Economics — a dismal and harmful science

from Lars Syll

It’s hard not to agree with DeMartino’s critique of mainstream economics — an unethical, irresponsible, and harmful kind of science where models and procedures become ends in themselves, without consideration of their lack of explanatory value as regards real-world phenomena.

Many mainstream economists working in the field of economic theory think that their task is to give us analytical truths. That is great — from a mathematical and formal logical point of view. In science, however, it is rather uninteresting and totally uninformative! The framework of the analysis is too narrow. Even if economic theory gives us ‘logical’ truths, that is not what we are looking for as scientists. We are interested in finding truths that give us new information and knowledge of the world in which we live.

Scientific theories are theories that ‘refer’ to the real world, where axioms and definitions do not take us very far. To be of interest to an economist or social scientist who wants to understand, explain, or predict real-world phenomena, the pure theory has to be ‘interpreted’ — it has to be an ‘applied’ theory. An economic theory that does not go beyond proving theorems and conditional ‘if-then’ statements — and does not make assertions and put forward hypotheses about real-world individuals and institutions — is of little consequence for anyone wanting to use theories to better understand, explain or predict real-world phenomena.

Real-world economists take note!

Planet is headed for at least 2.5C of heating with disastrous results for humanity, poll of hundreds of scientists finds 

Water Flowing Upwards: Net financial flows from developing countries

from C. P. Chandrasekhar and Jayati Ghosh

Once again, low and middle income countries (LMICs) are at the brutal receiving end of the fickle trajectory of international capital flows. As Figure 1 indicates, net financial flows to such countries, which increased rapidly after the Global Financial Crisis that began and was created by advanced economies, peaked in 2014. Thereafter, they have been on a downward trend, which has accelerated dramatically from 2021, to the point that they turned negative in 2023, and are expected to fall further in 2024. In 2023, LMICs as a group (excluding China) sent an estimated $21.4 billion (which they could ill afford to do) outside—and by 2024 that number is expected to more than double, such that these countries will be sending as much as $50.5 billion, mostly to rich economies and multilateral financial institutions.

Figure 1.

Source for Figures 1-3: https://data.one.org/data-dives/net-finance-flows-to-developing-countries/

In search of radical alternatives

from Crelis Rammelt and current issue of RWER

Our presumed dominion over nature is an illusion. No matter how clever technological innovations may seem, they remain subject to the laws of thermodynamics. Consequently, a growth-centered capitalist economy finds itself trapped in futile attempts to completely decouple itself from nature – aiming for a 100% circular, service-oriented and zero-waste existence. This obsession stems from an incapacity to imagine an economy that does not grow, where both the quantity and quality of its metabolism remain within secure ecological and planetary boundaries.

Hence, we must seek radically different pathways (the Latin radix means root). One such alternative is degrowth. In the broadest sense, degrowth represents a socio-economic transformation aimed at reducing and redistributing material and energy flows, with the goal of respecting planetary boundaries and promoting social justice.

The growing metabolism of the voracious beast with which I began this article has unevenly distributed burdens and benefits. World trade has resulted in a net outflow of low-entropy resources from the poorer areas of the world^[1] and an inflow of high-entropy waste back into those same areas.^[2] This has the consequence of depriving the poor of vital resources and damaging their local ecosystems, while wealth continues to accumulate for a small minority.

The argument for degrowth extends beyond a response to the ecological crisis and includes the pursuit of a more just system. The voracious beast must yield to the turtle. As a child, my parents gave me a small turtle. Over time, I noticed that it stopped growing before it became too large for the aquarium. Nevertheless, we bought a larger aquarium, and the turtle resumed its growth. But once more, it stopped before becoming too big. Although the turtle no longer grew in size and weight, it continued to change in its proportions, colors and behaviors. Thus, the end of growth does not mean the end of development but rather the opportunity to free ourselves from the compulsive and ruinous capitalist system. This will enable us to lead a healthier, more social, sustainable, and just life.  read more

Chang’s “Edible Economics”

from Junaid Jahangir and current issue of RWER

[Ha-Joon] Chang’s latest book Edible Economics (2022) crystallizes the narrative that he has developed through his popular books over the years. . . . I have reviewed the salient ideas as follows in a bid to draw out lessons I could share with my ECON 101 students.

. . . the main ideas of Ha-Joon Chang can be distilled in point form as follows.

