions of logical positivism. As a consequence, it is impossible for them to construct a sound alternative to conventional economic theories.
  3. FOR STARTERS: we must learn WHY the argument for revealed preference, which deceived Samuelson, is wrong. As per standard positivist ideas, preferences are internal to the heart and unobservable; hence they cannot be used in scientific theories. So Samuelson came up with the idea of using the observable Choices – unobservable preferences are revealed by observable choices. Instead of unscientific arguments about unobservable preferences, we can make scientific arguments about observable choices. Samuelson’s Nobel Prize cites his contributions in making economics a scientific subject. Yet the basic argument is wrong; one cannot eliminate the unobservable preference from economic theories. Understanding this error, which Samuelson failed to do, is the first knot to unravel, in order to clear our minds and hearts of the logical positivist illusions.
  1. Ed Seedhouse
    January 29, 2016 at 5:41 pm

    I was under the impression that logical positivism is not so much “wrong” as it is self contradictory and therefore meaningless by it’s own standards. I.E. the statement “logical positivism is correct” has no empirical foundation and therefore is meaningless according to the standards proposed by the logical positivists themselves.

  2. graccibros
    January 29, 2016 at 5:52 pm

    Yes, let me wade in but not too deeply. I was intrigued by your very first itemization about logical positivism having failed as a theory of knowledge, and especially your mention of it excluding morality. Since I am reading the late Joe Bageant’s “Deer Hunting with Jesus,” his book about the alienation of white working class Americans from upper middle class liberals, and them not voting the logical positivistic formulations of their own economic self interest, please note that this segment of America is where the morality contained in the Evangelical Movement/Fundamentalism has its deepest roots. They listen to Larry Summers tone, condescension (even as Larry has moved left, which he tries to hide by using terms like “secular stagnation) and run into the arms of Donald Trump, not Hillary Clinton…and who knows about Bernie Sanders.

    The irony though, is that the nature of religious morality in America has shifted to worship the market as the final moral authority in determining social standing…has become entrepreneurial itself…so I don’t want to draw too many neat distinctions. Pope Francis, a moderate if not conservative social democrat has shockingly reminded us in the US that you can come up with an entirely different political economy after listening to exactly the same “Sermon on the Mount.”

    Unfortunately the Right has been far more effective in translating the alienating scientific/mathematical posturing of economics into a more palatable ideological meal than the left, starting with Milton Friedman who had better sound bites than his debating partner, John Kenneth Galbraith. His son Jamie is trying, but his very interesting works (esp. The Predator State, The End of Normal) are hardly on the lips of the bottom 60-80%.

    The same goes for the other great economic book from 1944, Karl Polanyi’s “The Great Transformation,” which I still can’t help but defend as the single most relevant book for our times, where he gives full weight to the overwhelming disruptions the rise of industrialism gave to the surplus agricultural workers as they were meted out shock treatment transformation into an urban proletariat with no social safety net. Logical positivists demand that we revise that history because wages rose after 1850, and they are probably right, they did rise later, but the memory of the transition and the scalding impression it left gave rise to a “never again” attitude, very similar to that which Putin has built upon the bitterness and brutality of the shock treatment fiasco that Russia underwent post 1989, advised by the best and brightest from the West. Does it even make a shallow impression upon the department minds at Princeton, Harvard, MIT, Stanford and U of Chi? Does history have any greater, ironical, cruelties yet to deliver. Probably it does.

    It is out of experiences like these that ordinary human beings are driven from the cold winds that seem to blow perpetually from “scientific economics.”

    I’ll leave it at that.

  3. Paul Davidson
    January 29, 2016 at 7:02 pm

    Keynes explained [p.257 of the GT] that the fundamental flaw in classical theory is the assumption that a rigidity in money wage was the cause of unemployment snd “assumed fluidity of money -wages ” will restore full employment. Keynes went on to state:”My difference from this theory is primarily a difference of analysis”..

