Wednesday, December 07, 2011

Heterodoxy Unbound

I have spent the last two days at the conference of the Australian Society of Heterodox Economists.

The conference re-established a core point - the heterodox are united by what they stand against rather than what they stand for.

What they stand against is the dominant paradigm of the neo-classical core of economics. But even how much they stand against this varies.

Universally they would argue that neo-classicism fails because it is a system that assumes that the economic system is inherently stable and that analysis begins with an economy in equilibrium. You would probably get general agreement on the proposition that the neo-classical core ignores money and hence largely ignores the finance system, yet the latter accounts for 20% of US economic activity.

Going further you might actually get them to agree that the weaknesses of neo-classicism begin with the three core assumptions of Methodological individualism, methodological instrumentalism and methodological equilibriation.

I approach the heterodox economists from a telco policy stance where I am astounded how the terms "efficiency" and "competition" get chanted with no understanding of the limitations the theory of neo-classicism itself would impose on them, let alone all the other potential fallacies.

An interesting part of the conference was a session proposing a mathematically modelled macro system including finance that was attacked for not having "micro-foundations". This ignores the good conversation that the Hicks co-option of Keynes to give it "micro-foundations" was the point at which Keynes became misunderstood. It also assumes that microeconomics itself is well founded and that the issues are merely to do with macro.

Steve Keen eloquently describes the failures of micro - indeed its internal inconsistency - in his Debunking Economics.

There was so much good in the conference - but the paper by Lynne Chester that distinguished Australia from being characterised as a Liberal Market-Based Economy was a stand-out. Working backward, Australia's relatively better performance than the true LMEs (US, UK even Canada) can be attributed to its different institutional structure - the Australian approach to wage fixation, highest bank capital adequacy requirements.

To put it another way, as economies rushed to implement market mechanisms to facilitate the structural adjustments necessary to respond to the oil supply shock - seen as stagflation - Australia did so in an effective way that created just enough flexibility without overshooting.

There were interesting discussions on central bank policy - with different views of whether central banks in setting official interest rates can or cannot effect employment. The latter view was accompanied by a call for more explicit specification of a "full employment" goal.

In the end the conference had a discussion about the future of heterodox economics - and ultimately the question is whether the goal is the overthrow of the orthodoxy or not. Some, like Keen, think the orthodoxy is so dangerous it needs to be overthrown. Others regard the orthodoxy as being too ingrained to be rebelled against (and one could argue their approach to Keynes is evidence of that - on which the best paper on Keynes was given by UTS's Rod O'Donnell but the paper doesn't appear to be available anywhere).

Yet others see the real benefit in the heterodox as being its pluralism - the fact that it permits economics to be looked at from different dimensions.

My own view is that we do need a true "paradigm shift" but that the shift needs to be to a pluralism - to the kind of world like mechanics in which Newton, quantum and relativistic mechanics can co-exist because the boundary conditions are well understood. The overall title of the new paradigm will be "complexity economics" because that is the consequence of putting institutions directly into models - they create feedback loops.

Finally there is the question of the relation between heterodox and political economy. The latter was the original term for the field when the focus was on how to make wealth. It was inherently prescriptive not merely descriptive. The term is now also used to explain how the neo-classical position operates to support the entrenched power positions (the definition of efficiency says that the preference of the person with the most endowments counts more).

For me this is the piece that simply blows up the cant that economics is a "positive science". If it were only such there would be no preference for economists in policy roles.

Anyhow - short summary - great conference and we all need to pay more hede to the heterodox and spurn the orthodox.

Novae Meridianae Demetae Dexter delenda est

No comments: