Home > Uncategorized > The necessity and difficulty of shifting our economic paradigms

The necessity and difficulty of shifting our economic paradigms

from Asad Zaman and the current issue of the RWER

In the wake of the Global Financial Crisis, the failure of economic theories, and of economists, to provide any warnings, analysis, or remedies, became glaringly obvious to all. The Queen of England went to the London School of Economics to ask “Why did no one see it coming?”. The US Congress constituted a committee to investigate why “economics, a field that aspires to be a science … (but) … generally accepted economic models inclined the Nation’s policy makers to dismiss the notion that a crisis was possible.” General discontent with economics has been captured in books too numerous to list; as a small sample chosen at random, consider Steve Keen’s Debunking Economics: The Naked Emperor of the Social Sciences, Joe Earle, Cahal Moran and Zach Ward-Perkins: The Econocracy: The Perils of Leaving Economics to the Experts, and Phillip Pilkington: The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory.

g economists have expressed serious dis-satisfaction with the profession as a whole.  John Cassidy’s article “After the Blowup …” in The New Yorker describes his interviews with apostates from the Chicago creed. Krugman wrote that the “Profession as a whole went astray because they mistook the beauty of mathematics for truth.” David Romer wrote that economists’ “dismissal of fact goes …(so)… far beyond post-modern irony” that it should be called “post-real”. He wrote that the profession has been moving backwards, losing precious insights gained. Olivier Blanchard, Chief Economist at IMF writes that DSGE models make “assumptions profoundly at odds with what we know about consumers and firms”. This is just a small sampler; we can easily find many other similar statements from leading economists, and practitioners intimately involved with finance and central banks on a global level[1]

Despite widespread dis-satisfaction, the vast majority of dissidents argue that no paradigm shift is required. Instead of a complete overhaul, we just need to patch-up the problem areas. All of the dissidents have their own favourite culprits – like the DSGE models, rational expectations, ARCH/GARCH methodology for risk assessments, failure to include the finance sector, etc. etc. etc. In contrast to this reformation, I would like to argue for a revolution. We need to re-think the whole project of economics from scratch.[2] Just like modern astronomy was created by rejecting the concept of the heavenly spheres on which the stars rotated around the earth, so creating a viable economics for the 21st century requires rejecting the entire edifice of modern economics. The process by which a paradigm shift can be created differs radically from normal science, which involves looking at problems within existing theory and patchwork modifications. As opponents point out errors and difficulties with the maximization/equilibrium methodology, proponents can find ways to patch up the conventional framework to deal with new challenges. This is how Ptolemaic astronomy evolved. If the original spheres did not suffice, then new spheres were added, and if the second did not suffice to match observational evidence, a third sphere was added. Rethinking the whole framework from scratch cannot be done in a piecemeal way.   read more

[1] For a selection of choice quotes, see: Quotes Critical of Economics.

[2] See my “Questioning ALL of Economics?

  1. Frank Salter
    October 12, 2018 at 3:04 pm

    I am in total agreement with your comments. However…

    I have repeatedly explained the nature of the problem in many of the RWER blogs. To me the problem with conventional analysis is obvious but I appear to be failing to convince you, Asad, other bloggers and commentators.

    Conventional analysis assumes the clearly ridiculous hypothesis of equilibrium. It serves to make the mathematics simple but totally ignores the empirical facts. Economic cycles have been the norm ever since the South Sea bubble. So equilibrium SHOULD/MUST be rejected. I find it inconceivable that this hypothesis is still accepted as valid even by the academics who rail against its implications.

    Time must be dealt with in a physically realistic manner. This deals with transient changes and cycles. This OBVIOUS conclusion appears obvious to me but I do not know who else. I would, therefore, ask those who do accept this truth to stand up and be counted. We might then be able to move on and deal with reality rather than the alternate universe described by conventional analysis.

