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
Showing posts with label heterodox economics. Show all posts
Showing posts with label heterodox economics. Show all posts
Wednesday, December 07, 2011
Wednesday, August 24, 2011
Top read of the day
This column from Wired is about the complexity of the structure of a crushed piece of paper and why the ball that results which is 90% air is so rigid.
For those economists out there still wedded to economic models derived from 19th century thermodynamics and electromagnetism, you might like to reflect on the thought that real world markets are much like the crumpled paper - apparently simple but really very complex.
The problem is we don't have X-ray microtomography to look at the structure of economic markets.
Novae Meridianae Demetae Dexter delenda est
For those economists out there still wedded to economic models derived from 19th century thermodynamics and electromagnetism, you might like to reflect on the thought that real world markets are much like the crumpled paper - apparently simple but really very complex.
The problem is we don't have X-ray microtomography to look at the structure of economic markets.
Novae Meridianae Demetae Dexter delenda est
Tuesday, August 09, 2011
More on complexity economics
Since my complexity economics I have been making slow progress on the underlying paper.
I've turned up a couple of interesting papers in the Review of Political Economy by Holt, Rosser and Colander.
The first in 2004 is The changing face of mainstream economics which is a description of the study of economics itself as a complex system, and that it is changing into something new.
This year they have followed it up with The complexity era in economics in which they argue that the new thing they wrote about is "complexity economics", how it has grown out of the neoclassical and heterodox schools and how it will change the way we understand economic phenomena.
What I want to do today is just give some simple practical examples of what complexity economics can look like. The examples are all drawn from Physica A which is actually a journal of statistical mechanics. The examples I'm choosing are ones that could be relevant to our understanding of telecommunications markets.
The first is Evolution of cooperation among mobile agents with heterogenous view radii which isn't even from the econophysics section but the dynamical processes section of the journal. The paper is interesting because it is an advance on the Axelrod work and the way to explain co-operation using a more intricate model of agents which interact with a group of other agents. A conclusion is that co-operation is best facilitated by small interaction "circles" and a slow moving speed. This raises the potential issue that a fast moving networked economy DOESN'T facilitate co-operation as much as our older economy.
The second is A Markovian model market—Akerlof’s lemons and the asymmetry which models the degree of information assymetry (as measured by a consumer's perceptive capacity) and shows that Ackerlof's complete market failure occurs at a computable value for this. A potentially very important conclusion for industry is that;
When β is closer to 1 (symmetric information), the market becomes more profitable for high quality goods, although high and low quality markets coexist.
That is, co-operative effort by industry to improve consumer understanding of product offerings INCREASES INDUSTRY PROFIT.
The other two examples are ones that help with one of my favourite issues - understanding market structure and adoption rates.
In Dynamics of market structure driven by the degree of consumer's rationality the model shows how market structures evolve where the degree of consumer "rationality" (meaning how bounded it is) determines how the market evolves. It makes predictions that the size distribution of firms follows Zipf's Law and that the growth rate distribution follows Gilbrat's law. There is a perfect data set of firm size distribution over time for Australian carriers - but it is Zipf like but not actually Zipf in its distribution.
In Evolutionary model of an anonymous consumer durable market an evolutionary dynamic is set-up to explain purchase and innovation in consumer durables markets in which equilibrium is a special case. This I find of interest because in the global comparison of broadband take-up rates it is the different shapes of the S shaped diffusion curves that needs to be "explained", not the penetration at any point in time.
Two things need to be noted here.
The first is about the relationship between "complexity economics" and "econophysics". They are in essence the same thing, only the latter come to it through maths and physics. Econophysics does spend a lot of time discussing stock-markets - these are where all the infamous "quants" came from that got the investment banks into some of their trouble. But it also discusses complexity using dynamic models.
A word of caution has been issued by Steve Keen reminding the econophysicists that much of the economic science from which they wish to build has no foundation.
But equally the econophysicists need to recognise that what they are doing is still really economic science - not, as argued in Is econophysics a new discipline? The neopositivist argument, a new discipline. That thesis firstly completely misrepresents physics as "positivist" science, and ignores the claims made by the likes of Friedman that they were engaged in positive science.
As my larger piece argues we do blur the boundaries between economic science and political economy, the latter being prescriptions based on the former and an ethical stance on what our goals should be.
So what should be done. As I also noted recently complexity economics needs to be married to good maths. But I also note that the University of Melbourne seems to have had a foray into econphysics entirely from the Physics and Maths Departments. Meanwhile UQ has an ARC Centre for Evolutionary Economic Systems.
In the words of Steve Keen;
The most important thing that global financial crisis has done for economic theory is
to show that neoclassical economics is not merely wrong, but dangerous.
To replace it we need to apply mathematics to heterodox economics. It is forgotten that the original neoclassical "revolution" came about by the application of the then current maths of physical systems to economics. (see How Economics became a Mathematical Science
and More Heat than Light
)
Novae Meridianae Demetae Dexter delenda est
I've turned up a couple of interesting papers in the Review of Political Economy by Holt, Rosser and Colander.
The first in 2004 is The changing face of mainstream economics which is a description of the study of economics itself as a complex system, and that it is changing into something new.
This year they have followed it up with The complexity era in economics in which they argue that the new thing they wrote about is "complexity economics", how it has grown out of the neoclassical and heterodox schools and how it will change the way we understand economic phenomena.
What I want to do today is just give some simple practical examples of what complexity economics can look like. The examples are all drawn from Physica A which is actually a journal of statistical mechanics. The examples I'm choosing are ones that could be relevant to our understanding of telecommunications markets.
The first is Evolution of cooperation among mobile agents with heterogenous view radii which isn't even from the econophysics section but the dynamical processes section of the journal. The paper is interesting because it is an advance on the Axelrod work and the way to explain co-operation using a more intricate model of agents which interact with a group of other agents. A conclusion is that co-operation is best facilitated by small interaction "circles" and a slow moving speed. This raises the potential issue that a fast moving networked economy DOESN'T facilitate co-operation as much as our older economy.
The second is A Markovian model market—Akerlof’s lemons and the asymmetry which models the degree of information assymetry (as measured by a consumer's perceptive capacity) and shows that Ackerlof's complete market failure occurs at a computable value for this. A potentially very important conclusion for industry is that;
When β is closer to 1 (symmetric information), the market becomes more profitable for high quality goods, although high and low quality markets coexist.