    For decades now I have been trying to convince my heterodox colleagues to support Keynes’ analysis of unemployment as explain in chapter 17 of the GT under the title “The Essential; Properties of Intrest and Money”

    …” These ESSENTIAL PROPERTIES are for all liquid assets they are

    (1) the elasticity of production is zero — therefore money and all other liquid assets do not grow on trees so entrepreneurs can not hire workers to harvest these liquidity trees when people reduce their demand for producibles (, save out of current income) in the form of liquid assets; and

    (2) the elasticity of substitution is zero so that when the demand for liquidity rises and the price of liquid assets increase, ;real producible assets are not substitutes for liquid assets as a store of value and hence people do not substitute real assets for liquid assets in their savings holdings.

    In 1987 Frank Hahn demonstrated that even in a general competitive economic system with a tatonnement and perfectly flexible wages and prices, unemployment will occur whenever savings find a “resting place” in nonproducibles. Thus demonstrating what Keynes argued in chapter 17.

    Can I get any heterodox economists to support this approach???

    Paul Davidson

    • February 2, 2016 at 9:05 pm

      What stinks in all economics is the unwillingness to call a spade a spade. I have two dictionaries of economics, neither of which defines ‘tatonnement’. Thank goodness for Wikipedia! That sorted and GT ch 17 reread more closely, Paul, it seems Keynes was arguing your conditions in a counter-factual context. “To determine the relationships between the expected returns which are consistent with equilibrium …” and taking for granted what to be consistent he should have called ‘the stickiness of interest-levels’, “we must also know what the changes in relative values during the year are expected to be”. So the required turnover is never the optimum but that plus interest on borrowings plus that on Walras’s auctioneer’s fees, to say nothing of Paul Grignon on how this miracle is achieved: the banker’s fraud of obtaining not only interest but “seigniorage” on “twice-lent money”.

      So, Paul, I appreciate Keynes’ taking advantage (as in war-time) of government borrowing increasing the surplus money generated by this fraud to motivate bankers to put people back to work. I am not happy with the method being fraudulent, and see the government reclaiming seigniorage over its own borrowings (the “Positive Money” scheme) as a step in the right direction. This, however, still does not eliminate the incentives to rent-seeking and unnecessary monetary and institutional growth via percentage interest charges, wholesale price mark-ups, taxes and professional fees, arising from a percentage of a lot being much more rewarding than a percentage of a little. What does invert the motivation and include those now disadvantaged by being unemployed or underpaid is all livelihoods being acquired as credit which, as with credit cards, indebts only insofar as it is used and debts are written off only insofar as we do with it what it is needed for: to look after ourselves and to join with others in doing what needs doing.

      Thus, it is not that I don’t support your analysis in preference to what we have now: I think the Positive Money/Citizen’s Income approach better than that, and the constitutional equation of money with undesirable debt (Negative Money) in a decentralised Honest Money/Credit Card Income approach the most likely answer to dangerously unnecessary resource use and monetary growth. Gesell’s dated money also attempted to devalue it, and Keynes himself believed “that the future will learn more from the spirit of Gesell than from that of Marx”. (GT p.355). Of course that is not how we now do things, but a little over a hundred years ago who would have thought that pigs might fly?

  4. January 29, 2016 at 9:49 pm

    Who among you have read and challenged FREDERICK SODDY ?
    Who among you have after due examination found this to be false…THE KISS SOLUTION TO DECREASE INEQUALITY GAPS, POVERTY, and NATIONAL DEBT.



    “There never was an idea stated
    that woke men out of their stupid indifference
    but its originator was spoken of as a crank.”— Oliver Wendell Holmes, Sr.(1809-1894) American Poet

    .***Why not read and challenge a Noble Laureate ?
    **Excerpt from http://en.wikipedia.org/wiki/Frederick_Soddy
    “In four books written from 1921 to 1934, Soddy carried on a “quixotic campaign for a radical restructuring of global monetary relationships”, offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was “roundly dismissed as a crank”. While most of his proposals –
    “to abandon the gold standard,
    let international exchange rates float,
    use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends,
    and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort” – are now conventional practice, his critique of fractional-reserve banking still “remains outside the bounds of conventional wisdom”.
    Soddy wrote that financial debts grew exponentially at compound interest…”

    Gandhi’s famous quote: ““First they ignore you, then they ridicule you, then they fight you, and then you win.”
    PLEASE, ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC),