    • charlie thomas
      October 12, 2018 at 4:18 pm

      the equilibrium seems to be an artifact in economists’ training / minds … however there may be an ecology analogue that could form the basis of a new economics

  2. October 12, 2018 at 5:47 pm

    In a comment to Lars Syll’s post of October 11, 2018, I cited John T. Harvey’s article which appeared in Forbes October 8th:
    The Nobel Prize And Keeping Economics Real
    https://www.forbes.com/sites/johntharvey/2018/10/08/the-nobel-prize-and-keeping-economics-real/

    In his article, apart from Steve Keen, an interesting paper was mentioned. It is
    Dirk Bezemer (2011) The Credit Crisis and Recession as a Paradigm Test. Journal of Economic Issues 45(1): 1-18.
    http://www.economicsofcreditanddebt.org/media/research/JEI_PARADIGM_PAPER.pdf

    You may also read another paper with similar contents:
    Dirk Bezemer (2010) Understanding Financial Crisis Through Accounting Models
    https://www.researchgate.net/publication/227411453_Understanding_Financial_Crisis_Through_Accounting_Models

    In these papers, Bezemer is explicit. The new paradigm that could predict financial crisis of 2008-09 was (in his terms) Accounting Models as compared to Equilibrium Models.

    In the domain of industrial products (goods and services), we have already a new paradigm for price theory. See for a short account, my paper
    The Revival of Classical Theory of Value
    https://www.researchgate.net/publication/269393496_The_Revival_of_Classical_Theory_of_Values
    This theory is already developed to include international values (wage rates and prices of products) for a very wide situation that no neoclassical trade theories can compete.

    As John Harvey put it,
    ”There are well-developed and rigorous competing models out there already, only not in the journals they [the mainstream people] usually read.

    Mainstream economists must know it. But, more importantly, heterodox economists must know it. Everything starts here.

    The most important thing here is not methodology. There were too much of methodology talk and criticism. Our task is now to produce concrete theory or theories. For the time being, it is inevitable to have two or three independent (or loosely related) theories, but it is necessary to pay our efforts to unite them. If not, just like Post Keynesian economics which dissolved into different strands and are at the edge of demise, new paradigm(s) without firm theoretical foundations will not have real impact and will be absorbed into the mainstream economics. The new paradigm must take place of the new mainstream economics status and put the actual mainstream to the place of past economics. We now have the chance.

    • Craig
      October 12, 2018 at 10:10 pm

      Bezemer’s accounting perspective is insightful but like Stave Keen’s recognition of the importance of accounting is almost a century late and still not basic enough as C. H. Douglas’s cost accounting analysis of the flow of funds made him the first inherent disequilibrium theorist.

      Virtually all economic historians ignore Douglas despite this fact and despite his Social Credit theory being a world wide movement between the first and second world wars which the reforms of Keynesianism emerged as the fall back position of Finance against the nascent awareness (even amongst social crediters) of Social Credit’s new paradigm of monetary grace as in gifting with its policies of a universal dividend and a compensated retail discount…which also predated by almost one hundred years the emerging popularity of UBI/QE for the individual.

      My Wisdomics-Gracenomics is the new paradigm accomplishing theory that arises out of my economic heterodox education by Keen and Michael Hudson and my extensions and innovations of Douglas’s dual policies that in turn arose out of my study of the signatures of imminent and accomplished historic paradigm changes, my philosophical study and eclectic practice of the world’s major wisdom traditions and their reflective relevance to economics, virtually all of humanity’s systems and finally our species conscious evolution itself.

      • October 13, 2018 at 5:22 am

        When one is taking about economics, you are talking about politics. Your paradigm is a social reform, or a plan to change economic institutions. Paradigm change we need is the one in economics. It is an epistemic question. It has no direct relation to social or economic reforms. Please do not confuse two different paradigms.

      • October 13, 2018 at 6:49 am

        Yoshinori, you may be right about Craig confusing institutions with paradigms, but if you think paradigm change is an epistemic question, that shows you haven’t begun to understand the Tony Lawson and critical realism you so like to criticise. The question is an ONTOLOGICAL one: what is economics? What does economics DO, and what is the system now being labelled ‘economics’ actually doing? Paradigm change is about changing the examples we are using of how to DO things so we can see how to get back from ‘economics’ to economics. Although the Banker’s Nobel-winning James Mirlees that Roger G Lewis linked us to recently was an equation-loving and graph-loving mathematician, his argument very closely follows mine, hurriedly drawn to a practical conclusion at the end with the conjecture “an awful lot of ‘assets’ should be eliminated”. What do you suppose he was talking about?

      • Craig
        October 13, 2018 at 6:52 am

        Yoshi, Not correct. It is clearly an economic, monetary and financial paradigm change by virtue of it being in conceptual opposition to the current paradigm and also policy wise an inversion/transformation of current recognized realities in those fields. Those are signatures, requirements and definitions for paradigm changes.