That is, co-operative effort by industry to improve consumer understanding of product offerings INCREASES INDUSTRY PROFIT.
The other two examples are ones that help with one of my favourite issues - understanding market structure and adoption rates.
In Dynamics of market structure driven by the degree of consumer's rationality the model shows how market structures evolve where the degree of consumer "rationality" (meaning how bounded it is) determines how the market evolves. It makes predictions that the size distribution of firms follows Zipf's Law and that the growth rate distribution follows Gilbrat's law. There is a perfect data set of firm size distribution over time for Australian carriers - but it is Zipf like but not actually Zipf in its distribution.
In Evolutionary model of an anonymous consumer durable market an evolutionary dynamic is set-up to explain purchase and innovation in consumer durables markets in which equilibrium is a special case. This I find of interest because in the global comparison of broadband take-up rates it is the different shapes of the S shaped diffusion curves that needs to be "explained", not the penetration at any point in time.
Two things need to be noted here.
The first is about the relationship between "complexity economics" and "econophysics". They are in essence the same thing, only the latter come to it through maths and physics. Econophysics does spend a lot of time discussing stock-markets - these are where all the infamous "quants" came from that got the investment banks into some of their trouble. But it also discusses complexity using dynamic models.
A word of caution has been issued by Steve Keen reminding the econophysicists that much of the economic science from which they wish to build has no foundation.
But equally the econophysicists need to recognise that what they are doing is still really economic science - not, as argued in Is econophysics a new discipline? The neopositivist argument, a new discipline. That thesis firstly completely misrepresents physics as "positivist" science, and ignores the claims made by the likes of Friedman that they were engaged in positive science.
As my larger piece argues we do blur the boundaries between economic science and political economy, the latter being prescriptions based on the former and an ethical stance on what our goals should be.
So what should be done. As I also noted recently complexity economics needs to be married to good maths. But I also note that the University of Melbourne seems to have had a foray into econphysics entirely from the Physics and Maths Departments. Meanwhile UQ has an ARC Centre for Evolutionary Economic Systems.
In the words of Steve Keen;
The most important thing that global financial crisis has done for economic theory is
to show that neoclassical economics is not merely wrong, but dangerous.
To replace it we need to apply mathematics to heterodox economics. It is forgotten that the original neoclassical "revolution" came about by the application of the then current maths of physical systems to economics. (see How Economics became a Mathematical Science
and More Heat than Light) Novae Meridianae Demetae Dexter delenda est
God and economics
At last week's ACCAN/ACMA Summit on the Reconnecting the Customer report I got mentioned for the best tweet, being
DT says you can't embed an ethical basis into coroporations without an external motivator - hmmm sounds like God. #RTCsummit
The context was a discussion on whether regulation of telcos was required and one speaker advanced the proposition that regulation was necessary because firms won't self regulate - in his terms the
"ethical basis" has to be imposed by an external agent.
That's where God comes in - because under a religious world view we only act morally because of the intervention of God. And the only reason to behave morally is God's retribution.
Interestingly the fact that Adam Smith had a place in his economic world view for God as the creator of the natural order of markets. In fact, Veblen noted this as one of his critiques of neoclassical theory (the three part "The Preconceptions of Economic Science).
Put simply, the theory of self-interested rational utility maximisation is counter to the principles of an organised society and moral behaviour.
The good news is that dynamic, evolutionary models demonstrate that self-interested agents can and will create a system of trust - this was demonstrated by Axelrod in his Evolution of Cooperation
.
The intent of my comment was that the proposition must be wrong - firms just like people can iteratively create moral behaviour and norms. The regulatory question then is not how to impose the norms but how to affect the dynamics so that the morals evolve.
Novae Meridianae Demetae Dexter delenda est
DT says you can't embed an ethical basis into coroporations without an external motivator - hmmm sounds like God. #RTCsummit
The context was a discussion on whether regulation of telcos was required and one speaker advanced the proposition that regulation was necessary because firms won't self regulate - in his terms the
"ethical basis" has to be imposed by an external agent.
That's where God comes in - because under a religious world view we only act morally because of the intervention of God. And the only reason to behave morally is God's retribution.
Interestingly the fact that Adam Smith had a place in his economic world view for God as the creator of the natural order of markets. In fact, Veblen noted this as one of his critiques of neoclassical theory (the three part "The Preconceptions of Economic Science).
Put simply, the theory of self-interested rational utility maximisation is counter to the principles of an organised society and moral behaviour.
The good news is that dynamic, evolutionary models demonstrate that self-interested agents can and will create a system of trust - this was demonstrated by Axelrod in his Evolution of Cooperation
. The intent of my comment was that the proposition must be wrong - firms just like people can iteratively create moral behaviour and norms. The regulatory question then is not how to impose the norms but how to affect the dynamics so that the morals evolve.
Novae Meridianae Demetae Dexter delenda est
Monday, August 08, 2011
Yet another great Gittins column
A great column by Ross Gittins in today's SMH.
Today he takes solid aim at people clamouring for more "micro-economic reform" but rightly points out that such reform has never provided enduring changes to productivity improvement rates. What does that is technology and innovation, a subject standard economists still treat as "exogenous" to their models.
What I loved though is his very simple explanation for how it is that economists (and business people) who have unbounded faith in markets are forever calling for some kind of government action. Partly paraphrased he wrote;
We need to remind ourselves that governments don't actually run the economy, business people do. So if businesses aren't generating much productivity improvement, the obvious place to look is at the behaviour of business people.
Conventional economics' foundation assumption that economic actors are always and everywhere rational [and] as a general rule markets get it right.
It follows that, if the market isn't delivering satisfactory outcomes, it could be a case of ''market failure'', but it's much more likely to be a case of ''government failure''. It must be something the government's doing that's stuffing things up. Thus does every problem in the private sector become the government's fault.
Beautiful when you think about it. As he says this is the complete rationale for "micro-economic reform" which is coded as "government does less".
I would note one deviation from the Gittins position. He notes that the only exception to the rule that reform is less regulation is in the area of market power (basically monopolies and collusion).
