Anchored in neoclassical theory

Despite growing diversity in research, the theory flow of economics, often referred to as neoclassical, continues to dominate teaching and politics. It developed in the 19th century as an attempt to apply the methods of the natural sciences and especially physics to social phenomena, In the search for an “exact” social science, social relationships are abstracted to such an extent that calculations are possible. The neoclassical economics department primarily poses a question: How do rational actors optimize under certain circumstances? This approach in itself is not a bad thing. However, in view of the ecological crisis, we have to ask ourselves completely different questions in society: How can the planetary collapse be prevented? What can an economic system look like that is social, fair and ecological?

The necessary emission reduction should always be achieved by pricing CO2 – other control options remain subordinate to this approach.

The dominance of neoclassical can be seen, among other things, from the fact that these questions are structurally marginalized in the current debate. The societal discussion about dealing with climate change is dominated by market economy instruments. Be it the demands of Fridays for Future, the recommendations of the special report of the Council of Experts on the assessment of macroeconomic developments or the legislative proposal by Alexandria Ocasio-Cortez known as Green New Deal : The necessary emission reduction should always be achieved by pricing CO2. Other control options, such as regulatory law, remain subordinate to this approach.

Katharina Keil and Max Wilken

Wealth has always been about power

What has confused economists for centuries is that they’ve focused on what’s inside the fence of property rights, not the fence itself. And who can blame them? Historically, the things that were owned were easy to see. In contrast, the act of ownership — the institutional fence of private property — was abstract. And so economists tied wealth to property, not the property-rights fence.

The confusion dates back to the physiocrats. They saw agricultural land and proposed that it was the source of all value. The physiocrats couldn’t see that it was the landowner’s (institutional) fence that made him wealthy, not the land itself.

Then came the neoclassical economists. They saw capital (machines and factories) and proposed that it was a source of value. The neoclassical economists couldn’t see that it was the capitalist’s (institutional) fence that made him wealthy, not capital itself.

Then came the digital revolution. New companies emerged (like Facebook and Google) that owned nothing but algorithms. Wealth had suddenly become non-material. Or so it seemed to economists.

In reality, wealth had always been non-material — a social relation of exclusion. The digital revolution just laid this fact bare because it emptied out property, leaving only the fence of property rights. The digital revolution got rid of land. It got rid of physical capital. It got rid of all the physical things on which to pin wealth. All that was left (in digital tech firms) was the fence of property rights. And this fence was put up around the most non-material of things — ideas themselves.

Blair Fix

But more of what?

      Source: Nitzan and Bichler, Capital as Power

In 2005, Microsoft’s market value was 2,583% greater than that of General Motors. Mainstream economists would say that Microsoft therefore had more property than GM. But more of what? Nitzan and Bichler point out that when we look under the hood of market value, there’s nothing ‘real’ to back it up. Microsoft, for instance, has only 18% as many employees as GM. And it owns only 3% as much equipment (in dollar terms).

Lies, damned lies, and statistics

from Asad Zaman

From Ancient Greece to the late 19th century, rhetoric played a central role in Western education in training orators, lawyers, counsellors, historians, statesmen, and poets. However the rise of empiricist and positivist thinking marginalized the role of rhetoric in 20th Century university education. Julie Reuben in “The Making of the Modern University: Intellectual Transformation and the Marginalization of Morality” writes about this change as follows:

“In the late nineteenth century intellectuals assumed that truth had spiritual, moral, and cognitive dimensions. By 1930, however, intellectuals had abandoned this broad conception of truth. They embraced, instead, a view of knowledge that drew a sharp distinction between “facts” and “values.” They associated cognitive truth with empirically verified knowledge and maintained that by this standard, moral values could not be validated as “true.” In the nomenclature of the twentieth century, only “science” constituted true knowledge.”   read more

Challenges of complexity economics

from Joachim H. Spangenberg and Lia Polotzek and WEA Commentaries 

In recent WEA Commentaries, the issue of complexity theory and its implications for economics have rightfully gained some prominence. However, while the authors picked up some relevant points, the issue deserves a more comprehensive treatment in new economics, beyond mobilising some arguments to bolster ongoing debates. It should be recognised instead that complexity requires a different way of thinking, and of asking questions in economics. Only then the specific tools used in complexity research, unconventional as they are from a standard economics point of view, come into play. Thus we will briefly describe what we see as core elements of complexity, the corresponding world view, and the tools used.

