Home > Uncategorized > Necessary changes in economic theory

Necessary changes in economic theory

from Neva Goodwin

Ecology teaches that everything is connected to everything else. Economics teaches that the market is a – some say the – great connector. Its specialty is to connect demand (what people want) to supply (what people produce), via prices.

There are, of course, known problems in the use of prices as a society’s key connector. For one thing, those with more money have more of what is sometimes called “effective demand”; they can send louder, more effective signals to suppliers to produce the goods and services they want. Those with very little money can hardly get their needs and wants noticed. Aside from this translation of unequal purchasing power into unequal impact, the other most notable problem with markets as connectors is the presence of externalities, when something that matters simply is not picked up in market signals.

Ecologists sometimes complain that economists dismiss such important issues as “just” externalities – implying that these issues are regarded as unworthy of consideration. Good economists do not do this: they recognize full well that where there are externalities (where an economic actor produces effects that do not translate as signals to other economic actors) there is a market failure. Unfortunately, in situations of significant market failures markets do not produce the optimal outcomes that are expected in standard economic theory. This does make mainstream economists squeamish about admitting to externalities, since the optimality of market outcomes is one of their main boasts, and they don’t have an alternative theory to pull out of the hat. Some economists who have positions of influence in academic or policy circles have begun to grapple with Stern’s famous remark that “Climate change is a result of the greatest market failure the world has seen”.[1] However, in the absence of a widely accepted alternative theory, the growing acceptance of climate change reality by economists simply creates cognitive dissonance without resolution.

The existing dominant system of economic theory is used to justify the current conformation of the economy of the United States, and of much of the world. It is becoming increasingly clear that it is producing very sub-optimal results for most of society, though benefitting the short-term gains of the rich and powerful. It has permitted and sometimes encouraged economic actors – especially powerful corporations and governments – to ignore the harms they impose on people and other parts of nature having little political/economic power. These harms are not trivial; they have included the murder of indigenous people for the value of their lands or of the minerals under their lands; toxic wastes dumped in oceans and in the neighbourhoods of poorer people; schemes to cover-up the harms of profitable products like tobacco and fossil fuels; and, over many decades, effective prevention of public education about the dangers of climate change, and of ways to avert it – until it is too late to prevent a future of ever more catastrophe.

In order for economic theory, teaching, and policy application to provide useful guidance in this time of great danger, it must change in many ways. The following is a brief summary of the most critical changes that are needed.  http://www.paecon.net/PAEReview/issue87/Goodwin87.pdf

[1] Quoted by Alison Benjamin in the Guardian, London, 29 November 2007. “Stern: Climate change a ‘market failure'”.

  1. Frank Salter
    June 21, 2019 at 1:55 pm

    A major problem in economic thinking seems to be the belief that a complete solution will appear at one fell swoop, Scientific understanding did not emerge in that manner. It was pried piece by piece by examining the empirical evidence and deducing the mechanisms which pertained. While economists continue to ignore a truly scientific approach there will be no progress.

  2. June 22, 2019 at 2:04 am

    Well said Frank.

    And there is a complementary unwillingness to consider an alternative that is not ‘widely accepted’, as in ‘… in the absence of a widely accepted alternative theory …’.

    So even if alternatives are developing, we don’t want to do the harder work of understanding them and evaluating them ourselves. But that is Catch 22: it won’t be widely accepted until it is widely accepted.

    There IS an alternative. It is pretty clear economies are complex self-organising systems, and the understanding of them is progressing rapidly under the mainstream radar.

    See The Little Green Economics Book, Chapter 5, for a terse introduction,
    and http://betternaturebooks.net.au/2012/07/03/economics-science-maths/

    Better, look for my forthcoming (through WEA) Economy, Society, Nature, http://betternaturebooks.net.au/my-books/nature-and-purpose/.

  3. Helen Sakho
    June 23, 2019 at 2:16 am

    I look froward to reading all references above again. But is it indeed a Catch 22 situation. Although it has gone a little further than that. The “no pain, no gain” Moto has turned into “inflict as much pain onto others (everything on earth basically), so you can make the highest gains that even you could not have imagined in your wildest dreams”.