  5. January 30, 2016 at 4:40 am

    Why did Charles II work to return as King of the UK after his father was executed during the English Civil War? Why not just live out a life of comfort in France or the Dutch Republic? Two reasons, I think. First, he wanted some measure of revenge for his father’s execution/murder. Second, he believed firmly that an England without a monarch was both unGodly and uncivilized. So it is with neopositivist/neoliberal economists. No matter the errors of logical positivism or the mathematization of economic theory and models, such economists are like Charles II. They simply can’t see how the world could ever function or be civilized without the “structure” and “morality” they offer. Otherwise there is chaos and destruction for humanity. Charles’ II reign was mediocre at best and his brother, James II was dethroned, marking the end of English monarchy not controlled by the Parliament. So it is with neopositivist/neoliberal economics. Their reign is mediocre at best and their best and brightest have been dethroned. It is time for institute an economics that is consistent with and supports both science and democracy. The British made that leap with monarchy in 50 years. How can we do that with economics in that or less? 1) force economics to submit to the control of democratic institutions; 2) force economists to explain and defend their actions and proposals before all social scientists, not just other economists; 3) reduce the direct access of economists to policy makers and when they do have access make certain their advice is but one piece of information among many others – all of equal or near equal import; 4) end the input of “business” money to economics departments and individual economists unless the purposes of those contributions are revealed in full and there is an opportunity for public hearings if the money is misused for lobbying or clearly political purposes; 5) force the opening of economics departments to every variety of economic thinking and calls to action. A good start.

  6. January 30, 2016 at 9:07 am

    How Heterodoxy keeps the Naked-Emperor-Zombie alive
    Comment on Asad Zaman on ‘Fundamental Flaws of Conventional Economics’

    All thinking economists are agreed: orthodox economics is, as Keen famously put it, a naked emperor (2011), or as Quiggin put it, a zombie (2010). This is not news, the embarrassment is well advanced in years “As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell, 1980, p. 1)

    The list of defects is indeed almost endless — and exactly this is the problem. As a matter of methodological principle, the proof of one inconsistency should be enough to refute a theory. Ironically, Orthodoxy has delivered this proof themselves “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)

    The orthodox approach is refuted by every trick in the book — yet it is still trolling around with silly model bricolage. It seems that critique and refutation are not enough to get rid of a failed approach. This, though, is also well known.

    • “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)

    • “If we feel misgivings …, all we have to do is to start appropriate research. Anything else is pure filibustering.” (Schumpeter, 1994, p. 577)

    • “There is no evidence to suggest that economists abandon degenerating programs in the absence of a progressive alternative.” (Weintraub, 1985, p. 148)

    • “There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy.” (Hausman, 1992, p. 255)

    • “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990, p. 362)

    Let us call this the problem of the missing alternative or nothing-to-chose dilemma. What is common to Orthodoxy and Heterodoxy is the incompetence to find a superior alternative to what is easily recognizable as a failed approach: “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248) This is a program for secular stagnation. Until a promising alternative is available, the Zombie cannot die.

    Repetitive critique of Orthodoxy is a waste of time. Students need to know how the market economy works and need no historical account of how their ancestors messed up both theory and methodology. The sooner all this scientific garbage is referred to the historians of economic thought, the better.

    Asad Zaman has not yet got the point but repeats the multitude of already known defects. The curious fact is that Keynes has already pointed the way: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)

    These premises are well-known since more than 140 years “For it would not be too much of an oversimplification to present the field as having progressed smoothly and steadily, developing theories of ever greater power and broader scope within an essentially unchanged explanatory framework, based on the concepts of optimizing individual behavior and market equilibrium, that were already central to economic thought in the previous century.” (Woodford, 1999, p. 2)

    Or, in the blog-version of Krugman: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.

    And here you have it! What we know with absolute certainty is that the new economic paradigm has to be free of these green cheese assumptions. So, there is no need at all to take notice of any peer reviewed article or textbook or any post which contains maximization-and-equilibrium. Economic policy proposals of marginalists can simply be laughed out of every debate. Because of this, there is no need at all to criticize and discuss DSGE or RBC or the freshwater/saltwater junk on a heterodox blog. What is more, there is no need to criticize and discuss Walrasianism, Keynesianism, Marxism, and Austrianism. All this is obsolete stuff.

