Home > Uncategorized > The primary problem with mainstream economics

The primary problem with mainstream economics

from Lars Syll

Jamie Morgan: To a member of the public it must seem weird that it is possible to state, as you do, such fundamental criticism of an entire field of study. The perplexing issue from a third party point of view is how do we reconcile good intention (or at least legitimate sense of self as a scholar), and power and influence in the world with error, failure and falsity in some primary sense; given that the primary problem is methodological, the issues seem to extend in different ways from Milton Friedman to Robert Lucas Jr, from Paul Krugman to Joseph Stiglitz. Do such observations give you pause? My question (invitation) I suppose, is how does one reconcile (explain or account for) the direction of travel of mainstream economics: the degree of commonality identified in relation to its otherwise diverse parts, the glaring problems of that commonality – as identified and stated by you and many other critics?

einstein1988berlinLars P. Syll: When politically “radical” economists like Krugman, Wren-Lewis or Stiglitz confront the critique of mainstream economics from people like me, they usually have the attitude that if the critique isn’t formulated in a well-specified mathematical model it isn’t worth taking seriously. To me that only shows that, despite all their radical rhetoric, these economists – just like Milton Friedman, Robert Lucas Jr or Greg Mankiw – are nothing but die-hard defenders of mainstream economics. The only economic analysis acceptable to these people is the one that takes place within the analytic-formalistic modelling strategy that makes up the core of mainstream economics. Models and theories that do not live up to the precepts of the mainstream methodological canon are considered “cheap talk”. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered to be doing economics …

The kind of “diversity” you asked me about, is perhaps even better to get a perspective on, by considering someone like Dani Rodrik, who a couple of years ago wrote a book on economics and its modelling strategies – Economics Rules (2015) – that attracted much attention among economists in the academic world. Just like Krugman and the other politically “radical” mainstream economists, Rodrik shares the view that there is nothing basically wrong with standard theory. As long as policymakers and economists stick to standard economic analysis everything is fine. Economics is just a method that makes us “think straight” and “reach correct answers”. Similar to Krugman, Rodrik likes to present himself as a kind of pluralist anti-establishment economics iconoclast, but when it really counts, he shows what he is – a mainstream economist fanatically defending the relevance of standard economic modelling strategies. In other words – no heterodoxy where it would really count. In my view, this isn’t pluralism. It’s a methodological reductionist strait-jacket.

Real-World Economics Review

  1. EDWARD K ROSS
    October 6, 2019 at 12:29 am

    In regard to the above, although I am not an academic, or because I am not an academic, I think the above is a very important article. Because it highlights, that one of the main obstacles to promote a new economics, that relates to real people in the real world, is the gutless fence sitters, who are afraid to clearly challenge the ruling main stream neo liberal main stream economists, who are ultimately controlled by the elite wealthy. In my opinion this is is not something new but has been obvious since the since the 2004 at Cambridge, where many economists started claiming they were taking a heterodox position. however to my non academic mind, they were only taking a heterodox position within mainstream economics. Finally from my real life experience you cannot repair a broken non function system or introduce a new model system until you identify the cause of the problem correctly. HERE I DO NOT BELIEVE I am offering some new thinking on the subject as there has been some excellent articles on R W.E.R. but to a large extent they seem to have been ignored by the main stream and the fence sitters. Ted

    • Frank Salter
      October 6, 2019 at 2:18 pm

      Ted: You are absolutely right. One can not repair a system which is incapable of answering the questions which need to be answered. It is simple to demonstrate that all conventional and heterodox production and growth theories can NOT be valid. The inability of economists to recognise this fact is the reason that there is little possibility of progress. Even when I demonstrate that an abstract theory of production fully consistent with every empirical relationship is developed in my paper, Transient Development, economists appear to be incapable of working their way past their preconceptions and prejudices. The fact that the analysis reveals a plethora of mistakes in conventional analysis seems to go unrecognised. Considering that Occam’s razor reveals the analysis to introduce a minimum of entities — definitions of productivity and technical progress — I do not understand why apparently all this is considered to be of no account.

      That is why there will be little progress in economic analysis.

      • Craig
        October 6, 2019 at 7:31 pm

        @Frank and John

        “One can not repair a system which is incapable of answering the questions which need to be answered.”

        Correct. Except that “Considering that Occam’s razor reveals the analysis to introduce a minimum of entities — definitions of productivity and technical progress — I do not understand why apparently all this is considered to be of no account.” …is just another reform that misses the mark of the real problem, that is….the monetary and financial and hence the economic paradigm.

        Economics needs a NEW concept, a new monetary concept that transforms and creates an entirely new TEMPORAL UNIVERSE PATTERN/paradigm in economics.