  4. Ikonoclast
    June 24, 2019 at 1:08 am

    “Sometimes it is not just money that determines how the goals of some economic actors are most emphatically expressed in the design of an economy; there is also the matter of political power.”

    I think we need to look at Capital as Power (CasP) thinking. Capital itself is simply a quantization of power in the current system. It is not a quantization of value. This paper expresses the idea brilliantly and persuasively.


  5. Ken Zimmerman
    June 24, 2019 at 9:58 am

    Fascinating and informative overview of a culture that’s failing. Not unusual, however. Most cultures in human history have failed. The consequences of cultural collapse are almost always catastrophic. Culture defines our existence and makes us who we are. Without culture we have no past and no future.

    As all the products of the people of a society–material and non-material, culture is a complement to society, interacting people living in the same territory who share a common culture. Impossible to have one without the other (unless you want to call archaeological remains and historical records “culture” or “society”). People in society create culture; culture shapes the way people interact and understand the world around them. Culture determines what we know–the sum of all the angles in a triangle; what a screw driver is used for; how to use a computer to find out where Peloponnesians are… Culture also determines what we don’t know–how to catch a fish by hand; how to build a dugout canoe and navigate the South Seas without chart or compass. Culture determines what we want to be–lawyer; dairy farmer; computer programmer; doctor; shaman; pearl diver. Culture does this by providing the only options people can or will see at a time and place in history. In simple terms, culture makes human lives possible. When a culture no longer does this, when it impedes the continued being of a society, then the culture has failed. A culture such as Dr. Goodwin describes is on the edge of failure. Based on past cultural failures, this is not good news. Uncertainty, fear, and degradation generally follow. Is there any way to stop this?

    Finally, one comment about the content of Dr. Goodwin’s presentation. At several points Dr. Goodwin uses the terms optimal or sub-optimal. These are used in describing the goals of the current economic arrangements Dr. Goodwin is criticizing. They are normative statements about how current economic theories expect their theories to perform in society. Optimal refers to “most desirable or satisfactory,” “the best.” When writing about current economic theories using these terms, it is important to place the terms in context. To provide their history and the history of their use by economists.

    • Craig
      June 24, 2019 at 5:46 pm


      You’re right, if a culture/science/intellectual discipline does not evolve it will collapse. The economic culture that the current monetary paradigm of Debt Only created hasn’t changed since humans stopped nomadically wandering and formed cities and states. What does that tell you? It tells you that you’d better start thinking integratively-paradigmatically. Or we could just obsessively blather on with the various reductionist orthodoxies of science and social science, and obsessively de-constructing DSGE……none of which are integrative modes of thought.

      • Ken Zimmerman
        June 25, 2019 at 2:07 am

        Craig, cultures always adapt and change. When that no longer is effective the culture begins to collapse. Neoliberal-based culture has changed since the 1980s. But none of the adaptations have helped neoliberalism’s case. Now there’s a big effort underway to dump neoliberialism and replace it with something that gives the same results but without the push back and hostility. I believe GW Bush called it compassionate conservativism.

      • Craig
        June 25, 2019 at 5:35 am

        They change. However, I said “evolve” which is qualitatively different from mere change. The monetary paradigm has not changed OR evolved since the beginning of human civilization as we now know it.

        Do you see the potential of a direct and reciprocal monetary policy at the point of retail sale?

  6. Ken Zimmerman
    June 25, 2019 at 7:48 am

    Craig, if you’re speaking anthropologically or biologically, evolution is random physical change that is passed on to future generations or not. Generally, changes that improve human chances of survival are passed on since those holding these changes have less chance of dying. I believe what’s you’re speaking of is cultural adaptation. Not evolution.

    • Craig
      June 25, 2019 at 7:57 am


      Do you see the potential of a direct and reciprocal monetary policy at the point of retail sale?

      • Ken Zimmerman
        June 25, 2019 at 10:34 am

        Not really. It’s just another form of gift economy.

