Heterodox economics

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Heterodox economics refers to the approaches, or schools of economic thought, that are considered outside of mainstream, that is, orthodox economics. Heterodox economics is an umbrella term used to cover various separate unorthodox approaches, schools, or traditions. These include institutional, post-Keynesian, socialist, Marxian, feminist,Austrian, ecological, and social economics among others.^[1][2] These views may be contrasted with the framework used by the majority of economists, commonly referred to by its supporters as mainstream and by critics as orthodox. This framework consists of the neoclassical synthesis, which combines a neoclassical approach on microeconomics and Keynesian approach to macroeconomics, with varying degrees of emphasis.^[3][4]

It is difficult to define heterodox economics. The International Confederation of Associations for Pluralism in Economics (ICAPE) has avoided defining its umbrella too specifically, choosing instead to define its mission as "promoting pluralism in economics." A key challenge for "heterodoxy" is to define itself in ways that move beyond the rubric of "non-neoclassical" economics. In defining a common ground in the "critical commentary" some heterodox economists, such as Steve Cohn (Knox College, USA), have tried to do three things: (1) identify shared ideas that generate a pattern of heterodox critique across topics and chapters of introductory macro texts; (2) give special attention to ideas that link methodological differences to policy differences; and (3) characterize the common ground in ways that permit distinct paradigms to develop common differences with textbook economics in different ways.

History

A number of heterodox schools of economic thought challenged the dominance of neoclassical economics after the neoclassical revolution of the 1870s. In addition to socialist critics of capitalism, heterodox schools in this period included advocates of various forms of mercantilism, such as the American School dissenters from neoclassical methodology such as the historical school, and advocates of unorthodox monetary theories such as Social credit. Other heterodox schools active before and during the Great Depression included Technocracy and Georgism. In the case of Technocracy a Non-market economics system was proposed based on Energy accounting. In recent years more attention has been given people such as Frederick Soddy who inWealth, Virtual Wealth and Debt, turned his attention to the role of energy in economic systems. He criticized the focus on monetary flows in economics, arguing that real wealth was derived from the use of energy to transform materials into physical goods and services. Soddy's economic writings were largely ignored in his time, but would later be applied to the development ofbiophysical economics and ecological economics and also bioeconomics in the late 20th century.^[5]

Physical scientists and biologists were the first individuals to use energy flows to explain social and economic development.Joseph Henry, an American physicist and first secretary of the Smithsonian Institution, remarked that the "fundamental principle of political economy is that the physical labor of man can only be ameliorated by… the transformation of matter from a crude state to a artificial condition...by expending what is called power or energy."^[6][7]

The rise, and absorption into the mainstream of Keynesian economics, which appeared to provide a more coherent policy response to unemployment than unorthodox monetary or trade policies contributed to the decline of interest in these schools.

After 1945, the neoclassical synthesis of Keynesian and neoclassical economics resulted in a clearly defined mainstream position based on a division of the field into microeconomics (generally neoclassical but with a newly developed theory of market failure) and macroeconomics (divided between Keynesian and monetarist views on such issues as the role of monetary policy). Austrians and post-Keynesians who dissented from this synthesis emerged as clearly defined heterodox schools. In addition, the Marxist and institutionalist schools remained active.

Up to 1980 the most notable themes of heterodox economics in its various forms included:

1. rejection of the atomistic individual conception in favor of a socially embedded individual conception;
2. emphasis on time as an irreversible historical process;
3. reasoning in terms of mutual influences between individuals and social structures.

From 1980 (or thereabouts) significant changes begin to occur in economics; a number of new research programs began, in various ways, to be recognized by the mainstream economics. These include behavioral economics, complexity economics,evolutionary economics, experimental economics, neuroeconomics, and others. As a consequence, some heterodox economists, such as John B. Davis, proposed that the definition of heterodox economics has to be adapted to this new, more complex reality.^[8]

The argument of the previous section is that heterodox economics post-1980 is a complex structure, being composed out of two broadly different kinds of heterodox work, each internally differentiated with a number of research programs having different historical origins and orientations: the traditional left heterodoxy familiar to most and the 'new heterodoxy' resulting from other science imports.^[8]

Rejection of Neoclassical Economics

There is no single "heterodox economic theory"; there are many different "heterodox theories" in existence. "What they all share, however, is a rejection of the neoclassical orthodoxy as representing the appropriate tool for understanding the workings of economic and social life. The reasons for this rejection may vary." Some of the elements commonly found in heterodox critiques are listed below

Criticism of the neoclassical model of individual behavior

One of the most broadly accepted principles of neoclassical economics is the assumption of the "rationality of economic agents". Indeed, for a number of economists, the notion of rational maximizing behavior is taken to be synonymous with economic behavior (Becker 1976, Hirshleifer 1984). When some economists' studies do not embrace the rationality assumption, they are seen as placing the analyses outside the boundaries of the Neoclassical economics discipline (Landsberg 1989, 596).Neoclassical economics begins with the a priori assumptions that agents are rational and that they seek to maximize theirindividual utility (or profits) subject to environmental constraints. These assumptions provide the backbone for rational choice theory.