It is interesting to note that in the 1980s and 1990s all of Australia's big businesses were clamouring for competition in some other sector, the banks wanted competition in airlines, the airlines wanted competition in banks, while everyone wanted competition in telecommunications. But by the 21st century big business - as largely represented by the BCA - took the position that Australia's small economy needed these firms of big size to achieve scale efficiencies.
And this is (as Gittins notes) the dirty little secret of technological advance - it increases economies of scale - big firms get bigger.
It will be nice when echnocrats and business writers start getting it that the challenges of the new economy are much different to simply getting less government intervention.
Novae Meridianae Demetae Dexter delenda est
Today he takes solid aim at people clamouring for more "micro-economic reform" but rightly points out that such reform has never provided enduring changes to productivity improvement rates. What does that is technology and innovation, a subject standard economists still treat as "exogenous" to their models.
What I loved though is his very simple explanation for how it is that economists (and business people) who have unbounded faith in markets are forever calling for some kind of government action. Partly paraphrased he wrote;
We need to remind ourselves that governments don't actually run the economy, business people do. So if businesses aren't generating much productivity improvement, the obvious place to look is at the behaviour of business people.
Conventional economics' foundation assumption that economic actors are always and everywhere rational [and] as a general rule markets get it right.
It follows that, if the market isn't delivering satisfactory outcomes, it could be a case of ''market failure'', but it's much more likely to be a case of ''government failure''. It must be something the government's doing that's stuffing things up. Thus does every problem in the private sector become the government's fault.
Beautiful when you think about it. As he says this is the complete rationale for "micro-economic reform" which is coded as "government does less".
I would note one deviation from the Gittins position. He notes that the only exception to the rule that reform is less regulation is in the area of market power (basically monopolies and collusion).
It is interesting to note that in the 1980s and 1990s all of Australia's big businesses were clamouring for competition in some other sector, the banks wanted competition in airlines, the airlines wanted competition in banks, while everyone wanted competition in telecommunications. But by the 21st century big business - as largely represented by the BCA - took the position that Australia's small economy needed these firms of big size to achieve scale efficiencies.
And this is (as Gittins notes) the dirty little secret of technological advance - it increases economies of scale - big firms get bigger.
It will be nice when echnocrats and business writers start getting it that the challenges of the new economy are much different to simply getting less government intervention.
Novae Meridianae Demetae Dexter delenda est
Saturday, July 30, 2011
Australian Centre for Commercial Mathematics
I recently blogged about the need for a National Centre for Complexity Economics.
I said the centre should be in an institution with a mathematics department and an IT department able to support it.
Today I became aware of the Australian Centre for Commercial Mathematics, whose "mission is to conduct projects with industry to solve complex problems using advanced mathematics and statistics." It only commenced in January this year so it hasn't taken me too long to discover it.
The centre itself is based on the success over the last thre years of the Australian Research Council Centre of Excellence for Mathematics and Statistics of Complex Systems (MASCOS. This is certainly the right mathematics facility to support the complexity economics work.
The School of Economics at UNSW houses both the Economic Design Network (EDN) and the The Society of Heterodox Economists (SHE).
The EDN supports research and scholarship in economic theory and experimental economics, and in its application to the design of economic policy. They claim;
By encouraging interdisciplinary research and policy innovation, using state of the art techniques in economic theory and experimental economics, it will create practical tools that can be used to solve complex social and economic problems.
By linking Australasian researchers into multidisciplinary teams and networks involving some of the best scholars and centres for economic theory and experimental economics around the world, it will also build on our strengths and help us to create a world class economic design capacity in the region.
SHE represents a collaboration of economists outside the mainstream. Annual conferences, workshops, a working paper series and a virtual forum are also coordinated by SHE.
These two together offer the potential for the development of a centre for complexity economics.
I should note that my earlier post didn't adequately deal with my equivalent for economics of the unified field theory in physics. I touched on some of it on my post about John Quiggin's lecture.
The argument proceeds simply;
1. Neo-classical economics is inadequate as science as its assumptions (especially methodological individualism and methodological equilibriation) do not fit most real world circumstances.
2. Behavioural economics and institutional economics are both attempts to understand economic behaviour as systems - in a way, where do the preferences of individuals come from.
3. Evolutionary economics and economic dynamics attempt to deal with the fact that economic systems are, in reality, seldom in an equilibrium state.
4. The fact that the neo-classicists force economic problems to be tractable as constrained optimisation problems doesn't mean the use of mathematics is wrong, it is just the wrong mathematics.
5. If we posit that preferences are formed by experience of previous market transactions and that the question to study is how changes occur not what happens at "equilibrium" then the mathematics to be applied is the mathematics of complexity.
Finally, I draw a distinction between economic science and political economy that builds on John Neville Keynes original distinction between positive economics, normative economics and the art of economics. For me the latter is a separation of the issue into the three fields - economic science which describes how agents react to actions of other agents in economic affairs, ethics which is what our policy goals are (we should promote equity or we should promote efficiency) which are combined to create the kind of political economy practiced by Adam Smith - advocating policy positions.
I fully acknowledge the claim that many political economists would make that "economic science" is almost never practiced as it claims to be. I would however further assert that other aspects that appear in heterodox economics are either specific examples of institutions (more specifically the way that power is exerted to create preferences) or contentions about unstated ethical goals.
Novae Meridianae Demetae Dexter delenda est
I said the centre should be in an institution with a mathematics department and an IT department able to support it.
Today I became aware of the Australian Centre for Commercial Mathematics, whose "mission is to conduct projects with industry to solve complex problems using advanced mathematics and statistics." It only commenced in January this year so it hasn't taken me too long to discover it.
The centre itself is based on the success over the last thre years of the Australian Research Council Centre of Excellence for Mathematics and Statistics of Complex Systems (MASCOS. This is certainly the right mathematics facility to support the complexity economics work.
The School of Economics at UNSW houses both the Economic Design Network (EDN) and the The Society of Heterodox Economists (SHE).
The EDN supports research and scholarship in economic theory and experimental economics, and in its application to the design of economic policy. They claim;
By encouraging interdisciplinary research and policy innovation, using state of the art techniques in economic theory and experimental economics, it will create practical tools that can be used to solve complex social and economic problems.