        And yes, it is also an integrative epistemic/natural philosophical breakthrough as well. In fact it (Gracientialism and the formulaic concept of The Cosmic Code stated as: An integrated duality within an integrative trinity-unity-oneness-process) is a TOE (theory of everything) and its conceptual reflectivities with the scientific method, quantum physics and the world’s major wisdom traditions logically align with each other.

        I don’t shrink from that or from debate about it in forums other than ones devoted to economics like this one.

      • October 13, 2018 at 5:11 pm

        There will be a time to argue why Lawson’s ontology did not and does not produce anythings. He is always thinking about macroeconomic models. You are hopeless if you want to construct a macroeconomic model by which to predict something. I agree at that point with Lawson and Lars Syll. But economics theories are not restricted to that.

      • Craig
        October 13, 2018 at 7:31 pm

        Paradigms/paradigm changes are the single concept pattern creating occurrences that transform both institutions and people’s understandings of the world. There’s no confusion on my part between a paradigm and an institution.

      • Craig
        October 13, 2018 at 7:48 pm

        Dave, However, your identification of ontology as the branch of philosophy necessary to be applied to economics in order to truly understand and humanely craft and apply its policies is correct. There’s human ontology (nature of beingness) and temporal universe ontology, and when the two are “in synch” they reflect the double headed nature of all three of self/awareness, the inductive/deductive integration that is the mental discipline of Wisdom and the integrated dual nature of a paradigm (a single concept that defines, describes and creates an entirely new pattern).

  3. tyillc
    October 12, 2018 at 6:22 pm

    Perhaps it is less a revolution that is needed and more a recognition of how the assumptions made by Economists to make the math simple limit the application of these models. Once you start looking at the assumptions, you realize Economics has become exceedingly narrow in its focus. Here is the first step to expanding the focus (it just happens to explain why Economists didn’t see the financial crisis coming and why their preferred remedies may actually have made the financial crisis worse). http://instituteforfinancialtransparency.com/2018/10/09/it-is-astonishing-what-foolish-things-one-can-temporarily-believe-if-one-thinks-too-long-alone-particularly-in-economics/

    • October 13, 2018 at 5:10 am

      Dear tyllic

      Have you read Bezermer’s papers (2010 or 2011) that I have mentioned above? Please read them (or one of them). The question is clearly explained. You have oriented us to a page, but we can only read there some parts of Romer’s paper. It is much better to read John T. Harvery’s article in Forbes that I have cited in my post on Lars Syll’s post of October 11, 2018 (not that of October 12) that I have also mentioned above..

    • October 13, 2018 at 7:52 am

      Dear tyllic

      Re my comment above on James Mirlees, my argument is the other side of yours, that “recognition of how the assumptions made by Economists to make the math simple limit the application of these models”. If the maths is [in Einstein’s sense] “too simple” then one has to use it in complicated ways to do any sort of justice to the reality. Making a car more complex can actually make it easier to drive. Making ALGOL68 more complex – by requiring (making axiomatic) the specification of data types (modes of interpretation) – actually made complex computer programming simpler. Indeed, in the words of Raymond Turner in “Logics for Artificial Intelligence” (1984, Wiley), “The addition of such [modal] axioms, and appropriate rules of inference involving these operators, facilitates the derivation of theorems [working programs] which are not even expressible in the language of predicate calculus”.

      When I was required to write an operating system in the only [untyped] language available to me, I found just that. What would have been a doddle in Algol68 was impossible in COBOL60. Hence, anyway, the folly (or criminality) of Jevons et al, oversimplifying economic theorising by eliminating production and consumption to reduce everything to simple buying and selling. Put them back in, recognise money as a token of creditworthiness banks don’t have, and “an awful lot of ‘assets’ should be eliminated”. The whole banking, insurance, taxation and pensions scams can be reduced to just keeping accounts, which we do anyway.

  4. October 13, 2018 at 5:51 am

    Dear Asad Zaman,

    I support your plea for a total change of economics or paradigm change in economics. I have posted my own observation above in support of your plea. However, when I read your article (Reference [2] Questioning All of Economics), I feel you are mixing other problems, i.e. institutional reforms (the part after “ISLAM OFFERS” in particular). It is free that you preach such institutional reforms but I believe it is wiser not to confuse or mix up two different things.

    Among the heterodox economists and supporters, there are many who are only interested in social and economic reforms. I.m.h.o., they are in a sense a big obstacle for the paradigm change in economics. Because, they are not interested in the theoretical contents of economics. They are only frustrated by the state of economy and has no interest in the state of economics. We cannot talk with them about purely theoretical questions. But these arguments are now requested.