        All of the leading reforms affirm this. Minsky’s FINANCIAL instability hypothesis, Modern MONETARY Theory, Public BANKING, Hudson’s FINANCIAL parasitism…except they’re piecemeal, reductionistic instead of integrative, problem focused, overly abstract unconscious dancing around the SOLUTION….which is the necessity for a new monetary and financial paradigm. They all fail to rise to the integrative level of the paradigm.

  2. Marc Batko
    October 6, 2019 at 12:57 am

    The trouble with normal is that it always gets worse, said Canadian protest singer Bruce Cockburn. Here’s a link to John Nichols on “Why Impeachment Matters More Than Party Politics,” Sept 2019, 22 min https://freespeech.org/stories/impeachment-matters/

  3. yok
    October 6, 2019 at 5:45 am

    The wealthy and the powerful demand an ideology that serves. These people have spent a lifetime investing in the only available route to financial and academic success. They have found their place in it. Any new insight or thinking only raises the question of “how come you weren’t aware of this.”

  4. Kevin Cox
    October 6, 2019 at 7:26 am

    Models are approximations of reality. Mathematical models create abstractions that allow us to develop models we can more easily manipulate. This works and enables excellent progress in most fields of human endeavour.

    However, it all gets weird when we think the abstractions have the same meaning as the real world. Economics is a great example, but the same principle applies to all human modelling of reality.

    We invented the idea of money as a measure of value, a store of value and a means of exchange of goods and services. To make it more useful, we made money fungible.

    All these ideas are useful, and they have permitted us to coordinate our efforts and work together. It becomes expensive (cost more) when we make money able to generate money or value. Money cannot – on its own – create value. An asset that produces goods that someone will buy can generate value. The assets that people buy can create value, but money itself does not generate value. Economic models are built on the idea that it does. We have designed systems so that money is given as a loan and it is treated as though it generates profits in forms such as interest, capital gains, dividends. Money has not created more value and making systems, so it works as though money generated the value costs a lot to operate. It requires the cost of operating the financial system.

    There is a solution to the problem. We build systems where money does not generate value but only the assets that money has purchased create value when the goods and services are sold. Using this idea simplifies economic systems and results in lower-cost financial systems. Investors get returns on investments, but the returns are linked directly to the assets. Systems like this have a cost to operate, but the cost is a fraction of the cost of money.

    When we change an underlying mechanism in any complex adaptive system (like the economy), many things change.

    In an economy, this change makes it easy to share the profits of transactions between the buyers and sellers which lead to a more equitable distribution of wealth.

    It removes price as a critical factor for markets. Instead, the cost of producing goods and services become a crucial factor in the market.

    It changes the way we evaluate projects from returns on money to returns on assets.

    It makes any economic system lower cost. We do not have to get a return on money as we have a way of getting a direct return on the production of goods and services.

    It keeps the value of money constant.

    It permits flexibility in long-term investments, and it favours the construction of long-lasting assets as it has removed most of the cost of operating the financial system.

    It is remarkably easy to implement; if we change the way we think about money and think about ownership. It can be achieved one investment at a time and we can “retrofit” existing investments. It can be achieved within the existing system without a revolution. Rather we evolve existing systems to take advantage of lower-cost financing.

  5. October 6, 2019 at 7:37 am

    I believe that for the mainstream the writing is on the wall. They have to know, unless their dishonesty is endemic, that their theories and models are divorced from reality. Already the straw man arguments are brought out . They cannot win, the Crushing reality of MMT destroys all their nostrums, so they just refuse to look. As Bill Mitchell said, a paradigm shift is in the making. Even now there are hints along the line that they knew it all along. The next stage is We win.
    The mainstream has been so destructive adherents should be charged as frauds and criminalised

  6. Gerald Holtham
    October 7, 2019 at 7:28 pm

    “but money itself does not generate value. Economic models are built on the idea that it does.”
    Not many and none that are any use. No respectable theory of capital identifies it with money. There are enough straw men on this blog to feed all the cows in the world – and until they come home.

    • October 7, 2019 at 9:10 pm

      Bezos earns more in 12 seconds than an average Amazon worker earns in a whole year! We are the hoodwinked and have lost our way. Neoliberalism only recognizes persons as consumers and competitors and blocks out alternatives.Academia.edu could be the people’s publisher with over 23 million papers. I heard a podcast with Richard Price, the founder 11 years ago, who spoke of a “flip” from the pay wall to open access.Openculture.com has 1100 free movies (including “Alice in Wonderland,” 9 min from 1913), 700 free Internet books (including Dostoevsky’s “Diary of a Ridiculous Man”) and 700 audio books including (Orwell’s “1984”). Don’t concede to the Republican noise machine and incoherent rambling!  Happy reading and happy research!

