REVIEW ESSAY–The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory by Philip Pilkington Marc Morgan

Book review.

American Affairs

REVIEW ESSAY–The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory by Philip Pilkington

Marc Morgan | research economist at the World Inequality Lab of the Paris School of Economics.

Three Economic Ideas Threatening to Defenders of the Status Quo — Peter Cooper

1. Profit as surplus labor or as a property-based claim

One idea threatening to the defenders of the status quo is the recognition that profit income reflects capitalist property relations rather than productive contribution.…

 2. Capitalist economies are demand constrained 

 The Keynesian or Kaleckian principle of effective demand may not seem quite such a hindrance to defenders of the status quo as knowledge of the nature of profit, but the motivation for its denial – at least in the long run – is easy enough to perceive.…

3. Money matters, including in the long run

Also threatening to defenders of the status quo is any analysis that subjects the monetary system to scrutiny, whether it be the endogeneity of money or the implications, applicable to modern monetary systems, of currency sovereignty. (Money as Taboo for Economists illustrates this sociological dynamic in operation.)...

heteconomist
Three Economic Ideas Threatening to Defenders of the Status Quo
Peter Cooper

Bill Mitchell — Be careful of what parades as academic research (Uber)

It is Wednesday and I have a long trip by plane and road to Victoria where I am speaking at a major business conference in the mountains outside of Melbourne tomorrow morning. So only a few things today that I have been thinking about. Remember the 2010 film – Inside Job – which documented how my profession had become corrupted by the financial services sector into producing, allegedly, independent research reports extolling the virtues of deregulation etc and not admitting they were being paid for by the beneficiaries of the propaganda masquerading as research. It shows how corruption runs deep in the economics profession to accompany the incompetence that mainstream macroeconomists display. Well, I have been following an unfolding story about how Uber has decided to draw on that corrupt tendency for their own gains. It is not a pretty story. And then we have the so-called social media trend of cancel culture which is meant to be about matters of principles but leave the proponents caught up in a rather dirty pool of hypocrisy....

Bill Mitchell – billy blog
Be careful of what parades as academic research (Uber)
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Political Economy? — Peter Radford

One of the dominant themes of the last century was this general assumption that human activities can be studied through an ever increasingly rational lens. That may be, but economists then went too far: they projected rationality into the subject of study. Instead of using the tools of reason to tease out regularities of interest, they made the subject matter itself entirely rational. So the regularities they thought they saw were simply echoes, or mirrors, of their own thought processes. People in markets suddenly became economists, which made studying them more easy. The entire enterprise became a massive “if only” exercise. If only people behaved like economists it would so much easier for economists to study them! So that’s what happened. Entire Nobel winning careers were built around what was nothing more than a gigantic bout of self-absorption.

No wonder the discipline rapidly became so sterile.

And irrelevant.

Now, however, there are feint signs of hope....

Inequality is a policy variable that depends on how much rent the elite are permitted to extract. Growing inequality suggests elite capture of the government.

The Radford Free Press
Political Economy?
Peter Radford

Lars P. Syll — Economics — too important to be left to economists

The problem with economics as a discipline, and this generally includes all forms of economics including heterodox economics to some extent, is "economics." That is is to say, economists assume that economics is chiefly or exclusively about economic behavior when economic behavior is embedded in social and political behavior and includes the entire "human condition."

The only "economist" that really grasped this in depth was Karl Marx, and he was a philosopher coming from a Hegelian background rather than being an "economist" in today's terminology. He understood and emphasized social embeddedness, as do the economic anthropologists, economic sociologists and institutionalists that followed. Even Keynes approached economics in terms of the existing neoclassical paradigm that prevailed, and he did it as a mathematician would since his background was it mathematics and his principle work was the Treatise on Probability.

Conversely, almost as a reaction to Marx, the economic profession got sidetracked by Alfred Marshall's emphasis on formalizing economics in an attempt to make it "scientific." This led to the presumption (hidden assumption) that economics is chiefly or even solely about economic behavior. The result was the assumption of homo economicus as a homogenous agent behaving "rationally" to maximize self-interest in economic dealings, principally in markets, which act as calculating machines to maintain economic equilibrium through adjustments in price based on supply and demand.