  5. Rhonda Kovac
    October 13, 2018 at 9:08 pm

    At bottom, the problem is not about intellectual paradigms. It is about corruption of the academic economic establishment. University economics departments are awash in corporate money. Jobs for economists concentrate in the high-end business community, especially the financial services sector. Much of what passes for accepted economic theory and opinion comes from prominently positioned, politically driven, corporate funded ‘think tanks’.

    I think this best explains the brick wall that authentic economic reformers have hit in response to their exposure of blatant intellectual stupidity in the mainstream and its dug-in rejection of obviously sensible alternatives.

    I would say that in this situation, theoretical paradigm shifts, even full scale intellectual revolution — though essential parts of the picture — shouldn’t be the main thrust. The wealthy elite in the driver’s seat here are swayed by profit, not ideas.

    I suggest we can get over this hump only by promoting a popular revolution — per Bernie Sanders — going directly to the general population. It is when the great majority of people start getting what has been withheld from them for so long, that the fabric of corruption begins to unravel. Then sensible ideas will have a chance to gain a foothold.

    • Craig
      October 13, 2018 at 10:00 pm

      Excellent analysis especially the need for a grass roots movement that simplifies the messages/drives home the resolving and self interested nature of the paradigm change. We need both, that is, an integrated effort. Trying to change ego involved academics and “authorities” is a fruitless task.

      “In order to change an existing paradigm you do not struggle to try and change the problematic model. You create a new model and make the old one obsolete.”

      R. Buckminster Fuller

      “If there is one thing that all of the armies of the world cannot resist, it is an idea whose time has come”

      Victor Hugo

    • October 14, 2018 at 3:12 am

      Bernie Sanders is amazing. Although I am not an American citizen, I am supporting his movement. It is a hope for the U.S.A and the world. However, even if the Revolution that Bernie is trying to achieve is realized, economics paradigms does not change. It requires proper change of economics concepts, new understanding of systemic functions, rearrangement of the set of basic propositions, i.e. in short the theory. This paradigm change cannot be performed or brought by political activism that Rhonda and Craig imagine. They are dreaming something like contending that the change from the geocentrism to the heliocentrism automatically occurs when the Reformation arrives. It may have contributed to this change (although Protestant Churches were at first against the heliocentrism), but heilocentrism requires Copernicus, Tycho Brahe, and Kepler. Martin Luther could not do it.

      Political activists have a strong tendency to believe that their action can change everything. But in fact they are almost powerless to change something abstract and theoretical. We should not repeat the folly of those old Marxists who imagined that they can discard economics and economic laws, and that they can establish a world of freedom, when they could achieve a political revolution. They have once succeeded in their political revolution but were finally defeated by the economy (i.e. economic laws) and the lack of political freedom. This is one of the greatest lesson the human being learned in the 20th century.

  6. October 14, 2018 at 10:37 pm

    Rhonda’s analysis and Yoshinori’s reservations provide the basis for really constructive discussion, but Craig also is making very significant points: a grass root movement needs the message to be simplified, yet it is not a matter of whether theory or practice is more important, they are integral, like two sides of the same coin.

    Let me get over the difficulty by pointing out that theorising and practicing are not ‘things’ but processes, so the questions are what processes are needed to get from the one form to the other, and from a grass root to a popular revolution? Summarily, the answers are that theorising may come first, but the theory only survives if it continues to be communicated as teaching, only develops as a result of ‘negative feedback’ about its failures in practice, and it only spreads as a result of ‘positive feedback’ from supporters simplifying its profile.

    So how do such feedback loops work? I was trained as an engineer, defined as one who, like an interpreter between foreigners, sits between philosophers and workmen and has to understand the language of both. So the philosopher shows what is possible, the engineer designs, say, a car factory and the worker buys a car, both understanding this practically but the engineer also as an instance of theory. It is the worker showing his mates the car which sells it and problems in use which motivate redesign.

    The philosopher’s theory only gets changed when an engineer, not necessarily a car designer, finds possible what they had thought impossible. Newton saw the apple fall to the earth, but then saw the young lady in the old gravitational crone: the earth falling for the apple. So Aristotle’s philosophy was wrong: the moon didn’t have to be pushed round the earth but kept going unless an internal force acting at a distance (gravity) stopped it flying away. Given that the equations of cosmological motion followed as a matter of course, though it took some clever mathematics to reduce geometric observations to a calculus useable by engineers.

