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Posts Tagged ‘neoclassical economics’

Some Issues Re-visited

August 14, 2015 10 comments

from Peter Radford

Hmmm.

It seems that some people misunderstood my comments regarding neoclassical economics.

Allow me to reiterate and, perhaps, clarify.

I want to say that I regard neoclassical economics as a triumph. A wonderful achievement. Brilliant.

Please read the fine print: that brilliance has nothing to do with relevance, reality, or any other such yardstick.

All I am saying is that within its own confines, with regard to its own rules, and with respect to the limits placed upon it by its multitude of excellent practitioners, neoclassical economics has been an extraordinary success.

Further, and more to the point, I am saying that the number of instances of economies we find within the space of all possible economies described by neoclassical economics is tiny. So tiny we are unlikely ever to experience one. Read more…

The message: from austerity to prosperity

April 25, 2015 8 comments

from Asad Zaman

Modern history is largely driven by the battle of the rich (top 0.01%) against the masses (bottom 90%). Over the past few decades, the rich have been tremendously successful in having it all their way. A previous blog post on “Deception and Democracy” illustrates by examples their successful conversion of democracy into plutocracy in the USA. As pointed out by Polanyi, unregulated markets create disastrous outcomes for the majority. Therefore, in a democratic environment, theories which misrepresent facts and justify massive inequalities are essential pillars of support for the plutocrats. Spreading these theories via media and educational channels helps create an environment where people support policies which go against their common interests. Read more…

The obsession with equilibrium

March 14, 2015 8 comments

The changes to economic theory beyond the micro level involve a complete recanting of the neoclassical vision. The vital first step here is to abandon the obsession with equilibrium.

The fallacy that dynamic processes must be modelled as if the system is in continuous equilibrium through time is probably the most important reason for the intellectual failure of neoclassical economics. Mathematics, sciences and engineering long ago developed tools to model out of equilibrium processes, and this dynamic approach to thinking about the economy should become second nature to economists.  Read more…

Appreciating Mental Capital

March 8, 2015 Leave a comment

Cover of Appreciating Mental Capital: What and Who Economists Should Also Study

Appreciating Mental Capital: What and Who Economists Should Also Study

Robert Locke

Published 1 Feb 2015 by WEA Books

In Appreciating Mental Capital: What and Who Economists Should Also Study, Robert Locke sets straight the most famous case of historical falsification in economics – The neoclassical economists removal of the subject of mental capital from the lexicon of economic studies over which they had gained control by mid-20th century. He accomplishes this feat by returning to the origins of economic thought in the age of classical economics to rediscover, by broadening the analysis historically and geographically, especially to German economists, a thriving school of mental capital advocates persistently challenging the classical/neoclassical view of physical capital as the chief driver of technological expansion.

The neoclassical school’s takeover of economics, Locke asserts in Chapter I, has led to an incomplete and distorted discussion within economics of the subject. Students of economics, therefore, cannot rely on economists to examine the subject of mental capital, but need to study the actual formation of mental capital in our times.

Read more…

An economics fit for purpose in a finite world

March 4, 2015 6 comments

from Herman Daly

Causation is both bottom-up and top-down: material cause from the bottom, and final cause from the top, as Aristotle might say. Economics, or as I prefer, “political economy,” is in between, and serves to balance desirability (the lure of right purpose) with possibility (the constraints of finitude). We need an economics fit for purpose in a finite and entropic world.

As a way to envision such an inclusive economics, consider the “ends-means pyramid” shown below.

Ultimate Political Economy

Read more…

Recruiting for Revolutionary Reviews Brigade

February 24, 2015 4 comments

from Asad Zaman

Ideological propaganda is a very important in all types of warfare — many armies now have large sub-units exclusively dedicated for this purpose. Those who read Amazon book reviews can easily find attempts by ideological devotees of neoclassical economics to block access to good literature on real world economics. We need to counteract this act of vandalism vigorously. Readers  of the RWER Blog  are requested to post reviews of good eye-opening books on Amazon, and also to solicit other readers to do the same, so as to create some volume of good reviews of books on real world economics.

The human capital controversy

February 22, 2015 8 comments

from David Ruccio

Like the capital controversy of the 1960s, the current controversy over human capital pits neoclassical economics against its critics.