1. Neoclassical economics gives precedence to mathematics over real-world issues of inequality and power. It emphasizes markets over democracy.
2. Culture has elements both conducive and detrimental to development. Policy directs economic development, which then shapes culture.
3. Free market advocates focus on the economic freedom of consumers and corporations and not the freedom of workers to push for better jobs.
4. Poor people in poor countries are not poor because of low productivity but because the elites in their countries are unproductive, as they have failed to provide better technology and infrastructure.
5. Comparative advantage is not static and can be developed with temporary protectionism. Britain, the U.S., and East Asian economies of Japan, South Korea, and Taiwan, all used infant industry protection.
6. Entrepreneurship rests on collective efforts; interlocking patents impede technological progress.
7. Free trade is imposed on developing countries by advanced economies that used infant industry protection themselves.
8. The benefits of foreign investment materialize only when public policy ensures technology transfer and management techniques.
9. Neoliberal policies of trade liberalization, deregulation, and privatization have brought slower growth, higher inequality, and financial crises; the secret of economic development is to access advanced technologies and develop high value-added industries.
10. Welfare benefits including pension, healthcare, employment insurance, and housing subsidies are not freebies; they make capitalist economies more dynamic by reducing people’s resistance to technological change.
11. People pay value added taxes and sales taxes that burden the poor, but corporations evade taxes.
12. Equality of opportunity is not sufficient, and some equality of outcome is required, which necessitates equal access to education and healthcare, instituting a minimum wage, and redistributing income.
13. The market does not value based on contribution or need; marketization of care services should be restricted and regulated.
14. Both individual change and government action are required to address climate change, as the private sector is fixated on short term gains.
15. Shareholders and managers focus on short term gains in deregulated markets; multi-stakeholder capitalism recognizes that workers have a long-term stake in the firm.
16. Policy can help address automation with subsidies for retraining and by creating good jobs based on higher number of workers per people in education, healthcare, and senior care.
17. The post-industrial economy is a myth; manufacturing is the main source of technological innovation and the most important determinant of a country’s living standard.

Read more

The increasing collusion between . . . . . .

from a comment by Ikonoclast

“A truth is permitted only a brief victory celebration between the two long periods where it is first condemned as paradoxical and later disparaged as trivial.” – Arthur Schopenhauer.

As they break new ground, the Capital as Power theoreticians will encounter the “Schopenhauer Effect” over and over. When you point out something clearly for the first time, or even again after a long interregnum when few could see it, then everyone will say, “Oh, we always knew that.”

To widen the focus, I think a big part of what is happening now is the increasing collaboration, or rather collusion, between big government and big capitalism. I think what we have in the modern neoliberal system is a symbiotic relationship between big government and big corporations. It is common enough for people to believe that under neoliberalism we have been moving to small government. I don’t think that is the case.

The government may be “getting out of people’s lives” but only in the sense that it won’t spend (adequately) to help poor and ordinary people or to protect the environment. When it comes to helping big business with big money (corporate welfare) and tax breaks, the government is right there with the spending spigots wide open and the return valves (for taxes on big business) turned right down.

I doubt that government spending has gone down under this system. It simply has been redirected to aid business (especially big business) above all else. Where welfare spending remains in the system, it occurs under a regime (rental rather ownership, in essence) where the money simply passes rapidly through welfare recipients’ hands for necessities and up to wealth accumulation for the rich. Here, measuring the change in stocks (wealth accumulation) is probably more revealing than measuring flows. It’s not where it flows that matters so much as where it ends up accumulating.

I wonder if this is an area worth looking at from a CasP perspective.

Wealth catapulted up

from Blair Fix and current issue of RWER

Speaking of competition and losers, Ronald Reagan set the tone of the neoliberal era when, in 1981, he fired 11,000 striking air-traffic controllers (Houlihan, 2021). The message? Workers were losers who would be subjected to the discipline of competition. Reagan called it ‘morning in America’. But really, it was ‘morning for American big business’.

Today, we are well into the next-day’s hangover, and we know how the party played out. For workers, it was a disaster. But for the rich, it was an incredible boon. Wealth didn’t trickle down so much as it got catapulted up. The result, as Figure 1A shows, was a relentless rise in the concentration of American wealth.

Figure 1: A neoliberal experiment — rising wealth concentration among Americans, and American elites.