Many heterodox schools are critical of the homo economicus model of human behavior used in standard neoclassical model. A typical version of the critique is that of Satya Gabriel^[9]:

Neoclassical economic theory is grounded in a particular conception of human psychology, agency or decision-making. It is assumed that all human beings make economic decisions so as to maximize pleasure or utility. Some heterodox theories reject this basic assumption of neoclassical theory, arguing for alternative understandings of how economic decisions are made and/or how human psychology works. It is possible to accept the notion that humans are pleasure seeking machines, yet reject the idea that economic decisions are governed by such pleasure seeking. Human beings may, for example, be unable to make choices consistent with pleasure maximization due to social constraints and/or coercion. Humans may also be unable to correctly assess the choice points that are most likely to lead to maximum pleasure, even if they are unconstrained (except in budgetary terms) in making such choices. And it is also possible that the notion of pleasure seeking is itself a meaningless assumption because it is either impossible to test or too general to refute. Economic theories that reject the basic assumption of economic decisions as the outcome of pleasure maximization are heterodox.

Criticism of the neoclassical model of market equilibrium

Given market rationality, mainstream economists derive the familiar supply and demand functions which, under certain conditions, will lead to a determinate market clearing equilibrium. Under some conditions (with are less strict than the existence of equilibrium conditions) this equilibrium will be Pareto efficient.

Heterodox economics reject these fundamental assumptions on which most of neoclassical economics theory has been built. The concept of market equilibrium has been criticised by Austrians, post-Keynesians and others.

Hence, while mainstream economics may be defined in terms of the "rationality-individualism-equilibrium" nexus, heterodox economics may be defined in terms of a "institutions-history-social structure" nexus. Note that there is a different emphasis in distinguishing mainstream and heterodox economics in this way than is involved in distinguishing them as closed-system and an open-system approaches respectively (Lawson,1997);^[1] Dow, 2000) ^[10] It is often claimed that neoclassical theory is appropriate as a tool only under certain limited conditions, where there is "perfect" or "near-perfect" competition. While there is a large body of neoclassical analysis of imperfect competition, this terminology may be seen as incorporating the assumption that non-competitive markets represent minor deviations from an ideal or perfect norm.

Criticism of the neoclassical model of labor markets

Marxists view capitalism as inherently exploitative of labor, and regard neoclassical theories of the labor market as ideological devices to rationalise exploitation.

Non-specific criticisms

• That it is useless as a tool for understanding economic and social life.^[9]
• That all theories are valid so long as they are internally consistent.^[9]
• That neoclassical theory is a form of ideology or religion, which is grounded in unscientific concepts.^[9]

Most recent developments

Over the past two decades, the intellectual agendas of heterodox economists have taken a decidedly pluralist turn. Leading heterodox thinkers have moved beyond the established paradigms of Austrian, Feminist, Institutional-Evolutionary, Marxian, Post Keynesian, Radical, Social, and Sraffian economics—opening up new lines of analysis, criticism, and dialogue among dissenting schools of thought. This cross-fertilization of ideas is creating a new generation of scholarship in which novel combinations of heterodox ideas are being brought to bear on important contemporary and historical problems, such as socially-grounded reconstructions of the individual in economic theory; the goals and tools of economic measurement and professional ethics; the complexities of policymaking in today's global political economy; and innovative connections among formerly separate theoretical traditions (Marxian, Austrian, feminist, ecological, Sraffian, institutionalist, and post-Keynesian) (for a review of post-Keynesian economics, see Lavoie (1992); Rochon (1999)).

David Colander, an advocate of complexity economics, argues that the ideas of heterodox economists are now being discussed in the mainstream without mention of the heterodox economists, because the tools to analyze institutions, uncertainty, and other factors have now been developed by the mainstream. He suggests that heterodox economists should embrace rigorous mathematics and attempt to work from within the mainstream, rather than treating it as an enemy.^[11]

Energy economics relating to thermoeconomics, is a broad scientific subject area which includes topics related to supply anduse of energy. Thermoeconomists argue that economic systems always involve matter, energy, entropy, and information.^[12]Thermoeconomics is based on the proposition that the role of energy in biological evolution should be defined and understood through the second law of thermodynamics but in terms of such economic criteria as productivity, efficiency, and especially the costs and benefits of the various mechanisms for capturing and utilizing available energy to build biomass and do work.^[13][14]As a result, thermoeconomics are often discussed in the field of ecological economics, which itself is related to the fields ofsustainability and sustainable development.