The capital controversy (also known as the Cambridge controversy, because it was staged between neoclassical economists at MIT, and thus of Cambridge, Massachusetts, and non-neoclassical economists at Cambridge University, and thus of Cambridge, England), which actually took place between the mid-1950s and mid-1970s, was narrowly about the internal consistency of neoclassical economics and more generally about the role of capital in economic theory. The basic idea is that, in a world of heterogeneous capital goods (e.g., a shovel and an automobile assembly-line), you need to know the price of capital (the interest rate or rate of return on capital) in order to determine the quantity of capital (i.e., in order to add up all those different kinds of physical capital). But, in neoclassical economics, you need to use the quantity of capital in order to determine the price of capital (via supply and demand in the “capital market”), which creates a fundamental problem for the neoclassical theory of capital. Read more…

Yanis Varoufakis is Greece’s new finance minister

January 27, 2015 4 comments

It was announced this morning that Yanis Varoufakis is Greece’s new finance minister.  Two of Varoufakis’s papers have appeared in the Real-World Economics Review:
Egalitarianism’s latest foe: a critical review of Thomas Piketty’s Capital in the Twenty-Frist Century
What Is Neoclassical Economics?  (with Christian Arnsperger)

The Guardian reports:   Read more…

Brad DeLong and the true nature of neoclassical economics

January 18, 2015 6 comments

from Lars Syll

I think that modern neoclassical economics is in fine shape as long as it is understood as the ideological and substantive legitimating doctrine of the political theory of possessive individualism. As long as we have relatively-self-interested liberal individuals who have relatively-strong beliefs that things are theirs, the competitive market in equilibrium is an absolutely wonderful mechanism for achieving truly extraordinary degree of societal coordination and productivity. We need to understand that. We need to value that. And that is what neoclassical economics does, and does well.

Of course, there are all the caveats to Arrow-Debreu-Mackenzie:

Read more…

Read my lips — validity is NOT enough!

January 14, 2015 1 comment

from Lars Syll

Neoclassical economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality. As Julian Reiss writes: Read more…

Transforming economics education

December 9, 2014 3 comments

from David Ruccio

After the crash of 2008, in the midst of the Second Great Depression, students around the world have been calling for radical changes in the way economics is taught. They know that the discipline of economics, today as in the past, includes more than neoclassical economics—but, for the most part, students are not being exposed to concepts and methods other than those of neoclassical economic theory.

There are, of course, a handful of departments where non-mainstream theories have been developed and taught, alongside and in addition to neoclassical (and, for that matter, traditional Keynesian) economics. In the United States, in terms of Ph.D.-granting institutions, they include the University of Massachusetts at Amherst (where I received my degree), American University, the University of Missouri-Kansas City, the University of Utah, and New School University.

As Aaron Steelman recognizes, that handful also once included the University of Notre Dame. But that is no longer the case, since the current Department of Economics advertises itself as as purely neoclassical department.

Unfortunately, Steelman gets the history wrong. Read more…

The psychological “foundations” for neoclassical economics

September 27, 2014 14 comments

from Neva Goodwin

When I was beginning my studies in this field economist Robert Solow commented to me that the great strength of economics is that it is fully axiomatized; the entire edifice can be deduced from the basic rationality axiom, which says that rational economic man maximizes his utility. The origin of this axiom is often traced back to Smith, whose most widely quoted phrase comes from a passage in which Smith approvingly notes that merchants take what, today, we would call, a protectionist position – doing so, not with any thought for the good of society, but because their security and profit is tied to domestic industry. Thus, he says, the merchant “is in this as in many other cases, led by an invisible hand to promote an end which is no part of his intention.”[1] Excerpts such as this have been used as a justification for the 20th century economic model’s vision of an ideal world in which a society comprised of entirely self-interested economic actors would make the society as a whole better off, and the idea that pursuit of self-interest is the only thing that is done by rational economic actors – and that anything else is irrational. Read more…

Economics departments — turning out generation after generation of idiot savants

May 11, 2014 15 comments

from Lars Syll

Paul Samuelson once claimed that the ergodic hypothesis is essential for advancing economics from the realm of history to the realm of science.

That view on what constitutes economics doesn’t please neither yours truly nor Nassim Taleb, who writes (emphasis added): Read more…

Great news from Kingston University

May 9, 2014 3 comments

from Lars Syll

I have just accepted an offer to become Head of the School of Economics, History and Politics at Kingston University in London. I will take up the appointment in time for the Autumn term, which starts on September 23rd.

Kingston will respond positively to calls from students for genuine reform of economics education—like those made by the Post-Crash Economics Society in Manchester, and the International Student Initiative for Pluralism in Economics (which was launched only days ago).

These student calls for genuine reform are timely, because though there are some initiatives for reform, academic economics has, if anything, become more hostile to criticism of the mainstream and to presentation of alternative perspectives than it was before the crisis.