    But hey, the calculations worked out in the cosmos because the light of the stars Newton saw came from long ago in the past: nothing we can do to change that. The observed change had to be due to motion of the observer and (to cut a long story short) it can be ambigious: what feels like our car starting may actually be the beside us starting in the opposite direction.

    Contrary to our initial assumption that electrons are countable things, we now realise they are a negative potential. Contrary to money being of positive value (as we assumed from when it was things like gold) we now understand it is a credit with the potential to indebt us if we spend it. Just as one cannot reuse electrical energy but have to recharge the battery, so what we purchase on credit has to be regenerated by our and Nature doing work. Which is what most of us do but not what economists are seeing. They are offering a choice between more credit and more austerity, i.e. consumption.

    What I’m suggesting is that economists are not philosophers but social engineers, still using methods based on localised Newtonian mechanics rather than Faraday’s electro-magnetic fields acting at a distance, ordered by the time taken to communicate power and information. . To my mind that amounts to the paradigm change we need to be looking at. In response to Yoshori this is about neither institutions nor politics, it is about basic science and the philosophical choice between sticking with the devil you know and the avenging angel of Roger Lewis’s “dangerous thought”.

    • October 14, 2018 at 11:34 pm

      The above got sent accidentally. I wanted to remind Yoshinori [October 13, 2018 at 5:11 pm] that Tony Lawson, like the great John Locke, is a philosopher characterising his role as a humble underlabour to science. He is not a social engineer, proud of and anxious to sell his latest creation. If, like Locke, the foundations he has been laying are less than perfect [I have been arguing with him for twenty years about circuits having to be closed to be open for communication, and now think his ontology confusingly ‘micro’ rather than offering a ‘macro’ perspective], nevertheless, like Locke and G K Chesterton, he more than most has achieved what other good teachers merely aspire to: inspiring, enabling and by his very imperfections encouraging others to think for themselves.

    • October 15, 2018 at 4:22 am

      Dear davetaylor1

      thank your for your good summery of the problem. I under stand where I am, what is my problem.

      As for Tony Lawson, as I have written in one of my post above (October 13, 2018 at 5:11 pm), I want to argue on some other day his ontology and its effects on building a new paradigm in economics. I think he is missing the point and misleading many of his followers not to reconstruction but only to destruction. Let me add that Lawson is no enemy of mine. I used to attend to his workshop when I was in Cambridge many years ago, around 1987 or 8.

      • October 15, 2018 at 7:54 am

        Thank you for this, Yoshinori. As I wrote, my original letter got sent accidentally, before I had time to proof-read it. Two paras up “more austerity, i.e. consumption” should of course have ended “less consumption”, and three paras up “the beside us” should have been “the car beside us”.

      • October 15, 2018 at 11:27 am

        I now remember also, that where my comment broke off I had intended to link “sticking with the devil you know” with Rhonda’s starting point on corruption and the need for positive feedback in simplified form to enable “the great majority of people [to] start getting what has been withheld from them”.

        Rhonda, from what I have seen of your comments you are very good with words. I’m not: I’m aa visual thinker and see more thhan I can say. I’ve seen and referred to a simplified form in the already familiar credit card system, used interest free if use is kept down and worked for within the timescale contracted. However, I’ve not been able to express persuasively the implication that has been withheld from us (in defiance of early Christian and Moslem tradition): that all a bank loan is is a credit limit, on which no interest is due. Perhaps you (and perhaps others) can express this more clearly and start spreading the word?

  7. Helen Sakho
    November 4, 2018 at 12:25 am

    Let us try. There is only one God; the god of Humanity. And s/he is merciful to all dead and living creatures, does not sub-contract responsibilities; doesn’t shoot or kill or starve people. I have said my piece here numerous times, so I shall stop.

  8. Craig
    November 4, 2018 at 1:14 am

    The necessary insight for economists in order to leave their heads and actually progress

    They’re stuck operating almost entirely on two mental integrations below the level of paradigm perception/paradigm change.

    Ascending, these levels are:

    Theory- mentally gathering and analyzing research and data

    Philosophy- mentally organizing concepts

    Paradigm Perception/Paradigm Change-mentally analyzing and integrating lower levels of analysis so as to isolate the essential concept/currently reigning paradigm and then using the signatures of imminent paradigm change/actual paradigm change to decipher the new paradigm

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