    The ground has been cleared over and over again. Debunking has been wildly successful, now the only worthwhile task is to construct, or, to paraphrase the great economist and methodologist J. S. Mill: ‘Doubtless, the most effectual mode of showing how the science of Economics may be constructed, would be to construct it …’ (2006, p. 834)*

    Egmont Kakarot-Handtke

    Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University
    Press, 5th edition.
    Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, pages 123–138.
    Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge:
    Cambridge University Press.
    Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
    Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev. edition.
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
    Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
    Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, NY, Melbourne: Cambridge University Press.
    Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, NJ, Oxford: Princeton University Press.
    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.
    Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
    Woodford, M. (1999). Revolution and Evolution in Twentieth-Century Macroeconomics.
    Mimeo, pages 1–32. URL http://www.columbia.edu/~mw2230/macro20C.pdf.

    * See ‘How to restart economics’

    • January 31, 2016 at 7:09 pm

      Academics don’t necessarily have to be what they say they are – disinterested observers searching for the truth (or version thereof). In fact my experience is that many academics are quite self-interested and closed minded in the areas and theories they “believe in.” But more than belief there is expediency. Mainline economists have prestige, power, and are listened to when they speak. Those are potent aphrodisiacs. They stimulate more than just academic vigor. You need more than a new theory, good, bad, or indifferent to convince such economists to give up money, political power, prestige, and a center stage position. When an economist has few or none of these it is easy for that economist to criticize others who do. Not so easy to accept or act on such criticism when you are the person who is the possessor of all of these.

  7. January 31, 2016 at 1:49 am

    On many separate occasions I have stated that the paradigm constructed by all of the utilitarians required ignoring actual values-in-use and that this led to budgets being treated as ‘manna from heaven’ rather than grounded people’s providing for a hierarchy of human needs and wants.

    I have used our need for biological replenishment to stay alive and healthy to show how budget formation occurs with a view to providing for ourselves. I have stated very clearly that it is possible to show how the distribution of income affects both individual and aggregate consumption.

    I am coming to the conclusion that no one is actually interested in doing any more than critiquing existing theory rather than replacing it.

  8. January 31, 2016 at 5:09 am

    For my response to comments above, as well as comments in the parallel thread on same topic at the WEA Pedagogy Blog, please see my post: Theories of Knowledge

    • blocke
      January 31, 2016 at 8:31 am

      Asad, in your description of how you came to revolt against positivism, you mention Polyani and the need for theory to be contextual, but from what I can tell you never took up any serious study of history. Every history major and PhD has to take courses in historiography and I can tell you that you do not have to read Polyani to find the flaws in positivism, people studied in historiography have read its critics for well over a hundred years (Collingwood, Dilthey, Becker, etc). What I find most startling in this discussion is that people in economics and management science do not know much about this discussion that historians carry on regularly and for generations in teaching their craft.

      • January 31, 2016 at 9:22 am

        I have been a regulator for over 40 years now. But I’m a curiosity among my fellows in that business. I’m also a historian. In fact, my associates often tag me with that nickname. But on your points I want to share what I’ve seen for those 40 years as I negotiated with utilities and their consultants, many of whom are economists. These folks are generally intelligent and have real interest in the work. But they have little education apart from STEM and economics upon which to rely. They mostly have no background in history and only marginal education in sociology, psychology, anthropology, etc. They look at these areas of learning as frivolous things that have absolutely no relevance or value for the work they do. And 99% of them have never even heard of Collingwood, Dilthey, Becker, or Max Weber or Polanyi. A concrete example. I gave a series of presentations to staff and utility personnel in the 1980s on the changing utility arrangements and the explanations of those changes. I began it with an overview of the history of existing utility arrangements (before 1975). None of the attendees had any prior knowledge of how the existing structures had come to be. I followed that with a brief discussion on historiography to give them a feel for how the history of utility services had been worked out. What I got out of that was stark confusion and not a litter anger. My point is this. If you want to change what economists do and how they do it you’re going to have first give them a new basic education and then work through the fear and anger they’ll feel as you take away their professional footings. And that won’t be easy or pleasant.