The problem is that this model is based on a generalizing from economic behavior at a micro level, irrespective of social embedding. Therefore the scope of application is limited by the extremely narrow scale. Unfortunately, most economists ignore this limitation of scope and the significance of scale.

Macroeconomics cannot be scaled up microeconomics because behavior at the individual level is not the foundation of behavior at the macro level as is conventionally assumed by those promoting microfoundations; for the simple reason that most people's behavior is not exclusively economic but includes social and political factors as will as ideological presumptions that differ temporally, geographically, by class and according to affiliation and personal disposition.

Economics is embedded in society just as are individuals and their behavior. Social networks (systems) are comprised of individuals as elements but networks (systems) also influence individuals that are related to them, either as members or those affected peripherally. A social system is not an aggregation of individuals acting independently but rather a system in which relationships are highly influential. Therefore, economic aggregates cannot tell the whole tale.

Individuals often have conflicting interests as well. People do not always prioritize their economic interest over their social and political interests as the assumption of homo economicus posits. Their choices are influenced by personal disposition, knowledge base, and cognitive-affective biases. At a most evident level, people that belong to different political parties and their factions think, feel, and act differently, including with respect to economic affairs and interests. For example, traditionalists regularly set tradition and traditional values above economic interests such that they act "irrationally" from the economic point of view while not being actually irrational. They view themselves as acting on the basis of higher reasons.

While homo economicus may have a place in the study of microeconomics, at the scale of macroeconomics and political economy, the agent is not homo economicus but homo socialis, and homo socialis is non-homogenous and not necessarily economically "rational." So game theory does not apply in this case.

The fact that societies are complex adaptive systems, especially at the national and international levels, means that model-building is challenged by tractability. Many conventional approaches are based on introducing conventions for inducing tractability at the expense of realism, which effects the usefulness of such models in pragmatic application.

This can result in social and political disarray that is serious enough to lead to conflict. But even if it does not, it can produce in anti-social consequences instead of the pro-social result that free markets, free trade and free capital flows promise based on the erroneous assumptions.

Many economist do not stay abreast of developments in economic anthropology, economic sociology, social science in general, evolutionary theory, and other fields that impact economics. Many do not even consider institutionalism as important, and even deprecate accounting, money & banking, and finance as relevant. Even in economic matters per se, many economists dismiss or deprecate externality, market imperfection, distributional factors, etc. as relevant to their field. Moreover, the insist that the methodological debate is over and they won it — end of discussion.

Economics needs to expand its horizon to remain relevant. 

Lars P. Syll’s Blog
Economics — too important to be left to economists
Lars P. Syll | Professor, Malmo University

The End of the Free-Market Paradigm — Diane Coyle

The assumption of isolated individuals transacting in free markets has underpinned highly damaging economic policies since the 1980s. Given the interdependent nature of the digital world, economic researchers need to ditch their unscientific attachment to this paradigm and instead focus on the economy of the 2020s.

The 2020s will be the decade when the idea that economic problems can be “left to the market” to solve is finally put to rest – after some 40 years during which that belief has caused untold damage to society and the environment....

This sort of assumption may be appropriate, sort of, for micro-theorizing, but it unsuited to macro-theorizing, as the results reveal.  Now the stakes are so big as to require revisiting the foundations of the normal paradigm. The issue for economics is scope and scale. Microeconomic toy models don't scale and the issues of macro lie beyond the scope of micro. "Microfoundations" as a governing assumption must go.

Accountant Richard Murphy points out that the first step is taking externality into account in figuring costs. Capitalize the gains and socialize the losses, as is the case at present, is not working so well and things are just getting worse without the market dealing with true cost. The economic calculation errors are becoming enormous.