The need for a new economic paradigm

from Giandomenico Scarpelli and current issue of RWER

As documented in the previous paragraph, in recent years it finally seems that most orthodox economists have become more aware of the catastrophic outcomes of climatic disturbances; but at this point the traditional policy they recommend could be insufficient to meet the goals set at international level. In fact, that policy consists mainly of pollution permits and carbon taxes, but if the permits are offered with great generosity and if carbon taxes are low, these policies are ineffective. In order to counter climate change effectively economists should abandon the “… irrational commitment to exponential growth forever on a finite planet subject to the laws of thermodynamics”. This commitment is based on the assumption that GDP growth is always a good thing, and for this idea many distinguished economists for decades did not take into account the warnings of climate scientists, arguing that it was not worth giving up some points of GDP growth to implement an immediate and strong action to stabilize or reduce total output of greenhouse gases.

Also for this reason Herman Daly for a long time advocated a “paradigm shift” in economic theory, suggesting a new paradigm not focused on growth. We need such a paradigm to counter climate change, or a “climate revolution”. Otherwise, as professor Steve Keen wrote, “if climate change does lead to the catastrophic outcomes that some scientists now openly contemplate (…), then these Neoclassical economists will be complicit in causing the greatest crisis, not merely in the history of capitalism, but potentially in the history of life on Earth”.  read more

Weekend read – Enlightenment epistemology and the climate crisis

from Asad Zaman

Introduction

At first glance, it appears that industrialization, with its rampant overproduction and overconsumption, stands as the primary antagonist in our climate crisis narrative. However, this surface-level perception overlooks a more profound shift that lies beneath: an epistemological revolution birthed in the European Enlightenment. This era marked a pivotal transition in our relationship with the planet, from Mother Earth to a dead machine. Turbayne (1962) explores the significance in the change of metaphor in depth. This essay seeks to unravel this transformation in thought and its subsequent paving of the road to our current environmental challenges. Our solution lies not in mere technological or policy changes but in a fundamental revolution in thought—a revolution that reclaims the roles of heart, soul, and lived experience in shaping our knowledge. By embracing these often-neglected dimensions, we can forge a path towards a more harmonious interaction with our world, addressing the root causes of the climate crisis.

Historical Context of the Enlightenment

The genesis of the European Enlightenment can be traced back to the religious wars that ravaged Europe, a turbulent period that starkly illuminated the limitations of theology as the sole foundation for social and political theory. This era of conflict laid bare the urgent need for a new basis upon which to construct societal norms and governance—one that could transcend sectarian divides and offer a stable, peaceful coexistence. This necessity birthed an intellectual revolution, a move away from the scholastic tradition which had long intertwined social theory with biblical teachings.

new issue of Real-World Economics Review

Please click here to support this open-access journal and the WEA

 

real-world economic review

issue no. 106

download whole issue

 

How entropy drives us towards degrowth
Crelis Rammelt
2

“It is much too soon to act “ – Economists and the climate change
Giandomenico Scarpelli
8

Addressing the climate and inequality crises:
An emergency market plan simulation
Jorge Buzaglo and Leo Buzaglo Olofsgård
21

Stocking up on wealth … concentration
Blair Fix
40

Back to the past: income distribution in America
Ahmad Seyf
57

Blinded by science: The empirical case for quantum models in finance
David Orrell
68

Critique of Ayn Rand’s Atlas Shrugged political economy and its place in neoliberalism
Rafael Galvão de Almeida and Leonardo Gomes de Deus
80

Twenty-first century money: Huber and the case for CBDC
Jamie Morgan
97

Book review of Chang, Ha-Joon, (2022) Edible Economics
Junaid Jahangir
110

Board of Editors, past contributors, submissions, etc.
116

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Long Read – Is Bitcoin more energy intensive than mainstream finance?

from Blair Fix

When it comes to Bitcoin, there’s one thing that almost everyone agrees on: the network sucks up a tremendous amount of energy. But from there, disagreement is the rule.

For critics, Bitcoin’s thirst for energy is self-evidently bad — the equivalent of pouring gasoline in a hole and setting it on fire. But for Bitcoin advocates, the network’s energy gluttony is the necessary price of having a secure digital currency. When judging Bitcoin’s energy demands, the advocates continue, keep in mind that mainstream finance is itself no model of efficiency.

