Economics — a science in need of a paradigm shift

24 Jun, 2021 at 00:38 | Posted in Economics | 6 Comments

The methodology and ideology of modern economics are built into the frameworks of educational methods, and absorbed by students without any explicit discussion. In particular, the logical positivist philosophy is a deadly poison which I ingested during my Ph.D. training at the Economics Department in Stanford in the late 1970s. It took me years and years to undo these effects …

Paradigm Shift in EconomicsModern economics is much like this. It starts by making assumptions which are dramatically in conflict with everything we know about human behavior (and firm behavior) and applies mathematical reasoning to situations where it cannot be applied, quantifying the unquantifiable and coming to completely absurd and ridiculous conclusions. Nonetheless, speaking from personal experience, the brainwashing is powerful and effective. It is a slow and painful process to undo …

Unlike the older generation, for younger and more flexible minds, it is possible to take off glasses manufactured in the Euclidean factory, and put on non-Euclidean glasses. Nonetheless, it is still a disconcerting and uncomfortable experience, which will not be undertaken unless there is some expectation of a great reward for this struggle and sacrifice. The costs of paradigm shift must be paid upfront – one loses the ability to talk to the mainstream when one describes the world using an alien framework. The rewards are in the future, and highly speculative and uncertain. Nonetheless, for reasons explained elsewhere, it seems essential to make the effort – the survival of humanity is at stake.

Asad Zaman

6 Comments

  1. “What do we do instead?”
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    I have heard that question asked as if there can be no easy or obvious answer. Is that the case? After more than 50 years of devastating critiques, is it really so hard to conceive of doing economics better?
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    Granted, simply not-doing the neoclassical markets-in-equilibrium-optimal-allocation thing is by itself a null, but have not the critics suggested other paths, other topics, other methodological standards, other features of the economy to be curious about.
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    One place to stop the addiction to neoclassical sloppiness; stop talking neoclassical rubbish!
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    There are very few actual markets operating and to talk loosely and metaphorically about a “market economy” when markets are NOT a primary organizing principle of modern economies, not a mechanism of price formation, is to talk rubbish and rot one’s brain! Just say, no.
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    And then say yes to talking about how the economy is actually organized. Talk about bureaucracy. Talk about the economic functions of management. Talk about how considerations of technical efficiency dominate allocative efficiency.
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    Let’s talk realistically about price formation: consider how and why administrative pricing solves problems. Here is a truth long known by anyone paying attention: most (metaphorical) “markets” given actual cost structures can not arrive at a “market-clearing” price. Most firms have lower marginal costs than average cost — they want to sell more at current prices which is why they spend on advertising and promotion. Duh. This is also why Keynesian fiscal policy works so reliably, despite neoclassical denial. And, why general equilibrium models premised on market-clearing equilibrium prices are rubbish! Study what is. That is all.

    • Bruce,
      Does your prescription “Study what is” include the analysis of private and social opportunity costs, and consideration of consumers’ willingness to pay?
      If so, perhaps you are not totally rejecting the information provided by market prices, despite market imperfections. (The latter have been extensively studied within mainstream economics).
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      Alternatively, if you are not interested in private and social costs and benefits, or if you think market prices have no useful function in modern economies, surely the historical dismal performance of every communist and socialist “planned” economy suggests that you don’t have a viable alternative to market economics.

      • Absolutely, a consumer’s willingness to pay and their available alternatives come into any study of price formation. I am totally rejecting the idea that in the absence of any actual, functioning market, that there’s any sense to talking as if there are market prices. There’s no “market” price of hamburgers at a McDonald’s, and that is not an instance of market imperfection at work — that’s no market in existence. There’s exchange for money and so there are prices, but they are administered prices, set by the bureaucracy of the hamburger chain and their franchisees. And, the customers are calculating on the costs of available alternatives — cook at home, visit Burger King or some other restaurant, or the grocery.
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        I do think market prices have a useful function in modern economies, but I also think market prices are exceptionally rare in modern economies, because markets are exceptionally rare.
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        Economists have studied markets extensively, mostly in imagination, but sometimes in life. Market design is a thing. One thing we know about markets is that market-clearing prices cannot be sustained in the presence of certain, very common cost structures. A very common cost structure involves large fixed or sunk costs and very low marginal costs, marginal costs that declining over in the region of the current volume of production and sales. There’s no equilibrium price possible in such a case, so there’s no possibility of market price formation. Administered pricing with a schedule of price discrimination can solve that problem and that’s what Apple does with iPhones and what movie distribution companies and movie theatres do with movie tickets. There’s no “market price” for an iPhone. The price is set by the manufacturer and maintained, despite occasional moments of great demand or sometimes, slack demand. The movie ticket price for a popular movie is usually more-or-less the same as for an unpopular movie; nobody moves to fill the empty seats (and there are almost always empty seats aplenty) with a market offer of a lower price.
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        Economists study markets like theologians once studied angels and miracles and their reasons for doing so make about as much sense.

        • The larger point is that “market economy” is a mentality of self-deception that puts the economics discourse in an unreal place, a place where we are invited to imagine all sorts of things that simply are not so: a fantasy of magically optimizing social institutions rationally allocating resources with all available information. Here, in real life, allocative efficiency is almost always a secondary issue to managing energy, information, error and waste — the social management and engineering of production and distribution. Far from being “optimized”, the economy organized largely by bureaucracies and systems of rules, is a series of kludges patching up the endlessly problematic nature of a deeply specialized and decentralized system of production and trade. The fantasy is of the best of all possible worlds; the reality is what is.

  2. That the assumptions underpinning neoclassical economics are devoid of reality is a matter that is not contestable.
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    This, in my mind, is not the prime issue.
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    The prime issue is that neoclassical economics (General Equilibrium Theory) is devoted to solving the problem of optimal resource allocation under constraint – i.e. it deals with microeconomics, not macroeconomics.
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  3. He also writes:

    “Based on my own experiences and difficulties in unlearning, and also the experiences of Keynes and many others who have unsuccessfully battered the gates of the citadel of neoclassical economics, I have come to the conclusion that this is a hopeless task. We do not expect to be able to convert the economists. This revolution will not be televised. Our only hope is to work on an external revolution – take the message to outsiders, not to economists.”

    So come along, guys! We outsiders are fed up with the neo-classic claptrap. But what should we argue instead?


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