Complexity

Complexity economics is a genuine theoretical approach based on applying complexity analysis to the economic system; it requires a world view different from the one of neoclassical economics, moving from reductionist linear thinking to non-linear approaches of conceptualising the economy.  read more

The transnational corporation and economics

from Grazia Ietto-Gillies and WEA Commentaries 

There is now a very large body of literature on theories of the transnational corporation (TNC) and the subject has reached a suitably mature stage to have a history of economic thought about it.² The first theory of the ‘International Firm and its Operations’ was developed in 1960 by Steven Hymer, a Canadian student working for a doctorate under the supervision of Charles Kindleberger at the Massachusetts Institute of Technology. A British scholar at the University of Reading was, contemporaneously. researching the effects of American investment in the UK. John Dunning later developed his own very successful theory (1977 and 1979) and continue to do theoretical and applied research in the field till his death a few years ago. Many theories and studies have been developed on both sides of the Atlantic in the intervening decades, in particular the so-called ‘Internalization theory’ by Peter Buckley and Mark Casson (1976) also at the Reading University. The theory has recently been updated by Casson (2018).

The subject of ‘International Business’ is now well developed and most theories of the TNC are developed and taught in its multi disciplinary context. However, the study of TNCs has not been fully accepted within the academic economics profession – including the non-orthodox academics – and is . . .  read more

Trade Wars: The economic and political theoretical implications and their impact on multilateralism – A Call for Papers

Trade Wars: The economic and political theoretical implications and their impact on multilateralism

A new conference from the WEA, scheduled for October.

Open call for papers

new issue of WEA Commentaries

WEA Commentaries

Volume 10, Issue 1  –    February 2020
download whole issue

Simpson’s Paradox 
          – Asad Zaman
How International Corporations Could Be Taxed and Why the US is Working to Prevent It
          – Norbert Häring
The Transnational Corporation and Economics 
          – Grazia Ietto- Gillies
Challenges of Complexity Economics
          – Joachim H. Spangenberg and Lia Polotzek
WEA Commentaries Appoints New Co-Editors
WEA contact details

Please click here to support the WEA

Understanding income: You can’t get there from here

from Blair Fix

You can’t get the right answer when you ask the wrong question.

This truism, I’ve come to believe, explains much of what is wrong with economics. When it comes to studying income, economists ask the wrong question. Economists, I argue, have mostly asked: is income fair? The problem is that this is a moral question, not a scientific one. It has no scientific answer.

When the wrong questions get entrenched

You can’t get the right answer when you ask the wrong question. This principle seems trivial. Of course you need to ask the right question! The problem, though, is that when you do science it’s rarely obvious which question is right. Compounding this problem is the fact that scientists are, well, human.

Once we (scientists) pose a question, we get engrossed with answering it. The problem is that it’s not easy to answer a question while simultaneously being skeptical of it. It’s like adding two numbers while you think about multiplying them instead. It’s an exercise in cognitive dissonance.

Here’s how you can make this exercise even more difficult. Join a group in which everyone else asks the same question. This, in a nutshell, is what it means to belong to a scientific discipline. A discipline is a group of people who agree on the questions they’re asking. Particle physicists, for example, agree to ask “what are the fundamental constituents of matter?” Evolutionary biologists agree to ask “what are the determinants of evolution?” Economists, I’ll argue, agree to ask “is income fair?”