Project Syndicate
The End of the Free-Market Paradigm
Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

Bill Mitchell — Discredited academic dinosaurs continue to seek relevance

As many mainstream macroeconomics try to reinvent themselves after their reputations were trashed during and in the aftermath of the GFC, some are still trying to stay relevant by recycling the usual trash about deficits, public debt and bond yields that defines the New Keynesian orthodoxy in macroeconomics. That approach has been emphatically exposed as fake knowledge by the fact that none of the predictions that can be derived from that framework have proven to be accurate. On December 9, 2019, the UK Guardian took a rest from imputing anti-semitist motives to Jeremy Corbyn and published a sort of dinosauric-type article from Kenneth Rogoff – Public borrowing is cheap but ramping up debt is not without risk. Yes, the same character that claimed during the crisis that there was a public debt threshold of 90 per cent of GDP, beyond which, governments would face insolvency. When it was discovered the spreadsheet they had used to come up with that conclusion had been incompetently (or fraudulently) manipulated and that the actual data did not show anything of the sort, Rogoff should have slunked off and shut his mouth forever. But that is not the way these characters operate. Memory is short. Their position as an agent for their elites is well paid. And so they keep recycling the nonsense. Eventually, their influence will decline. But as Max Planck noted in 1948 “Die Wahrheit triumphiert nie, ihre Gegner sterben nur aus”, which has been reduced to ‘science advances one funeral at a time’, which is not a verbatim translation but an accurate depiction of how change is slow to come to the academy....

Bill Mitchell – billy blog
Discredited academic dinosaurs continue to seek relevance
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Lars P. Syll — Blog Public trust in economists

Economists can take consolation that they beat politicians anyway.

Lars P. Syll’s Blog
Public trust in economists
Lars P. Syll | Professor, Malmo University

Michael Roberts Blog — Economics as a social science

There is no substitute for the ‘big picture’. Economists should not be doctors but social scientists, or more accurately they should develop an economics that recognises the wider social forces that drive economic models, in particular, the social mode of production that is capitalism. That is political economy, mostly not taught in universities and certainly not practised in international agencies....

Michael Roberts Blog — blogging from a marxist economist
Economics as a social science
Michael Roberts

Bill Mitchell — The evidence from the sociologists against economic thinking is compelling

One of the stark facts about the academic economics discipline is its insularity and capacity to deliver influential prognoses on issues that affect the well-being of millions with scant regard to the actual consequences of their opinions and with little attention to what other social scientists have to say. The mainstream economists continually get things wrong but take no responsibility for the damage they cause to the well-being of the people. A 2015 paper – The Superiority of Economists– published in the Journal of Economic Perspectives (Vol 29, No. 1) by Marion Fourcade, Etienne Ollion and Yann Algan is scathing in its assessment of the economics discipline. They say that mainstream economists largely ignore contributions by other social scientists and consider them inferior in technological sophistication, have a “predilection for methodological and theoretical precision over real-world accuracy”, largely ignore”the basic premise of much of the human sciences, namely that social processes shape individual preferences”, and parade an arrogance and superiority that masks the sterility of their analysis. In this context, I thought the 2015 Report from the Joseph Rowntree Foundation – Sociological perspectives poverty – was a breath of fresh air in its approach to understanding poverty. The empirical base it presents refutes most of the major assumptions and conclusions of economists who work in the field of poverty. A mainstream professor who was supervising my economics graduate program once said to me: “Bill you are a bright boy but you should be doing sociology”, which was an example of the negative control mechanism designed to weed out dissidents (like me). It didn’t work. But I always considered the disciplines of sociology and anthropology (not to mention psychology, political science, social welfare etc) to be important in my journey to become ‘well read’. Most economists, however, do not think that. Perhaps that is why I was able to be part of the development of Modern Monetary Theory (MMT)....

There's word for it — "insularity." In jargon, it is "silo-thinking."

Bill Mitchell – billy blog
The evidence from the sociologists against economic thinking is compelling
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Our Shrinking Economic Toolkits — Jayati Ghosh

For the last four decades, mainstream economists and policymakers have been wedded to fixed dogmas. Their blind belief in fiscal discipline and consolidation, and resulting refusal to consider more public spending even in an obvious downturn, now threatens the very stability of societies....

Project Syndicate
Our Shrinking Economic Toolkits

Jayati Ghosh | Professor of Economics at the Centre for Economic Studies and Planning, School of Social Sciences, at the Jawaharlal Nehru University, in New Delhi

See also at Project Syndicate

With the German economy close to recession, European Central Bank President Mario Draghi has rightly urged eurozone governments to provide more fiscal stimulus. And acknowledging the interaction between fiscal and monetary policy would leave critics much less room for ECB-bashing.