Read more…

The betrayal of the intellectual

April 15, 2014 1 comment

from Robert Locke

It is very difficult for historians to establish any set of ideas when confronted by people who are historically ignorant.  Recently I wrote, in a the RWER Blog that economics has never established a scientific paradigm  in its discipline.  So the idea that neoclassical economics did and that it is now being challenged is false.  It never did achieve paradigm status.  Twenty-five years ago (1989) I said the same thing in the first two chapters of Management and Higher Education Since 1940 (Cambridge University Press).  In the first chapter, “The New Paradigm,” I wrote about the attempt  Read more…

Economics textbooks on ‘capital’ — how to get away with scientific fraud

April 11, 2014 Leave a comment

from Lars Syll

It is important, for the record, to recognize that key participants in the debate openly admitted their mistakes. Samuelson’s seventh edition of Economics was purged of errors. Levhari and Samuelson published a paper which began, ‘We wish to make it clear for the record that the nonreswitching theorem associated with us is definitely false’ … Leland Yeager and I jointly published a note acknowledging his earlier error and attempting to resolve the conflict between our theoretical perspectives … However, the damage had been done, and  Cambridge, UK, ‘declared victory’: Levhari was wrong, Samuelson was wrong, Solow was wrong, MIT was wrong and therefore neoclassical economics was wrong. As a result there are some groups of economists who have abandoned neoclassical economics for their own refinements of classical economics. In the United States, on the other hand, mainstream economics goes on as if the controversy had never occurred. Macroeconomics textbooks discuss ‘capital’ as if it were a well-defined concept — which it is not, except in a very special one-capital-good world (or under other unrealistically restrictive conditions). The problems of heterogeneous capital goods have also been ignored in the ‘rational expectations revolution’ and in virtually all metric work.
Edwin Burmeister

burmeister

 

What is neoclassical economics?

March 14, 2014 7 comments

from Lars Syll

For your edification, I offer this link to an elegant explanation of why neoclassical economics presents itself as purely scientific and denies any ideological commitments, and strangles pluralism.

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In brief: Arnsperger and Varoufakis define “neoclassical” economics in terms of three “meta-axioms.” First, neoclassicism assumes “methodological individualism,” i.e. that economists must ultimately posit individuals’ behaviors as the root cause of broad economic phenomena. Second, it assumes “methodological instrumentalism,” i.e. that these actors are somehow or other acting instrumentally in pursuit of goals, are “irreversibly ends-driven.” Third, it assumes “methodological equilibration,” i.e. rather than asking whether or under what conditions shall a state of affairs continue unchanged, it seeks to show that if equilibrium occurs, then it will endure.  Read more…

Unequal austerity and its economics

November 7, 2013 24 comments

from Peter Radford

Inequality is much discussed nowadays. Pundits of all political stripes are weighing in on its causes and on its effects. As usual there is no agreement. So, also as usual, I suspect there will be no action.

This is not a new problem, nor is it trivial. The steadily increasing privilege afforded capital – higher profits, dividends, and rents, and the consequent steady erosion of the rewards to work – wages and salaries, have been accumulating beneath the surface for decades. I believe that in the years ahead the emergence of our highly unequal society will be the hallmark of the entire Reaganite era.

I don’t think this problem is as complicated as some people make it out to be. It is a direct consequence of the shift in the dominant economic theory that infuses our decision making across all relevant domains of activity in our economy. It was an intentional consequence. It was not, as Bill Gross tries to make sound, a happy accident of being alive at the right moment. If you’re  capitalist that is. If you’re a regular worker, then tough.

What happened?

Well, back before the shift took place the dominant economic theory guiding decision making was the post-war version of Keynesianism. It seemed to explain things well, and seemed to produce excellent results: the western world bounced back from its wartime trauma and produced a golden age of growth that propelled living standards, wages, and profits all together.

Then it hit a snag. Read more…

Inequality, the Second Great Depression, and mainstream economics

January 22, 2013 22 comments

from David Ruccio

This morning, we’re faced with the extraordinary spectacle of two left-of-center, Nobel Prize-winning economists stumbling all over themselves trying to make sense of the role of inequality in creating and sustaining the Second Great Depression.

Really?! Now, they may have missed the trend of growing inequality over the course of the past three decades. Still, with all the talk of obscene levels of inequality in the last five years and mainstream economists, even the best and the brightest, are still having a hard time formulating a theory about the impact of that inequality in producing the conditions for the crash of 2007-08 and sustaining the recovery that never was.

First, Joseph Stiglitz argued that “Inequality stifles, restrains and holds back our growth.” Then, Paul Krugman responded by telling us he’s not convinced “that this particular morality tale is right.”  Read more…

Dutch books and money pumps (wonkish)

December 26, 2012 11 comments

from Lars Syll

Neoclassical economics nowadays usually assumes that agents that have to make choices under conditions of uncertainty behave according to Bayesian rules (preferably the ones axiomatized by Ramsey (1931), de Finetti (1937) or Savage (1954)) – that is, they maximize expected utility with respect to some subjective probability measure that is continually updated according to Bayes theorem. If not, they are supposed to be irrational, and ultimately – via some “Dutch book” or “money pump” argument – susceptible to being ruined by some clever “bookie”.

dutch5

Bayesianism reduces questions of rationality to questions of internal consistency (coherence) of beliefs, but – even granted this questionable reductionism – do rational agents really have to be Bayesian? As I have been arguing elsewhere (e. g. here and here) there is no strong warrant for believing so, but in this post I want to make a point on the informational requirement that the economic ilk of Bayesianism presupposes.   Read more…