Here, I think the advocates have a point.

If you want to argue that Bitcoin is an energy hog, you’ve got to do more than just point at its energy budget and say ‘bad’. You’ve got to show that this budget is worse than mainstream finance.

On this comparison front, there seems to be a vacuum of good information. For their part, crypto promoters are happy to show that Bitcoin uses less energy than the global banking system. But this result is as unsurprising as it is meaningless. Compared to Bitcoin, global finance operates on a vastly larger scale. So of course it uses more energy.

To be meaningful, any comparison between Bitcoin and mainstream finance must account for the different scales of the two systems. So instead of looking at energy alone, we need to look at energy intensity — the energy per unit of circulating currency. That’s what I’ll do here. In this post, I compare the energy intensity of Bitcoin to the energy intensity of mainstream US finance.

Which system comes out on top? The results may surprise you.

Why and how economics must change

from Jayati Ghosh

Economics needs greater humility, a better sense of history, and more diversity

The need for drastic change in the economics discipline has never been so urgent. Humanity faces existential crises, with planetary health and environmental challenges becoming major concerns. The global economy was already limping and fragile before the pandemic; the subsequent recovery has exposed deep and worsening inequalities not just in incomes and assets but in access to basic human needs. The resulting sociopolitical tensions and geopolitical conflicts are creating societies that may soon be dysfunctional to the point of being unlivable. All this requires transformative economic strategies. Yet the discipline’s mainstream persists in doing business as usual, as if tinkering at the margins with minor changes could have any meaningful impact.

There is a long-standing problem. Much of what is presented as received economic wisdom about how economies work and the implications of policies is at best misleading and at worst simply wrong. For decades now, a significant and powerful lobby within the discipline has peddled half-truths and even falsehoods on many critical issues for example,

“The Political Economy of COVID-19”

 New book from WEA Books

At the beginning of 2020, the outbreak of Covid-19 and the lockdown practices imposed worldwide generated a global economic crisis that challenges the traditional explanations of economic downturns .  Like the economic crisis of 2008, the Covid-19 pandemic crisis was systemic and global, and this collection of essays examines it in a broad geographical and historical context.

Kindle $6.00                  Paperback $14.99
Amazon US   UK   FR  DE   IN    AU    CA

Income inequality in the USA increased with each expansion

Pavlina R.Tchemevra is the source of the data for this chart which appeared in September 2014 in the New York Times in an article by Neil Irwin “The Benefits of Economic Expansions Are Increasingly Going to the Richest Americans”.  Can anyone source or provide an updated version of this chart?  

Complexity and Econ 100

from Maria Alejandra Madi and RWER issue 106

Complexity is characteristic of a system that preserves the differentiation among its constituent elements while also preserving their identity. Complexity also implies dynamic systems, that is to say, open totalities of interrelated parts constantly changing in spacetime. The complexity of a system is related to the coexistence of intertwined parts in spacetime and complexity is intrinsic to real-world natural, economic and social processes (Almeida Filho, 1998). If we are to address contemporary problems of the kind referred to in the introduction both the natural world and human society need to be understood as complex systems, where the latter is nested in the former and interdependencies of different kinds arise.

An economy, similar to other systems, consists of complex networks of agents engaged in ongoing interactions, characterised by competition and cooperation. These agents constitute heterogenous components and are in a constant state of learning, adaptation, coevolution, and potential transformation or elimination, as part of an uninterrupted dynamic process (see Arthur, 1988; Arthur et al., 1997). In an economic system, different agents must work to find solutions to challenges they encounter, act in accordance with what is expected of them by others, and collaborate with one another to construct economic, legal, and social structures.

Three principal strategies for theorizing a “new economics of ecological limits”

from Richard Parker and RWER issue 106

Back in the late 1960s, a tiny band of unconventional economists encountered an environmentalism in the midst of radical rethinking. Prompted by Carson’s Silent Spring, capitalism and its science were being accused of major crimes—against nature, our fellow species and humankind itself.  Hiroshima had shattered confidence in the benignity of Progress, especially Progress through Markets and Corporate Science.  Now that skepticism looked around through a wider lens and would soon birth “ecology” with its excoriating indictment of our fundamental relations with Earth.^[1]  Herman Daly and John Cobb’s pioneering works, Ken Boulding’s “spaceship earth” argument, and The Club of Rome’s Limits to Growth warnings led the way.  Much has since transpired—nowhere more apparent than in “economics” and the crises today it seeks to address.