By linking Australasian researchers into multidisciplinary teams and networks involving some of the best scholars and centres for economic theory and experimental economics around the world, it will also build on our strengths and help us to create a world class economic design capacity in the region.
SHE represents a collaboration of economists outside the mainstream. Annual conferences, workshops, a working paper series and a virtual forum are also coordinated by SHE.
These two together offer the potential for the development of a centre for complexity economics.
I should note that my earlier post didn't adequately deal with my equivalent for economics of the unified field theory in physics. I touched on some of it on my post about John Quiggin's lecture.
The argument proceeds simply;
1. Neo-classical economics is inadequate as science as its assumptions (especially methodological individualism and methodological equilibriation) do not fit most real world circumstances.
2. Behavioural economics and institutional economics are both attempts to understand economic behaviour as systems - in a way, where do the preferences of individuals come from.
3. Evolutionary economics and economic dynamics attempt to deal with the fact that economic systems are, in reality, seldom in an equilibrium state.
4. The fact that the neo-classicists force economic problems to be tractable as constrained optimisation problems doesn't mean the use of mathematics is wrong, it is just the wrong mathematics.
5. If we posit that preferences are formed by experience of previous market transactions and that the question to study is how changes occur not what happens at "equilibrium" then the mathematics to be applied is the mathematics of complexity.
Finally, I draw a distinction between economic science and political economy that builds on John Neville Keynes original distinction between positive economics, normative economics and the art of economics. For me the latter is a separation of the issue into the three fields - economic science which describes how agents react to actions of other agents in economic affairs, ethics which is what our policy goals are (we should promote equity or we should promote efficiency) which are combined to create the kind of political economy practiced by Adam Smith - advocating policy positions.
I fully acknowledge the claim that many political economists would make that "economic science" is almost never practiced as it claims to be. I would however further assert that other aspects that appear in heterodox economics are either specific examples of institutions (more specifically the way that power is exerted to create preferences) or contentions about unstated ethical goals.
Novae Meridianae Demetae Dexter delenda est
Monday, July 18, 2011
Complexity economics
I'm currently slaving away trying to write a piece on the importance of complexity economics to public policy. This builds on all the critiques of the neo-classical orthodoxy which I enjoy.
Against the orthodoxy there is arrayed a group that refers to itself as either heterodox economics or political economy. This includes a large strand that rejects the use of mathematics in economics and also make a cry for plurality.
My piece focuses on an alternative view that behavioural, institutional and evolutionary economics all form facets of complexity economics, which has fundamentally different underlying axioms than the neo-classical model, but is nonetheless able to be constructed in mathematical form.
I do so because just as the neo-classical revolution in economics was spurred by the corresponding changes in economic activity (the latter, or sometimes second, industrial revolution) so the issues of the digital economy require a response in economic theory.
As I do so I despair at how little either the intellectual context of economics is taught in Australian Universities, and how little of the more recent behavioural theories occur.
Then I receive by e-mail the results of the policy opinion survey conducted by the Economic Society of Australia. The responses were few (just under 500) but nearly two-thirds were employed as economists, over 80% had Honours degrees or more, and they were fairly evenly divided between private sector, public sector and university employment.
In response to two questions on whether Australian undergraduate economics degrees should include more on both behavioural economics and the context of economics a majority agreed with the proposition.
The people surveyed as either the providers of the courses or the employers of the output should surely be doing more than just responding to the survey.
A challenger in Australia right now would be finding enough staff qualified to conduct the courses.
My view is that we need a National Centre for Complexity Economics housed in an institution with both a mathematics and an IT faculty interested in assisting with the research and training in the centre.
Novae Meridianae Demetae Dexter delenda est
Against the orthodoxy there is arrayed a group that refers to itself as either heterodox economics or political economy. This includes a large strand that rejects the use of mathematics in economics and also make a cry for plurality.
My piece focuses on an alternative view that behavioural, institutional and evolutionary economics all form facets of complexity economics, which has fundamentally different underlying axioms than the neo-classical model, but is nonetheless able to be constructed in mathematical form.
I do so because just as the neo-classical revolution in economics was spurred by the corresponding changes in economic activity (the latter, or sometimes second, industrial revolution) so the issues of the digital economy require a response in economic theory.
As I do so I despair at how little either the intellectual context of economics is taught in Australian Universities, and how little of the more recent behavioural theories occur.
Then I receive by e-mail the results of the policy opinion survey conducted by the Economic Society of Australia. The responses were few (just under 500) but nearly two-thirds were employed as economists, over 80% had Honours degrees or more, and they were fairly evenly divided between private sector, public sector and university employment.
In response to two questions on whether Australian undergraduate economics degrees should include more on both behavioural economics and the context of economics a majority agreed with the proposition.
The people surveyed as either the providers of the courses or the employers of the output should surely be doing more than just responding to the survey.
A challenger in Australia right now would be finding enough staff qualified to conduct the courses.
My view is that we need a National Centre for Complexity Economics housed in an institution with both a mathematics and an IT faculty interested in assisting with the research and training in the centre.
Novae Meridianae Demetae Dexter delenda est
Friday, July 08, 2011
What have we learned from the GFC?
Had the pleasure to listen to John Quiggin at yesterday's Australian Economics Society seminar on "What have we learned from the Global Financial Crisis?"
By we he meant the economics profession and policy makers.
The core of the talk was basically a quick - and very good - summary of his book Zombie Economics
The thesis is that there is a group of economic ideas that emerged from the failure of Keynesian economics to deal with the crisis of the 1970s (oil shock stagflation) that refuse to die. Instead, despite evidence that should kill them once and for all, they continue to roam the planet like zombies.
He collectively refers to the set of ideas as "market liberalism". There are five core ideas that he dissects;
1. The idea that the period starting with the 1980s was a "great moderation" that would see the end of the business cycle.
2. The efficient market hypothesis, that you can't use historical data to predict asset price moves because the price already includes all the available information. That is financial markets are the best possible guide to the value of assets.
3. Dynamic Stochastic General Equilibrium modeling and the inherent assumption that the economy never deviates far from equilibrium.
4. Trickle down economics and the idea that a focus on efficiency will guarantee that everyone is ultimately better off, even if equity diverges.
5. Privatisation and the belief that all economic activity is better performed in the private sector - even natural monopolies.