      • blocke
        January 31, 2016 at 12:07 pm

        Ken, I agree with you. Reeducating people is harder than educating them. When economists dropped history from their lexicon of knowledge, out went so much that could be of interest now in reevaluating study in economics. Reading material with which every well trained historian is familiar has simply vanished from the consciousness of economists, and since they think the field is theirs and the historians outsiders, they resent the lessons In historiography.

      • January 31, 2016 at 4:31 pm

        Yes. Positivism has long been disgraced.

        I was very fortunate to have Emmet Mulvaney–Karl Polanyi’s research assistant as he was working on economic distribution through reciprocal networks (non-monetary exchange mechanisms and traditions not involving monetary exchange)–as one of my early economic teachers.

        This led me to distrust leading ‘positivistic’ theorists like Sir John Hicks or Milton Friedman not because I knew anything then about logical positivism but, and rather, because Friedman’s textbook thought had nothing to do with traditional non-monetary exchange: the latter bound in tradition, culture, and family relations.

        The central question in economics is, and has always been, how people provide for themselves individually and together. When monetization of exchange takes place, it overturns longstanding relations between tradition, culture, and family and ‘exchange’. It does so by divorcing value-in-exchange from all other values. It reframes ‘value’ itself as the ‘price of’ in terms of money.

        ‘Nuff said.

    • January 31, 2016 at 6:44 pm

      Thank you, and please,”***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC),”

      Why would you not read and challenge a Noble Laureate ? for Physics and challenge ? ******Excerpt from http://en.wikipedia.org/wiki/Frederick_Soddy:
      “In four books written from 1921 to 1934, Soddy carried on a “quixotic campaign for a radical restructuring of global monetary relationships”[this quote needs a citation], offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was “roundly dismissed as a crank”[this quote needs a citation]. While most of his proposals – “to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort” – are now conventional practice, his critique of fractional-reserve banking still “remains outside the bounds of conventional wisdom”[this quote needs a citation]. Soddy wrote that financial debts grew exponentially at compound interest…”

      Why would you not want to prove or disprove ?
      ******.“Capitalism is the “best” system to date devised by mankind. As it is administrated, perhaps, is where the “flaw” is manifested. If capitalism used its Central Bank properly,that is for the betterment of the common good, with equality and justice for all, capitalism would be the best ways and means to help “form a more perfect union….”,

      • January 31, 2016 at 6:52 pm

        This is supposed to be a repy to: Asad Zaman
        January 31, 2016 at 5:09 am Reply
        For my response to comments above, as well as comments in the parallel thread on same topic at the WEA Pedagogy Blog, please see my post: Theories of Knowledge

        Once again, Thank you.

  9. roberto
    January 31, 2016 at 2:24 pm

    I had write about this on “Riodialogues”:I suppose a new rule for Central Bank: when one of the CB, respectively of each country or through international agreements ,have a new emission of money whith each rate the same bank print corresponding quantity of money of rate off budget ,and give this quantity,ffor free, to compense the monetary mass to solve the lack natural compensation previously provided by ‘gold mining , at a pubblic commission that use for pubblic necessity etc etc…we resolve three problem :pubblic necessity,pubblic balance,and market crisis,;for example : the B.C. have a emission of hundred billion unit and fix a rate of 3% and give this money to privat bank or pubblic… at the same moment print 3 billion extra and give these to “pubblic commission” that spend for pubblic problem …i hope to be clear but if not you can also have a look to :https://www.facebook.com/Teoria-della-compensazione-della-massa-monetaria-137335536277534/notes

  10. February 1, 2016 at 1:53 am

    It seems to me that the persistence of wrong economics is due to the fact that while we have rejected logical positivism, we have not rejected (as we should) the Enlightenment fantasy that human behavior can be understood through Newtonian/Cartesian metaphors.

    Darwin and Natural Selection is harder to visualize. Hence “the political spectrum” still used to describe coalition forming behavior that is analogous to the visible spectrum is zero respects.