Sixty years on, let me name three principal strategies for theorizing a “new economics of ecological limits” that have evolved from that 1960s moment:

World democracy map

Internalizing “externalities”

from Victor Beker and RWER issue 106

There was a time when it was thought that the main task of economics was to assure economic growth. For example, John M. Keynes predicted that “the day is not far off when the Economic Problem will take the back seat where it belongs” (Keynes 1931: 6). Then, once scarcity has been overcome, mankind would devote most of its efforts to real problems, the problems of life and human relations (ibid,).

The impact of economic growth on the Earth environment was not an issue. This is no longer so. The ecological impact of economic activities can no longer be ignored. Ecological sustainability is an imperative if we want to preserve the planet for future generations. Ecological economics is a new subfield which addresses the challenge of introducing the ecological restrictions into economic analysis, trying to provide an integral response to the pressing environmental problems, many of them caused by economic activities.

This collides with the traditional economic point of view of a continuing and unlimited economic growth.

“I object to the question on which this volume focuses.”

from Richard Norgaard and RWER issue 106

I object to the question on which this volume focuses. It assumes that biophysical limits are real and knowable rather than a human construct associated with a particular understanding of how natural systems might behave. Limits have been an extremely useful construct for critiquing the even simpler construct that assumes science and technology can provide unlimited economic growth. Nature, however, has zillions of limits that are crossed all of the time, and not only by people (Giorgos Kallis 2019). Nature is continually changing and reconstructing itself in response to zillions of events. The idea that people can affect nature and have it resiliently return to an historic equilibrium unless we affect it too much is a myth. Yes, nature reconstructs, but never completely, always moving to a new state with every provocation, whether by a weather event, bacterial evolution that resets the balance of larger species, or numerous other changes including those initiated by people. And the idea of limits makes little sense for stock resources which come in ever lower qualities, i.e., ever more tightly bound in the complex natural order.

The idea of limits assumes nature, or discrete components of nature, operate in an equilibrium state to which it returns after being perturbed. If the perturbation is too great, however, pushing the system beyond its limit, well, all hell breaks loose, we really cannot say. In this constructed framing, illustrated by a ball rolling about in a bowl, people obviously need to avoid perturbing nature too much, i.e., pushing the ball out of the bowl. To some extent, we seem to observe such phenomena in ecosystems. We may think of nature as being in equilibrium, or in a disturbed state from which it will recover, or having been pushed beyond recovery, but that is because of how we think, perhaps because of something ingrained in our consciousness. The ball is rolling out of the bowl all of the time, changes occur, but all hell does not break loose.

Introducing nonlinear and non-equilibrium perspectives into ecological economics

from Ping Chen and RWER issue 107

Economic Complexity vs. Neoclassical Simplicity

Complexity science originated from astrophysics when Henri Poincaré discovered the three-body problem had no analytical solution in 1899. The discovery and development of deterministic chaos in the 1960s to 1990s found wide evidence that nonlinear deterministic systems only have limited predictability. Ilya Prigogine further recognized the important role of irreversibility in biological evolution since time’s arrow and history inherent to biological evolution works against thermodynamics equilibrium. In reality, non-stationarity is dominant in time series economics but absent in controlled experiments in physics and biology. In this sense economic complexity is more complex than physics and biology. In any case, the study of economic complexity reveals the fundamental flaws of neoclassical simplicity in three ways (Chen 2019, 2024).

First, the three-body problem is radically different from a one-body, two-body, and infinite-body problem. Three and many-body problems are more complex and often without analytical solutions, while in economics the representative agent model, the two-player model in game theory and international finance, and the mean-field model in statistics are all equivalent and deficient as an equilibrium framework. For example, a two-country exchange model can calculate the exchange rate and interest rate parity, but this is not so for three or more major currencies. This is also why the option-pricing model has a fundamental flaw since it is based on a single-particle model of Brownian motion without collective behavior.

Second, nonlinear stochastic processes may have a multi-peak distribution such that high moments cannot be ignored during phase transition, and this is the root of financial crises (a point that will make more sense to readers conversant in finance). The polarized presidential election in the U.S. shows a typical polarization with dual-peak distribution, which is a sign of bifurcation at the cross-point of coming crise.