      • Craig
        June 25, 2019 at 5:45 pm

        Incredible. A 50% discount to all consumer products from a package of bubble gum to an automobile or house that immediately doubles the purchasing power of everyone’s earned income is no big deal. The IMMEDIATE change in individual and systemic reality from monetary scarcity/austerity to abundance is no big deal. That’s an individual and systemic monetary transformation, not “just another form of gift economy”. Gift economies never had the technological development, productive capability and systemic infrastructure that we now have. Hence they couldn’t conceive of or implement such sweeping changes. And those who deal with culture today, which is the social and mental pattern, apparently still can’t see it as anything but another reductionistic data point instead of the entire pattern change it actually is.

      • Craig
        June 25, 2019 at 7:05 pm

        The economic problem IS the monetary paradigm. One of the contributors here Steve Keen has correctly recognized this when he said DSGE theorists ignore money, debts and banks.

        To be precise its the monetary paradigm of Debt Only and the profit making banking and financial system which with its idiotic charter to monopolistically create credit/money ONLY AS DEBT that dominates virtually everyone and all of the other actually legitimate economic/productive business models.

        Strategically integrating the new monetary paradigm of Direct and Reciprocal Monetary Gifting into the economy at the point of retail sale opens up so many beneficial possibilities that seemingly NO HETERODOX ECONOMIST SEES, and resolves what virtually EVERY HETERODOX ECONOMIST AGREES are the two biggest economic problems we face, i.e. lack of actually available individual purchasing power and fear of inflation.

        Every paradigm change is accompanied by a new insight and/or a new tool. With the Copernican Cosmological paradigm change it was the invention of the telescope and the realization that moons revolve around planets. With the change from Hunting and Gathering to city and nation civilization it was agriculture and animal husbandry.

        And with the new monetary paradigm of Direct and Reciprocal Monetary Gifting it is the recognition of the incredibly powerful economic effects of a 50% discount/rebate monetary policy at the point of retail sale.

        You just have to actually and completely/paradigmatically look at it.

      • Ken Zimmerman
        June 26, 2019 at 12:59 am

        Craig, if I could change the current economic arrangements as I wished, I’d make it something like what my family has in Germany and Norway. But that’s not likely. At least not without one hell of a war, or economic collapse, or both.

      • Craig
        June 26, 2019 at 3:20 am

        It doesn’t have to wait for a war or economic collapse, AND MUSTN’T. That’s the disintegrative nonsense of Trump, Bannon and the authors of “The Fourth Turning”.

        In the first place such an occurrence is more likely to cause even more chaos and confusion about actual solutions, and in the second place Scandinavian socialism isn’t actually a paradigm change any more than any capitalist theory would be. There ARE genuine third alternatives and actual paradigm changes always sweep aside the orthodoxies and all of the palliative reforms that have grown up around the old paradigm.

        The new monetary paradigm isn’t capitalism or socialism it’s the integration of only the truths, highest workabilities, most relevant applicabilities and highest ethical considerations of the duality of capitalism and socialism that results in the thirdness greater oneness of DIRECT AND RECIPROCAL monetary DISTRIBUTISM.

        There can be a theory of the new paradigm, but A MERE THEORY IS NOT A PARADIGM. A theory is a model, a paradigm is an entirely NEW AND DIFFERENT CONCEPT……THAT CREATES AN ENTIRELY NEW PATTERN.

      • Ken Zimmerman
        June 26, 2019 at 9:33 am

        “The new monetary paradigm isn’t capitalism or socialism it’s the integration of only the truths, highest workabilities, most relevant applicabilities and highest ethical considerations of the duality of capitalism and socialism that results in the thirdness greater oneness of DIRECT AND RECIPROCAL monetary DISTRIBUTISM.”

        Craig there is no practical way I know of you can gain political approval of such changes. And culturally speaking, most people won’t know what the hell you’re even proposing. And that alone will scare the hell out of them. And lead them to put your proposals out with the trash. You would have a better chance after years of building and shoring up a cultural foundation for the proposals.

        This is from Encyclopedia Britannica. Perhaps helpful.