After he explained all of these theories, why they should be dead and how they are still emerging, in his talk he went on to cover a few bits about the economic profession that didn't make the book - and that I'm not going to do justice to here. The first was that we need to factor more of the learning of behavioural economics into microeconomic theory - less homo econimus in the theory. The second was a twin recognition of the problem of assuming markets at or near equilibrium and of the need for policy to focus on risk management.
Both the book and the lecture concluded with three statements of what is needed in economics;
1. More on realism, less on rigor
2. More on equity, less on efficiency
3. More on humility, less on hubris
The ultimate question here is whether we are just seeing the need for a few "tweaks" in neo-classical economics or the need for a fundamental revolution.
This raises the question of exactly what is "neo-classical" economics?
I referred to a great paper by Arnsperger and Varoufakis on this in discussing digital economy policy. That listed the three axioms of neo-classicism as;
1. Methodological individualism.
2. Methodological instrumentalism.
3. Methodological equilibriation.
At heart Quiggin is really endorsing not just the need to walk away from market liberalism as a philosophy, but to revise these axioms.
I take a wide view that behavioural economics, institutional economics and complexity economics are all manifestations of a "realist" economics that confronts axioms 1 and 3 with the reality that the "preferences" that determine agent choices are socially constructed by the interaction with other agents - particularly so with network effects - and that as a consequence the "system" is not only never at equilibrium but is more likely than not to have multiple not singular equilibria.
The neo-classicists themselves will point to all the ways that they might piecewise incorporate elements of a widely defined institutionalism, an excellent article by Philip Mirowski showed how this attempt ultimately fails.
That article ended with a nice piece that reads;
To attempt to portray all history as the end result of purposive constrained maximization is to make the same error as was made by early biologists who touted Darwinian evolution proved that man was the peak of the evolutionary process. Biologists now teach that there is never a peak or a maximum in evolution, which is merely a process of incomplete adaptation to circumstances that are shifting, partly as a result of past adaptations. As Victor Goldberg has wrtitten in the context of his study of contracts, "the results stemming from the establishment of new institutions or modifications in existing ones are seldom known precisely and are often widely divergent from the original expectations."
As I noted Quiggin's "we" was both academics and policy makers. The challenge of convincing academics is hard enough, but at least they should understand the theory. The problem with policy makers is that they have started to incant market theory and competition policy without any understanding.
This was a point eloquently put by Evan Jones at last year's Contesting Markets Symposium..
I think I have covered it is some of the concepts I outlined in my first submission to the Convergence Review wherein I argued for a better view of "competition policy".
I think the simplest way to describe it is that Quiggin critiques Trickle Down theory, which argued that a focus on efficiency improves life for all. The way "efficiency" is now used it has become the policy objective itself. Market Liberalism as a theory said you don't need to worry about equity because efficiency improves everyone's lot, modern policy theory doesn't even get that far.
Novae Meridianae Demetae Dexter delenda est
By we he meant the economics profession and policy makers.
The core of the talk was basically a quick - and very good - summary of his book Zombie Economics
The thesis is that there is a group of economic ideas that emerged from the failure of Keynesian economics to deal with the crisis of the 1970s (oil shock stagflation) that refuse to die. Instead, despite evidence that should kill them once and for all, they continue to roam the planet like zombies.He collectively refers to the set of ideas as "market liberalism". There are five core ideas that he dissects;
1. The idea that the period starting with the 1980s was a "great moderation" that would see the end of the business cycle.
2. The efficient market hypothesis, that you can't use historical data to predict asset price moves because the price already includes all the available information. That is financial markets are the best possible guide to the value of assets.
3. Dynamic Stochastic General Equilibrium modeling and the inherent assumption that the economy never deviates far from equilibrium.
4. Trickle down economics and the idea that a focus on efficiency will guarantee that everyone is ultimately better off, even if equity diverges.
5. Privatisation and the belief that all economic activity is better performed in the private sector - even natural monopolies.
After he explained all of these theories, why they should be dead and how they are still emerging, in his talk he went on to cover a few bits about the economic profession that didn't make the book - and that I'm not going to do justice to here. The first was that we need to factor more of the learning of behavioural economics into microeconomic theory - less homo econimus in the theory. The second was a twin recognition of the problem of assuming markets at or near equilibrium and of the need for policy to focus on risk management.
Both the book and the lecture concluded with three statements of what is needed in economics;
1. More on realism, less on rigor
2. More on equity, less on efficiency
3. More on humility, less on hubris
The ultimate question here is whether we are just seeing the need for a few "tweaks" in neo-classical economics or the need for a fundamental revolution.
This raises the question of exactly what is "neo-classical" economics?
I referred to a great paper by Arnsperger and Varoufakis on this in discussing digital economy policy. That listed the three axioms of neo-classicism as;
1. Methodological individualism.
2. Methodological instrumentalism.
3. Methodological equilibriation.
At heart Quiggin is really endorsing not just the need to walk away from market liberalism as a philosophy, but to revise these axioms.
I take a wide view that behavioural economics, institutional economics and complexity economics are all manifestations of a "realist" economics that confronts axioms 1 and 3 with the reality that the "preferences" that determine agent choices are socially constructed by the interaction with other agents - particularly so with network effects - and that as a consequence the "system" is not only never at equilibrium but is more likely than not to have multiple not singular equilibria.
The neo-classicists themselves will point to all the ways that they might piecewise incorporate elements of a widely defined institutionalism, an excellent article by Philip Mirowski showed how this attempt ultimately fails.
That article ended with a nice piece that reads;
To attempt to portray all history as the end result of purposive constrained maximization is to make the same error as was made by early biologists who touted Darwinian evolution proved that man was the peak of the evolutionary process. Biologists now teach that there is never a peak or a maximum in evolution, which is merely a process of incomplete adaptation to circumstances that are shifting, partly as a result of past adaptations. As Victor Goldberg has wrtitten in the context of his study of contracts, "the results stemming from the establishment of new institutions or modifications in existing ones are seldom known precisely and are often widely divergent from the original expectations."
As I noted Quiggin's "we" was both academics and policy makers. The challenge of convincing academics is hard enough, but at least they should understand the theory. The problem with policy makers is that they have started to incant market theory and competition policy without any understanding.
This was a point eloquently put by Evan Jones at last year's Contesting Markets Symposium..