How do you spot a crank?

from Blair Fix

I confess that I have a recurring nightmare. In it, I realize that everything I’ve ever written about economics is wrong. Neoclassical economics is not, as I’ve repeatedly claimed, a pile of bullshit. In this nightmare, neoclassical economics is correct. And as a strident critic of neoclassical theory, I realize the horrible truth. I’m a crank!

I wake up in a cold sweat, wondering if I’m wasting my life. Then, as rational thought returns, my fears ebb away. I think about everything I know about neoclassical economics — its flaws, its absurdities. I reassure myself that I’ve made the right choice. I’m not a crank. I’m a rational critic of an absurd theory.

The crank identification problem

Now that I’ve told you about my nightmare, I’ll assure you that this post is not about my late-night fears. Instead, my nightmare got me thinking about an age-old problem in science. How do you tell if someone is a crank?

Economics awaits a Darwinian revolution

from Blair Fix and RWER issue #90

Modern economics, I have come to believe, resembles pre-Darwinian biology. By this, I mean that economics is captivated by an ideology that is stopping scientific progress. Let’s look at the parallels.

Before Darwin, biologists believed that life on Earth was created by God. This seductive idea stunted scientific progress for centuries. Much of the evidence for evolution – the fossil record, the similar anatomy of different species – was staring scientists in the face long before Darwin proposed his theory of evolution. But because life was viewed as God’s eternal creation, this evidence was mostly ignored.

Darwin’s “dangerous idea”[1] – evolution by natural selection – gave meaning to this evidence. Life was not an eternal order, Darwin proposed. Instead, it was an evolving system, driven by differential reproduction. The plethora of evidence for evolution suddenly made sense.

In hindsight, Darwin’s idea seems obvious, almost trivial. But it was not at the time. Most scientists were simply unable to imagine alternatives to their ideology of an unchanging cosmos. The situation is much the same in economics today.

40 years of wage redistribution in the USA

Human sociality and resource distribution

from Blair Fix and RWER issue #90

Is it obvious to you that humans are evolved social animals? Is it also obvious that our sociality is central to how we distribute resources? If you think so, you’re probably not an economist.

Through years of schooling, mainstream economists are trained to ignore the obvious facts about human nature. The theories that economists learn make it impossible for them to understand human sociality. Economists are trained that humans are asocial “globules of desire”. This is Thorstein Veblen’s satirical term for “homo economicus”, the economic model of man. Here’s Veblen describing homo economicus:

“The hedonistic conception of man is that of a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated, definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-poised in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him, whereupon he follows the line of the resultant. When the force of the impact is spent, he comes to rest, a self-contained globule of desire as before” (Veblen, 1898).

As Veblen makes clear, economists’ model of human behavior is bizarre. Indeed, the assumptions are so far-fetched that one wonders how this “theory” ever gained acceptance.

Three analytical questions that do not arise in standard neoclassical economics

from Herman Daly and RWER issue #90

Regarding quantification ecological economists distinguish growth from development. Growth is increase in size by assimilation or accretion of matter – it is quantitative. Development is qualitative improvement in design, priorities, or purpose. Growth is easier to measure than development, but development is more important for the future. Sustainable development, so-called, is qualitative improvement without quantitative growth in scale beyond ecosystem capacities for waste absorption and resource regeneration. By accepting ecological limits, we force the path of progress away from quantitative growth and on to qualitative development. Some argue that because economics deals with growth in value (GDP), it does not really encounter physical limits. While it is true that value cannot be expressed in simple physical units, it is also true that value of production is measured in units of “dollar’s worth”, not dollars, and a dollar’s worth of anything is a physical quantity, namely that quantity that can be purchased for one dollar. Aggregating many diverse “dollar’s worth” quantities into GDP does not erase the physical dimensions. The eagerness to defend “growthism” gives rise to many lame arguments.