  7. Ken Zimmerman
    October 11, 2019 at 1:38 pm

    The concept known as the law of the instrument, otherwise known as the law of the hammer, Maslow’s hammer (or gavel), or the golden hammer, is a cognitive bias that involves an over-reliance on a familiar tool. As Abraham Maslow said in 1966, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” The concept is attributed both to Maslow and to Abraham Kaplan, although the hammer and nail line may not be original to either of them. That line’s been attributed to sources ranging from Buddha to the Bible to Mark Twain to the stock market speculator and author Bernard M. Baruch, though it cannot be found in any of these sources.

    The instrument law is a learned concept and can be quite powerful, particularly in science dependent societies such as the US. This is, in my view the bias that drives many of the actions of mainstream economists. To borrow from Maslow, I suppose it is tempting, if the only tool you have is standard economic theory and analysis, to treat everything as if it were an analytic-formalistic modeling problem. In simpler terms, mainstream economists are stuck in a rut and don’t know how, or perhaps don’t want to get out.

    • Robert Locke
      October 11, 2019 at 3:42 pm

      The instrument has to be appropriate to the task. When I first started to investigate German business economics, I discovered that its center of gravity was the firm. People studying business economics started to measure success in terms of profitability, but as the firm evolved, the purpose became firm efficiency (Wirtschaftlichkeit) A firm’s efficiency cannot be restricted to profitability, unless the view of the firm is strictly proprietary, if the firm is conceived of as composed of various stakeholders, efficiency has to be determined in how it serves all the stakeholders, and the instruments appropriate to that task has to be sought out in a stakeholder firm.

      • Ken Zimmerman
        October 12, 2019 at 9:49 am

        Robert, you state, “A firm’s efficiency cannot be restricted to profitability, unless the view of the firm is strictly proprietary …” First, yes, a firm’s efficiency can be restricted to profitability. Economists, bankers, and even the US government do it regularly. Second, this restriction of firm success and efficiency to only profitability is based precisely on a proprietary view of all firms, even charities. It seems based on your comment this is not how firms are assessed in Germany. Also, Robert don’t underestimate the power of socialization and the concepts it instills in humans. It’s the basis of human cultures (or civilizations). Historians are socialized into their discipline, as are all forms of scientists, including economists. If we want to change the concepts economists use, change their socialization.

    • Robert Locke
      October 12, 2019 at 11:16 am

      If socialization of economists or business historians is done primarily within the confines of Anglo-Saxonia, then a proprietary conception of firms and maximization of their profitability will be the norm. What surprised me, when I read into the development of the field of German business economics, is that a organic conception of the firm (call it stakeholder) was part of the German view, stretching back into the nineteenth century, and enshrined in the Weimar constitution. With this conceptual heritage one has a different discussion about a firm and its purpose.They did within the confines of German Betriebswirtschatslehre,which was my particular enlightenment in management culture. But without a knowledge of this different socialization of economists and business historians, the Anglo-Saxonian view, for historical not functional reasons, has prevailed. I think if the readers of this blog read more articles published in the Business History Review, and World History, they might see the socialization of the disciplines less myopically.

      • Ken Zimmerman
        October 13, 2019 at 1:17 am

        Robert, the economics profession is mostly an Anglo-Saxonia game and has been since the end of WWII. Even the French, the only non-Anglo-Saxonia (apart from Russia) with any economic power after the War have been frozen out of power in the profession. Many French economists are like Robert Guesnerie, unable to free themselves from mainstream economics but still not accepting its theories or its methods. His L’economie de marche is an attempt at a compromise.

        I agree about more reading in such as Business History Review and World History, Most economists are so trapped by their undergraduate and graduate socialization and then the socialization of professional meetings and publications that I doubt such investigations as business history, world history, or even corporate or firm history ever enter their thoughts.

      • Robert Locke
        October 13, 2019 at 10:07 am

        The first PhD awarded at Cambridge was in 1933, long after doctorates were awarded in Germany, at universities where Americans studied. Its just that the English called what they were doing economics in the postwar world and then borrowed heavily from US neoclassical economics and econometrics in their graduate studies. Its not scientific method.

      • Ken Zimmerman
        October 13, 2019 at 3:09 pm

        Robert, I haven’t studied this period or these topics, so can’t venture an opinion. But I do know that currently British economists are split on neoclassical economics, but few accept it wholly.

  8. Gerald Holtham
    October 14, 2019 at 6:21 pm

    Robert Locke is quite right that the socialization of economists takes different forms in different places. And Ken Zimmerman is quite right that the dominant strain in economics and that which informs most economic commentary is a US one. It is also true that economists in both France and Germany tend to fall on a spectrum running from an undiluted national tradition to an international US-dominated one. Every tradition has its strengths and its pathologies. One day some of us hope to persuade all German economists that a balanced government budget is not a moral or categorical imperative. I doubt if we shall ever persuade US freshwater economists that government is not the root of all evil.

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