I think I have covered it is some of the concepts I outlined in my first submission to the Convergence Review wherein I argued for a better view of "competition policy".
I think the simplest way to describe it is that Quiggin critiques Trickle Down theory, which argued that a focus on efficiency improves life for all. The way "efficiency" is now used it has become the policy objective itself. Market Liberalism as a theory said you don't need to worry about equity because efficiency improves everyone's lot, modern policy theory doesn't even get that far.
Novae Meridianae Demetae Dexter delenda est
Wednesday, June 29, 2011
Where is Australia's FuturICT?
I established my DigEcon Research brand as a place to undertake policy research on the implications of the Digital Economy. One of the issues I have in my frame is that the neoclassical model of economics simply doesn't cut it.
There are a couple of reasons. The first is that it can't cope with the fact that there are no longer real restraints to the size of firms. The second is it doesn't account for "network effects" - or generally demand side economies of scale and scope.
FuturICT is a proposed European "flagship" project - looks like what we'd call a Co-operative Research Centre. Their pitch is;
The ultimate goal of the FuturICT flagship project is to understand and manage complex, global, socially interactive systems, with a focus on sustainability and resilience. Revealing the hidden laws and processes underlying societies probably constitutes the most pressing scientific grand challenge of our century and is equally important for the development of novel robust, trustworthy and adaptive information and communication technologies (ICT), based on socially inspired paradigms.
We think that integrating ICT, Complexity Science and the Social Sciences will create a paradigm shift, facilitating a symbiotic co-evolution of ICT and society. Data from our complex globe-spanning ICT system will be leveraged to develop models of techno-socio-economic systems. In turn, insights from these models will inform the development of a new generation of socially adaptive, self-organized ICT systems.
Paul Ormerod has provided a take on what that means in economics and posed four hard problems. Anyone familiar with his books Butterfly Economics
and The Death of Economics
will know that he comes from the school of mathematically aware heterodox economists.
A possible weakness in the Ormerod style is that the straw-man of neoclassicism he presents is one that can be rebuffed by economists who argue that it is all in the simplifying assumptions and that the neo-classical model can deal with the specific issues when it needs to.
A better place to start is a paper by Arnsperger and Varoufakis that identifies the three axioms of neo-classical economics. They are;
1. Methodological individualism. All agents are treated as individuals, and structures are the creation of agents never the other way around. verything worth knowing can be found by studying individuals.
2. Methodological instrumentalism. All behaviour is preference-driven, and preference is given, current and fully-determined. This doesn't permit a decision on emotion or any other basis. It is philosophically the equivalent of determinism versus free-will - just not determined by God.
3. Methodological equilibriation. The assumption that an economic system starts at or will reach an equilibrium.
Each of these is challenged by a model that sees economic agents as being influenced continually by other agents, their preferences being shaped by the networks they are part of and demand and supply "functions" that are always massively auto-correlated and hence more likely to have unstable than stable, and multiple rather than singular, "equilibria".
But we don't research that stuff here.
Novae Meridianae Demetae Dexter delenda est
There are a couple of reasons. The first is that it can't cope with the fact that there are no longer real restraints to the size of firms. The second is it doesn't account for "network effects" - or generally demand side economies of scale and scope.
FuturICT is a proposed European "flagship" project - looks like what we'd call a Co-operative Research Centre. Their pitch is;
The ultimate goal of the FuturICT flagship project is to understand and manage complex, global, socially interactive systems, with a focus on sustainability and resilience. Revealing the hidden laws and processes underlying societies probably constitutes the most pressing scientific grand challenge of our century and is equally important for the development of novel robust, trustworthy and adaptive information and communication technologies (ICT), based on socially inspired paradigms.
We think that integrating ICT, Complexity Science and the Social Sciences will create a paradigm shift, facilitating a symbiotic co-evolution of ICT and society. Data from our complex globe-spanning ICT system will be leveraged to develop models of techno-socio-economic systems. In turn, insights from these models will inform the development of a new generation of socially adaptive, self-organized ICT systems.
Paul Ormerod has provided a take on what that means in economics and posed four hard problems. Anyone familiar with his books Butterfly Economics
and The Death of Economics will know that he comes from the school of mathematically aware heterodox economists.A possible weakness in the Ormerod style is that the straw-man of neoclassicism he presents is one that can be rebuffed by economists who argue that it is all in the simplifying assumptions and that the neo-classical model can deal with the specific issues when it needs to.
A better place to start is a paper by Arnsperger and Varoufakis that identifies the three axioms of neo-classical economics. They are;
1. Methodological individualism. All agents are treated as individuals, and structures are the creation of agents never the other way around. verything worth knowing can be found by studying individuals.
2. Methodological instrumentalism. All behaviour is preference-driven, and preference is given, current and fully-determined. This doesn't permit a decision on emotion or any other basis. It is philosophically the equivalent of determinism versus free-will - just not determined by God.
3. Methodological equilibriation. The assumption that an economic system starts at or will reach an equilibrium.
Each of these is challenged by a model that sees economic agents as being influenced continually by other agents, their preferences being shaped by the networks they are part of and demand and supply "functions" that are always massively auto-correlated and hence more likely to have unstable than stable, and multiple rather than singular, "equilibria".
But we don't research that stuff here.
Novae Meridianae Demetae Dexter delenda est
Tuesday, June 28, 2011
The economics of growth and innovation
There is an outfit in the US called the The Information Technology and Innovation Foundation. They are best described by a quote from a job ad;
ITIF is a growing non-profit, non-partisan public policy think tank committed to articulating and advancing a pro-productivity and pro-innovation public policy agenda. We believe that innovation is central to spurring economic growth and addressing key societal challenges and that public policies should actively work to support innovation, productivity and economic competitiveness. ITIF works to help policy makers understand the critical importance of innovation and innovation policy. We produce publications, hold events, meet with policy makers, speak at forums and engage in other activities to shape innovation policy.
Their policy settings put them somewhere generally into the "free market" camp, with a bit of sectoral special pleading.
The President of the ITIF Dr Robert Atkinson has just published an interesting article The Trouble with Progressive Economics in the new Breakthrough Journal. It is worth a read.