The key to understanding ecological economics is its pre-analytic vision of the economy as an open subsystem of a larger ecosystem that is finite, non-growing, and materially closed (though open with respect to solar energy). This immediately suggests three analytical questions that do not arise in standard neoclassical economics:

Breaking the national envelope

from Shimshon Bichler and Jonathan Nitzan and RWER issue #90

On the whole, then, the global decline of so-called American firms is not an accounting gimmick or an exchange-rate artefact. It is a real process with real causes and real consequences. And paradoxically, this decline is intimately related to a seemingly opposite process: the growing dependency of these very “American” firms on foreign operations.

This latter dependency is shown in Figure 4. The top series measures the share of U.S. corporate profit coming from foreign subsidiaries, while the bottom series estimates the share earned from exports.

Figure 4 U.S. Corporate Dependency on Foreign Profit: Foreign Operations vs Exports

 NOTE: This chart is revised and updated from Nitzan and Bichler (2009: Figure 15.6, p. 357). Profit from foreign operations denotes receipts from the rest of the world as a per cent of corporate profit after tax. Profit from exports is estimated by the export share of GDP. The last data points are for 2018.

The awakening of an econ student

from carmeloferlito

I became an economist by mistake. The malicious will say that you can deduce it from the quality of my writings. I like to believe in the bizarre paths of Destiny on which the flights of human liberty stumble along.

Here I would like to link my personal experience – of little interest to the reader – to the far more interesting subject of the ongoing debate in economic science. Indeed, as is well known, particularly since the crisis began in 2007, a certain disillusionment has been growing about economists’ ability to foresee the course of events. While asking economists to foresee something perhaps pushes them into the sphere of magic to which they do not belong, there is strong discontent with their ability to explain events in progress. If the beautiful and highly formal mathematical models developed over the course of decades do not serve to predict the future – and it astonishes me that someone might believe that – they lack ex-post usefulness in interpretation. In short, they are not very useful.  read more

A stock market boom is not the basis of shared prosperity

from Thomas Palley

The US is currently enjoying another stock market boom which, if history is any guide, also stands to end in a bust. In the meantime, the boom is having a politically toxic effect by lending support to Donald Trump and obscuring the case for reversing the neoliberal economic paradigm.

For four decades the US economy has been trapped in a “Groundhog Day” cycle in which policy engineered new stock market booms cover the tracks of previous busts. But though each new boom ameliorates, it does not recuperate the prior damage done to income distribution and shared prosperity. Now, that cycle is in full swing again, clouding understanding of the economic problem and giving voters reason not to rock the boat for fear of losing what little they have.

The Groundhog Day boom-bust cycle links with John Kenneth Galbraith’s observations on the phenomenon of financial fraud via embezzlement, which he termed “the bezzle”:

Economic growth and carbon emissions are closely linked.

source

Unrealistic mental models 6

from Asad Zaman

In the previous post (Three Types of Models 5), we discussed three types of models. The first type is based purely on patterns in observations, and does not attempt to go beyond what can be seen. This is an “observational” or Baconian model. The second type attempt to look through the surface and discover the hidden structures of reality which generate the observations we see. The best approach to this type of models has been developed by Roy Bhaskar, so we can call it a critical realist model or a Bhaskarian model. The third type of model creates depth and structures in our minds which create the patterns we see in the observations. The question whether our mental structures match reality is considered irrelevant. These may be called Kantian, or mental models.  The models of modern Economics are largely Kantian, while Econometric models are largely Baconian. The key defect of both of these approaches is that they GIVE UP on the idea of finding the truth. Max Weber’s ideas about methodology played an important role in this abandonment of the search for truth, but it would take us too far away from our current concerns to discuss this in any detail. Briefly, Weber thought that heterogeneity of human motives made “explanation” of social realities via “truth” impossibly complex. Instead, he argued that we should settle for a weaker concept based on “ideal-types” – deliberately over-simplified models of behavior which create a match to observed aggregated patterns of outcomes. We now discuss the disastrous consequences of this abandonment of truth in greater detail.

There is a famous article of Milton Friedman on methodology in economic theory, which recommends the abandonment of truth: read more

Still in the danger zone

from Shimshon Bichler and Jonathan Nitzan