        Third way, in politics, a proposed alternative between two hitherto dominant models, namely left-wing and right-wing political groups. Historically, the term third way was used to refer to a variety of forms of government—from Nordic social democracy to fascism. At the end of the 20th century, however, it acquired a more specific meaning when British sociologist Anthony Giddens used it to describe an alternative to neoliberalism and social democracy in an era of globalization. The term third way may be applied to refer to a new and distinctive policy program, to a new political economy, to a new conception of social justice, and, by many of its critics, to a centre-left capitulation to neoliberal globalization.

        The third way was associated most clearly with the New Labour administration of Tony Blair, who served as prime minister of the United Kingdom from 1997 to 2007. It also was associated, less directly, with a number of centre-left administrations, notably those of U.S. Pres. Bill Clinton (1993–2001) and Chancellor of Germany Gerhard Schröder (1998–2005).

      • Craig
        June 26, 2019 at 5:43 pm

        “culturally speaking, most people won’t know what the hell you’re even proposing. And that alone will scare the hell out of them. And lead them to put your proposals out with the trash.”

        You’re right which is why I wouldn’t start out in that way. Instead I’d say something much more simple and obviously self interested like “Here is the simple way I’m going double your social security check” or “Here is the simple way I’m going to double the money actually available to purchase your businesse’s goods and services” or “Here is the simple way I’m going to enable you to go to college, live comfortably on $24k-$36k/yr and fully pay for your tuition while you attend so you don’t have $50-75k debt hanging around your neck for the next 15 years” or “Here’s the way I’m going to turn your $30,000 yearly income into $60,000.”

        “there is no practical way I know of you can gain political approval of such changes.”

        You’ll notice that the statements above integrate the normally opposed political constituencies of students and businessmen or retirees, and everyone who works and who they work for. If that isn’t a politically practical and winning program….I don’t know what is, and I studied political science in college.

        Your third way information is entirely correct but I couldn’t possibly give a damn about the pretend third ways which do not focus on the monetary paradigm and do not have the insight regarding the potential for monetary policy at the point of retail sale….which everyone can plainly comprehend….if they are directed to look at its immediate, empirical, mathematical and temporal universe effects. Ordinary people are open to such things. Intellectuals whose minds are still entirely too culturally entangled in complexities and orthodoxies….not so much.

      • Ken Zimmerman
        June 27, 2019 at 2:34 am

        “Ordinary people are open to such things.”

        Craig, if you try this in the “real” world, you’ll find you are wrong about this.

      • Craig
        June 27, 2019 at 4:52 am

        Not if you make them look at the benefits. Of course there are some people who are so propagandized and acculturated to the enslavement the money system has concocted for them that they will at first reject it, but that cynicism and folly will evaporate by simply stating the empirical and numerical facts to them enough times for them to see what’s in it for them. That and then acting out the policies effect with them as the consumer. The businessmen will back it right away because how can they object to doubling the money available for their products and services. Students overwhelmingly the same. Women, the same. Even the libertarians will quickly cave on the “free lunch” when their wives hit them over the head with a rolling pin for returning their dividend “on principle”.

      • Ken Zimmerman
        June 27, 2019 at 9:05 am

        Craig, if they don’t blow you off as just one more con artist.

      • Craig
        June 27, 2019 at 4:24 pm

        The con artists (whether conscious or unconscious) are always shilling for either capitalism or socialism. Economics isn’t the actual problem. When they realize that I or someone else is actually trying to free them by changing the monetary paradigm and that BOTH business and the individual tremendously benefit from that…..the vast majority will understand and be ready to get the evolutionary pitch forks out to fight the real problem.

      • Ken Zimmerman
        June 28, 2019 at 10:36 am

        I may believe what you claim, or perhaps not. Now how will you convince the rest of the planet?

  7. Craig
    June 26, 2019 at 12:12 am

    Wake up RWER contributors to your own contributors realizations and to the paradigm changing REAL WORLD ECONOMIC effects of my innovations of policies suggested at the birth of macro-economics before it descended into the fallacies of neo-liberal DSGE and the obsessive and terminal abstraction it has fallen into.

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