Atkinson starts by asserting that progressives are "flummoxed" by economic policy, saying;
Most can't fathom why the neoclassical economic consensus shows no sign of being overthrown despite its role in causing the greatest economic crisis since the Great Depression. Compounding their befuddlement is the fact that the era of bipartisan Keynesianism (mid-1940s to mid-1970s) out-performed the era of bipartisan neoliberalism (mid-1970s to today) along virtually every metric, including unemployment rates, GDP growth, income equality, and the trade deficit.
He suggests that progressives therefore struggle with the reality that neoclassical economics remain the north star of most economic policy makers, including many in the Obama administration.
Atkinson first defines for himself "progressive economics" and then suggests that neither it nor neo-classical is fit for the task, writing;
What passes for progressive economic doctrine today is a haphazardly updated version of mid-century Keynesianism that has largely failed to come to terms with the realities of the globalized, innovation-powered, 21st century economy in which we live. Just as classical liberal economics was unable to respond to the challenges of the Great Depression, and Keynesianism was unable to respond to stagflation in the 1970s, neither anti-government neoliberalism, nor anti-corporate Keynesianism are fit to deal with America's present economic predicament.
I suggest Atkinson needs to get out a bit more - for heterodox economics is made up of a much wider variety than simply New Keynesians. (see note)
That said it is his general critique that is of interest, a critique that can apply equally well to neoclassical and New Keynesians.
Firstly neither has a real explanation for growth. Neoclassical growth theory refers to some outside force of technological progress whereas the Keynesian view has Government expenditure as the engine of growth. The latter can be, as it was in the sixties and seventies, when it funds R&D and knowledge. He rightly notes that progressive economics has "focused less on promoting growth and more on fairly distributing its fruits" so "what passes for a progressive growth agenda mostly remains a redistribution agenda."
I wouldn't back away from the need for the progressives to point out how inequitable neoclassical theory is, in particular its definition and pursuit of efficiency. I also wouldn't back a Green agenda of labelling "growth" per se "bad", growth is the only way to make the less well off better off without doing a Robin Hood.
And so Atkinson concludes;
the progressive canon still lacks a coherent or credible theory for how to spur productivity, innovation, and competitiveness. Little wonder that many voters find the neoclassical story, flawed as it is, more appealing: it at least claims to produce a larger pie. ...
Developing a credible growth agenda will require progressives to fully embrace efforts to accelerate technological innovation and productivity growth. The best scholarship today identifies knowledge, technology, entrepreneurship, and innovation as the primary drivers of long-term economic growth. Over the long-term, innovation (the development of new products, services, processes, and business models) creates jobs and enables higher wages and lower prices. Moreover, sustained increases in rates of innovation and productivity growth likely represent the only long-term path to equitable growth and a sustained social welfare state in an increasingly competitive and globalized economy.
But innovation does not simply materialize out of thin market air. In fact, sustained government investment was required to produce many of the big innovations we take for granted, from the steam engine to the Internet to the iPhone. Unfortunately, progressive Keynesians, like neoclassical economists and a large swath of the American political elite, tend to ignore the government's role in proactively spurring innovation. Neoclassical economists have an excuse: they believe the market drives innovation and that governments need not get involved since government interference in markets only makes matters worse.
With this I agree. I part company with Atkinson when he says;
Supporting innovation and productivity will, by necessity, require progressives to support corporations. The vast majority of jobs and economic activity are in the private sector. In fact, most small business jobs, especially the "Main Street" jobs progressives claim to love, are fundamentally dependent upon the health of corporate manufacturing and the technology sector. As such, improving the productivity and growth rate of the US economy requires helping private firms, including corporations, become more productive and innovative. Unfortunately, progressives today overwhelmingly view businesses, especially large multinational corporations, as part of the problem, not the solution.
Most large corporations are the opposite of innovation.
There are three strands that need to be developed for an Atkinson style "progressive economics".
1. An understanding of "managerial capitalism"
Capitalism as a theory is founded in the concept of a unitary producer who accumulates capital. The reality is firms which are an agglomeration of "capital" and the issue of the principal/agent problem occurs - do managers do what shareholders want. This has been very poorly resolved by defining a purpose of the firm to "create shareholder value" and managers to manage to the share price. Firms need to exist for a market purpose and the thing shareholders want from managers is entrepreneurship to perform that purpose better.
2. An understanding of the source of profit
Basic economics talks of production functions that convert labour, capital, entrepreneurship and land (or resources) into goods. But all modelling tends to be focussed on just two dimensions of capital and labour. This conveniently enables two dimensional diagrams, but is more driven by the apparent ease of measuring quantities of labour and capital compared with the other two inputs. In reality "capital" isn't as simply quantified as it might seem, and labour has an annoying problem of being not of a uniform quality.
Indeed land can be treated as a special kind of capital and entrepreneurship as a special kind of labour, but both make the elegant mathematical models of the neo-classicist impossible to construct.
3. An understanding of the benefit of "spill-overs".
To the extent there is a growth theory that accounts for innovation it is Romer's New Economic Growth Theory. This explicitly allows for the fact that an innovation by a firm has some "public good" characteristics - others benefit from it. This runs counter to corporate thinking which is about their right to fully retain the benefit of innovation.
This issue is worse when it is added to the university sector and the desire for "commercialisation".
New Keynesians might struggle, but Neo-institutionalists (not New Institutionalists) wouldn't. This lot are also known as evolutionary economics and study the dynamics of markets and industries.
That would lead to an understanding of the need for a competition policy that focusses on externalising transactions, an intellectual property regime that does not grant excessive rights and an R&D policy that does not try to commercialise public investments.
Note: Interested readers may find out more at the website for the Association for Heterodox Economics. Their forthcoming conference features Australia's own Lynne Chester on regulation. There is one paper I'd really like to hear Dennis Badeen, Ontology and Pluralism: A cognitive map of ontologies in economics and the critique of neoclassical economics
Novae Meridianae Demetae Dexter delenda est
ITIF is a growing non-profit, non-partisan public policy think tank committed to articulating and advancing a pro-productivity and pro-innovation public policy agenda. We believe that innovation is central to spurring economic growth and addressing key societal challenges and that public policies should actively work to support innovation, productivity and economic competitiveness. ITIF works to help policy makers understand the critical importance of innovation and innovation policy. We produce publications, hold events, meet with policy makers, speak at forums and engage in other activities to shape innovation policy.