Germany Versus the ECB

Hans-Helmut Kotz, a former member of the executive board of Deutsche Bundesbank, is Program Director of the SAFE Policy Center at Goethe University in Frankfurt and a resident fellow at the Center for European Studies at Harvard University

At a time of slowing global growth and ultra-low interest rates, major central banks continue to “push on the string” of further monetary easing. But what if the same old rules – or even the same old economic theories – no longer apply?
In this Big Picture, Harvard’s Lawrence H. Summers and Anna Stansburyargue that central banks have exhausted their ability to control inflation and unemployment levels through traditional channels, and should admit as much. Roger E.A. Farmer of the University of Warwick agrees, and suggests that it is not just the traditional tools that are broken; it’s the entire underlying theory. Making matters worse, economists Ernest Liu, Atif Mian, and Amir Sufi show that today’s loose monetary policies are not just ineffective, but possibly even contractionary, and thus entirely counter-productive.

 No Game in Town?

How to reform the economics Ph.D — Tyler Cowen

Along those lines, I have a modest proposal. Eliminate the economics Ph.D, period. Offer everyone three years of graduate economics education, and no more (with a clock reset allowed for pregnancy). Did Smith, Keynes, or Hayek have an economics Ph.D? This way, no one will assume you know what you are talking about, and the underlying message is that economics learning is lifelong.

Adam Smith and Friedrich Hayek were philosophers, and Keynes was a mathematician. Karl Marx, who goes unmentioned even though he influenced the modern world as much as any other, if not more, was also a philosopher. 

All of them influenced economics and also changed the world more profoundly more than any academic economist.  Conversely, Kenneth Boulding was an economist. Dissatisfied with the direction of academic economics, he became a philosopher and co-founded general systems theory.

Ok, these were outliers. Economic training is needed to do the day to day, nitty gritty.

But just what kind of training and how much is needed to do work in economics, including work that is contributory to knowledge? How would that be measured? What are the criteria? Are there hidden assumptions?

Tyler Cowen makes some suggestions but shouldn't something as important as this be studied on the basis of data? And as he points out, it likely applies to other fields as well. Are we sticking to a traditional process in education out of habit even though it could be greatly improved upon, as well as reevaluated for current needs? Have we inadvertently sacralized convention?

Marginal Revolution
How to reform the economics Ph.D
Tyler Cowen | Holbert C. Harris Chair of Economics at George Mason University and serves as chairman and general director of the Mercatus Center

No More Economic Malpractice: African-American Faith Leaders Take On The Establishment — Delman Coates

MMT to the rescue.

Sojourners

No More Economic Malpractice: African-American Faith Leaders Take On The Establishment

Delman Coates

See also

VOX
A generation of economists helped get us into this mess. A new generation can get us out.

Jared Bernstein | Senior Fellow at the Center on Budget and Policy Priorities and former Chief Economist and Economic Adviser to Vice President Joe Biden in the Obama Administration

Fixing Capitalism — Prakash Loungan

More than a decade after the global financial crisis, macroeconomists have failed to absorb three crucial sets of lessons. Their models are still struggling – and mostly failing – to cope with disruptive change, and with the fact that both balance sheets and inequality matter.…

Stating the obvious but it that most at the top don't get it yet.

Project Syndicate
What Economists Still Need to Learn
Mark Cliffe is Chief Economist and Head of Global Research of the ING Group.

Also of interest is this review of Raghuram Rajan's new book.

His latest book attempts to go beyond warning of the dangers of unfettered capitalism to what can be done to fix it. Rajan suggests restoring the third pillar of society, the community, which he defines as a social group residing in a specific area that shares government and often a common heritage. Markets and the state remain indispensable, but “when the three pillars of society are appropriately balanced” … “society has the best chance for providing for its people,” particularly those who lose out from the effects of trade and technology.

At least some economists are rediscovering community if not society. The convention assumption is still "there is no such thing as society" (Margaret Thatcher). As a result no systems awareness.

The Unassuming Economist
Fixing Capitalism
Prakash Loungani | Assistant Director and Senior Personnel & Budget Manager in the IMF’s Independent Evaluation Office

Thorstein Veblen: Economics "is a `Science' of Complaisant Interpretations, Apologies, and Projected Remedies" — Timothy Taylor

I always enjoy reading Thorstein Veblen, partly because his writing strays back and forth across the line between "raising questions of real interest" to "just plain old dyspeptic and cantankerous." His 1918 essay "The Higher Learning In America:A Memorandum On the Conduct of Universities By Business Men" is full of comments from both categories, often closely overlapping.

It's also the source of one of the liveliest insults to the field of economics, that economics is "a `science' of complaisant interpretations, apologies, and projected remedies." Veblen also argues that this isn't because economists and other academics have been paid off, but only because they have been selected and trained for their narrow intellectual horizons....

Compare Upton Sinclair:

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" — I, Candidate for Governor: And How I Got Licked (1935); repr. University of California Press, 1994, p. 109.

Once an investment in education is built up providing access to academia, it is difficult to think in ways that challenge this investment.

Veblen noticed this of economists back in 1918 and called attention to it.

Conversable Economist
Thorstein Veblen: Economics "is a `Science' of Complaisant Interpretations, Apologies, and Projected Remedies"
Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

The Fall of the Economists' Empire — Robert Skidelsky

The problem is not so much with the modeling, actually. People are free to construct any models that please for whatever reason. The problem is with the conclusions that are drawn from the model when they exceed the limitations of the of the assumptions.

This is not a problem with modeling but with logic. Drawing conclusions that exceed the scope and scale of the premises in a context other than the model is flat out illogical, and any inferences drawn on this basis are unsound, that is, do not follow from the premises of the argument and the reasoning about them.

Models don't automatically transfer to the world that they purport to model. This is a fundamental of scientific method. Semantic interpretation is required, along with methodological rigor, and hypothesis testing is necessary.

Project Syndicate
The Fall of the Economists' Empire
Robert Skidelsky | Professor Emeritus of Political Economy at Warwick University, fellow of the British Academy in history and economics, member of the British House of Lords, and author of a three-volume biography of John Maynard Keynes
ht Lars Syll

Lars P. Syll — The logic of economic models

Why conventional economics is a failed project. It's the approach to assumptions.

Lars P. Syll’s Blog

The logic of economic models
Lars P. Syll | Professor, Malmo University

Indoctrinated by Econ 101 — John Warner

My fundamental understanding of the world has been warped by a now challenged approach. I'm not alone.…

In the end, the chief byproduct of my general education exposure was a kind of indoctrination into the centrality of markets to understanding human behavior and the apparent importance of economics professors.

I’m not alone. Introductory economics could be one of the most widely received credits in all of higher education. And unlike other common courses (like say, first-year writing), Econ 101 is extremely similar institution to institution. Supply and demand is framed as a law in the same fashion as gravity. When supply and demand does not seem to work according to the “law” (e.g., health care) it is the not the law that is faulty, but the market itself, with much public policy effort going toward trying to bring the market in compliance with the law, often to negative effect.

That supply and demand might not be a law doesn’t seem to occur. Higher education seems to be bumping up against these tensions as well....

Bingo! That's is the purpose of it, after all. Some are finally waking up to it. Fake news is one thing that drives the narrative, and fake knowledge is another.

And it is not just Econ 101. The brainwashing continues through the PhD.

Inside Higher Ed
Indoctrinated by Econ 101

John Warner

See also

Real-World Economics Review Blog
Economics is an ideology

Why Economics Must Go Digital — Diane Coyle

Another argument for paradigm shift away from the neoclassical model in economics. It no longer fits the facts (if it ever did). The "free market" that neoclassical economics assumes, the atomism of methodological individualism, and other such assumptions based on "simplifying," are myths concocted partly for methodological convenience ("mathematical tractability") and partly owing to ideology (cognitive bias). Theoretically, this would just be a curiosity of history, like the "ether" and "philostigon" of physics if economics were not crucial to policy formulation and adoption.

The Enlightened Economist
Why Economics Must Go Digital
Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

Lars P. Syll— Axel Leijonhufvud—the road not taken

A must-read (not least because of the interview videos where Leijonhufvud gets the opportunity to comment on the ‘madness’ of modern mainstream macroeconomics)!

Axel Leijonhufvud's On Keynesian Economics And The Economics Of Keynes: A Study In Monetary Theory is a free download at archive.org here.

Lars P. Syll’s Blog
Axel Leijonhufvud — the road not taken
Lars P. Syll | Professor, Malmo University