Georgescu-Roegen reintroduced into economics, the concept of entropy from thermodynamics (as distinguished from what, in his view, is the mechanistic foundation of neoclassical economics drawn from Newtonian physics) and did foundational work which later developed into evolutionary economics. His work contributed significantly to bioeconomics and to ecological economics.^{[15][16][17][18][19]}

Fields or schools of heterodox economics

• American Institutionalist School
• Austrian economics # (partly within, and partly outside of mainstream economics)^[20]
• Binary Economics
• Bioeconomics §
• Complexity economics
• Ecological economics
• Evolutionary economics #§ (partly within mainstream economics)
• Economic methodology
• Econophysics
• Feminist economics #
• Gesellian economics
• Institutional economics # (partly within mainstream economics)
• Marxian economics #
• Mutualism
• Neuroeconomics
• Participatory economics
• Political economy (the term is used in various ways, also to describe certain kind of economics)
• Post-Keynesian economics
• Post scarcity
• Socialist economics #
• Sraffian economics #
• Supply-side economics
• Technocracy Incorporated (Energy Accounting)
• Thermoeconomics

# Listed in Journal of Economic Literature codes scrolled to at JEL: B5 - Current Heterodox Approaches.

§ Scrolled to at JEL: C73 - Stochastic and Dynamic games; Evolutionary games.

Research is also being done in the multidisciplinary field of cognitive science on individual decision making, information as a general phenomena, distributed cognition and their implications on economic dynamicity.

Some schools in the social sciences aim to promote certain perspectives: classical and modern political economy; economic history; economic sociology and anthropology; gender and racial issues in economics; economic ethics and social justice;development studies; and so on.

References

1. ^ ^{a b} LAWSON, Tony. The nature of heterodox economics. Advanced access copy, Oxford University Press, on behalf of the Cambridge Political Economy Society, 2005, in: Cambridge Journal of Economics 2006 30(4):483-505; doi:10.1093/cje/bei093
2. ^ JEL classification codes#Schools of economic thought and methodology JEL: B Subcategories.
3. ^ Barry, C. (1998). Political-economy: A comparative approach. Westport, CT: Praeger.
4. ^ Case, K. & Fair, R. (2008). The principles of economics. New Saddle River, NJ: Pearson.
5. ^ Soddy, Frederick. Encyclopedia of Earth
6. ^ Cutler J. Cleveland, "Biophysical economics", Encyclopedia of Earth, Last updated: September 14, 2006.
7. ^ "Mr. Soddy’s Ecological Economy", The New York Times, April 12, 2009.
8. ^ ^{a b} DAVIS, John B. The Nature of Heterodox Economics. post-autistic economics review, issue no. 40, 1 December 2006, article 3, pp.23-30.
9. ^ ^{a b c d} GABRIEL, Satya J. Introduction to Heterodox Economic Theory. , June 4, 2003 Satya J. Gabriel is a Professor of Economics at Mount Holyoke College
10. ^ DOW, S. C. Prospects for the Progress in Heterodox Economics. Journal of the History of Economic Thought 22 (2): 157-170., 2000.
11. ^ Colander, D. (2007). Pluralism and Heterodox Economics: Suggestions for an “Inside the Mainstream” Heterodoxy
12. ^ Baumgarter, Stefan. (2004). Thermodynamic Models, Modeling in Ecological Economics (Ch. 18)
13. ^ Peter A. Corning 1 *, Stephen J. Kline. (2000). Thermodynamics, information and life revisited, Part II: Thermoeconomics and Control information Systems Research and Behavioral Science, Apr. 07, Volume 15, Issue 6 , Pages 453 – 482
14. ^ Corning, P. (2002). “Thermoeconomics – Beyond the Second Law” – source: www.complexsystems.org
15. ^ Cleveland, C. and Ruth, M. 1997. When, where, and by how much do biophysical limits constrain the economic process? A survey of Georgescu-Roegen's contribution to ecological economics. Ecological Economics 22: 203-223.
16. ^ Daly, H. 1995. On Nicholas Georgescu-Roegen’s contributions to economics: An obituary essay. Ecological Economics 13: 149-54.
17. ^ Mayumi, K. 1995. Nicholas Georgescu-Roegen (1906-1994): an admirable epistemologist. Structural Change and Economic Dynamics 6: 115-120.
18. ^ Mayumi,K. and Gowdy, J. M. (eds.) 1999. Bioeconomics and Sustainability: Essays in Honor of Nicholas Georgescu-Roegen. Cheltenham: Edward Elgar.
19. ^ Mayumi, K. 2001. The Origins of Ecological Economics: The Bioeconomics of Georgescu-Roegen. London: Routledge.
20. ^ A Companion to the History of Economic Thought (2003). Blackwell Publishing. ISBN 0631225730 p. 452