Their policy settings put them somewhere generally into the "free market" camp, with a bit of sectoral special pleading.
The President of the ITIF Dr Robert Atkinson has just published an interesting article The Trouble with Progressive Economics in the new Breakthrough Journal. It is worth a read.
Atkinson starts by asserting that progressives are "flummoxed" by economic policy, saying;
Most can't fathom why the neoclassical economic consensus shows no sign of being overthrown despite its role in causing the greatest economic crisis since the Great Depression. Compounding their befuddlement is the fact that the era of bipartisan Keynesianism (mid-1940s to mid-1970s) out-performed the era of bipartisan neoliberalism (mid-1970s to today) along virtually every metric, including unemployment rates, GDP growth, income equality, and the trade deficit.
He suggests that progressives therefore struggle with the reality that neoclassical economics remain the north star of most economic policy makers, including many in the Obama administration.
Atkinson first defines for himself "progressive economics" and then suggests that neither it nor neo-classical is fit for the task, writing;
What passes for progressive economic doctrine today is a haphazardly updated version of mid-century Keynesianism that has largely failed to come to terms with the realities of the globalized, innovation-powered, 21st century economy in which we live. Just as classical liberal economics was unable to respond to the challenges of the Great Depression, and Keynesianism was unable to respond to stagflation in the 1970s, neither anti-government neoliberalism, nor anti-corporate Keynesianism are fit to deal with America's present economic predicament.
I suggest Atkinson needs to get out a bit more - for heterodox economics is made up of a much wider variety than simply New Keynesians. (see note)
That said it is his general critique that is of interest, a critique that can apply equally well to neoclassical and New Keynesians.
Firstly neither has a real explanation for growth. Neoclassical growth theory refers to some outside force of technological progress whereas the Keynesian view has Government expenditure as the engine of growth. The latter can be, as it was in the sixties and seventies, when it funds R&D and knowledge. He rightly notes that progressive economics has "focused less on promoting growth and more on fairly distributing its fruits" so "what passes for a progressive growth agenda mostly remains a redistribution agenda."
I wouldn't back away from the need for the progressives to point out how inequitable neoclassical theory is, in particular its definition and pursuit of efficiency. I also wouldn't back a Green agenda of labelling "growth" per se "bad", growth is the only way to make the less well off better off without doing a Robin Hood.
And so Atkinson concludes;
the progressive canon still lacks a coherent or credible theory for how to spur productivity, innovation, and competitiveness. Little wonder that many voters find the neoclassical story, flawed as it is, more appealing: it at least claims to produce a larger pie. ...
Developing a credible growth agenda will require progressives to fully embrace efforts to accelerate technological innovation and productivity growth. The best scholarship today identifies knowledge, technology, entrepreneurship, and innovation as the primary drivers of long-term economic growth. Over the long-term, innovation (the development of new products, services, processes, and business models) creates jobs and enables higher wages and lower prices. Moreover, sustained increases in rates of innovation and productivity growth likely represent the only long-term path to equitable growth and a sustained social welfare state in an increasingly competitive and globalized economy.
But innovation does not simply materialize out of thin market air. In fact, sustained government investment was required to produce many of the big innovations we take for granted, from the steam engine to the Internet to the iPhone. Unfortunately, progressive Keynesians, like neoclassical economists and a large swath of the American political elite, tend to ignore the government's role in proactively spurring innovation. Neoclassical economists have an excuse: they believe the market drives innovation and that governments need not get involved since government interference in markets only makes matters worse.
With this I agree. I part company with Atkinson when he says;
Supporting innovation and productivity will, by necessity, require progressives to support corporations. The vast majority of jobs and economic activity are in the private sector. In fact, most small business jobs, especially the "Main Street" jobs progressives claim to love, are fundamentally dependent upon the health of corporate manufacturing and the technology sector. As such, improving the productivity and growth rate of the US economy requires helping private firms, including corporations, become more productive and innovative. Unfortunately, progressives today overwhelmingly view businesses, especially large multinational corporations, as part of the problem, not the solution.
Most large corporations are the opposite of innovation.
There are three strands that need to be developed for an Atkinson style "progressive economics".
1. An understanding of "managerial capitalism"
Capitalism as a theory is founded in the concept of a unitary producer who accumulates capital. The reality is firms which are an agglomeration of "capital" and the issue of the principal/agent problem occurs - do managers do what shareholders want. This has been very poorly resolved by defining a purpose of the firm to "create shareholder value" and managers to manage to the share price. Firms need to exist for a market purpose and the thing shareholders want from managers is entrepreneurship to perform that purpose better.
2. An understanding of the source of profit
Basic economics talks of production functions that convert labour, capital, entrepreneurship and land (or resources) into goods. But all modelling tends to be focussed on just two dimensions of capital and labour. This conveniently enables two dimensional diagrams, but is more driven by the apparent ease of measuring quantities of labour and capital compared with the other two inputs. In reality "capital" isn't as simply quantified as it might seem, and labour has an annoying problem of being not of a uniform quality.
Indeed land can be treated as a special kind of capital and entrepreneurship as a special kind of labour, but both make the elegant mathematical models of the neo-classicist impossible to construct.
3. An understanding of the benefit of "spill-overs".
To the extent there is a growth theory that accounts for innovation it is Romer's New Economic Growth Theory. This explicitly allows for the fact that an innovation by a firm has some "public good" characteristics - others benefit from it. This runs counter to corporate thinking which is about their right to fully retain the benefit of innovation.
This issue is worse when it is added to the university sector and the desire for "commercialisation".
New Keynesians might struggle, but Neo-institutionalists (not New Institutionalists) wouldn't. This lot are also known as evolutionary economics and study the dynamics of markets and industries.
That would lead to an understanding of the need for a competition policy that focusses on externalising transactions, an intellectual property regime that does not grant excessive rights and an R&D policy that does not try to commercialise public investments.
Note: Interested readers may find out more at the website for the Association for Heterodox Economics. Their forthcoming conference features Australia's own Lynne Chester on regulation. There is one paper I'd really like to hear Dennis Badeen, Ontology and Pluralism: A cognitive map of ontologies in economics and the critique of neoclassical economics
Novae Meridianae Demetae Dexter delenda est
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