  11. February 1, 2016 at 6:27 am

    I agree that we continue to believe in theories of rational behavior which are remote from our own personal experiences as well as our daily observations of human behavior. This stems from certain positivist ideas which have ENABLED this disconnect. The idea that we only need to match appearances (observables) and we can make arbitrary models of the internal reality (unobservables) is a central problem. This is PATENTLY FALSE, but widely believed. Even though we observe a wide range of human motivations, these are unobservable, so the question becomes: CAN WE model observed behavior as-if it is solely based on greed? Furthermore success of our model is judged only on match to observations, and our internal observation that people are not greedy is NOT ALLOWED to count as evidence AGAINST these theories.

  12. February 1, 2016 at 8:22 am

    To be a science, a field of study has to be able to make valid predictions. Clearly in aggregate at least, Economics has failed i that and is therefore not a science. The question is, can it be made into one? If not, it is no better than an art, and not particularly useful one either since it does not stand alone, subject to critical review, but instead influences the outcomes of entire societies and the world economy.
    There may be some small glimmer of hope, however.
    There are, for example, some economists who predicted the crash, and not in a stopped clock sort of way, but with empirical testable data and theory. Georgist economists like Mason Gaffney, expanding on the work of Homer Hoyt in the 1930s, is one such example, using the Land Cycle, with 30 or so clearly delineated steps from peak to trough to identify the 2008 crash ahead of time and testable steps leading up to it.
    There are others. And it ought to be possible, in a scientifically rigorous way, to disaggregate other irrelevant factors from the true causes, or at least to identify cycle constants if we use a long enough repeating set of cycles.
    If not, then what are we doing here?

  13. Joe
    February 2, 2016 at 9:23 pm


    Interesting writeup. I have been on the sidelines for some time now, noodling on economics and how it appears to influence the word around me. At a friend’s request, I am reading Peter Schiff’s “How an Economy Grows and Why It Crashes” as a way to familiarize myself with the somewhat popular Austrian economic concepts. The allegory is a good format for the concepts, though the work is philosophically incomplete (so far–I haven’t finished yet, though the number of lose ends is growing faster than the explanations).

    As I read it, I was struck by a sense of how arbitrary the rules or goals of an economy can be. So why not explore that a bit.

    With the historical perspective on civilization, we know that some hierarchy is necessary to maintain civil society and to engage new generations of individuals. In the simplest sense, Economy is a system, administrated by people, that rewards human activity. The goals of the design and administrators of the system (i.e. all the nitty gritty implementation details) inherently reward certain activities and individuals over others.

    The Austrians, according to Mr. Schiff, have two primary goals for their ideal economy: 1) Production and 2) Savings. Noticeably lacking is any duty toward employment of current and future generations, as well as the notion of human behavior outside of homo-economicus.

    The more academic economics brands, such as neoclassical, have their prioritized goals which can be reduced from their worldview as well. I’ll not go into that just yet, though I think those may be a key factor in explaining the differences to the public and in debate.

    The three goals you proposed for an economy: 1) Moral soundness, 2) Historically grounded, 3) Anti-ideological seemed like good principles to have in general, so I thought I might throw my own out there for the fun of it.

    The next generation economic system (which includes some aspects of the administrating body). What might be some goals for it? Here are some I can think of quickly:
    1) Meritocracy – Better performance, more resources, more responsibility.
    2) Transparency – Accountable to all.
    3) 100% engagement – If the new generations do not want to partake, the system will at best fragment and at worst die out. If any are consistently unfairly excluded from opportunity and the wealth created by the generations which came before, then there will eventually be issues that threaten civil society (e.g. ISIS).
    4) Prioritize labor activity – Robustly maintain or improve the quality of life. The specific list may evolve over time.
    4.1) Security.
    4.2) Production of necessities.
    4.2) Essential fundamental and applied research – At least proportional to the expected social costs for the associated issues. For example, a natural resource becomes scare and alternatives need developed within a certain time period.
    4.3) Incentivize and support activity which may benefit society.
    4.4) Regular market activity.
    5) Resource management.


    • February 3, 2016 at 11:04 am

      Joe, are you prescribing these changes? Or is this what you believe those actually concerned with such things will do, might do, could possible due, or will not do in the future? If it’s the former you just quit your job as an academic. If it’s the latter you get to remain in the union.

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