Contemporary Issues in Heterodox Economics

Implications for Theory and Policy Action

Arturo Hermann, Simon Mouatt, Arturo Hermann, Simon Mouatt

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000199499
• Edition: 1
• Topic: Economía
• Subtopic: Política comercial

Heterodox economics can provide a more complete and robust explanation of economic realities than orthodox (or mainstream) economics. Contemporary Issues in Heterodox Economics: Implications for Theory and Policy Action argues that this greater explanatory power gives heterodox economics the ability to illuminate appropriate policy for the major crises of our time, as well as proffer the basis for a more rounded, pluralist approach to economic theory.

The chapters in this wide-ranging volume address some of the key issues facing the global economy, including the growing disparity of income/wealth between persons and economic areas, environmental degradation, issues associated with employment, and the regularity of economic/financial crises. The authors examine potential policy responses such as modern monetary theory, models of public ownership, and the need to move beyond standard concepts of growth. They also explore the deficiencies of orthodox economics, and contend that a more pluralist approach to economics is required in the public sphere, in academia, and in the classroom in order to help face the challenges of the twenty-first century.

This book is invaluable reading for students and scholars across the social sciences who are interested in alternatives to mainstream economic thinking.

Part I

Pluralism, ethics and economic method

1

Dynamics versus statics

On the nature of heterodox and orthodox economics

Anders Ekeland

Introduction

This chapter is a contribution to the discussion of the question: what are the fundamental characteristics of heterodox economics? My answer is very simple: dynamics. Heterodox economics has real, causal time; orthodox economics has not. Of all economics systems we have seen, capitalism is clearly the most dynamic. The chapter argues that the motivation to use a static model to understand such a dynamic phenomenon was, and is, politically and ideologically motivated. The goal of all founding fathers and high priests of neoclassical economics, Walras, Pareto, Hicks, Samuelson, was of course to have a dynamic model, proving that free, perfect markets gave the optimal use of resources and maximal utility. As it turned out – at every stage of the evermore sophisticated mathematical version of Walras’s initial model, it became more and more obvious that it was impossible to prove the dynamic stability of the model; and without proof of stability – the static Walras model was scientifically irrelevant. It could not say anything about a dynamic phenomenon, but as we know by now, scientific irrelevance of the model did not matter much, because of its enormous political relevance. This means that static versus dynamic models is the fundamental dividing line between heterodox and orthodox economics. When you have real time, real causation and real feedback loops in your model, you have a model suited to the object of study, the economic aspect of human society, and in particular such a highly dynamic system as capitalism. That is science; a static model is fundamentally ideological.

The chapter primarily relates to two recent contributions to the debate about the essence of heterodox economics, Tony Lawson’s ‘Economics and Ideology’ (Lawson 2016) and Geoffrey Hodgson’s ‘Is there a Future for Heterodox Economics?’ (Hodgson 2019). Both Lawson and Hodgson discuss whether orthodox economics is an ideology, but while having somewhat different definitions, they both have too narrow a concept of ideology, thus rejecting the view that orthodoxy is an ideology. Lawson argues that orthodoxy is a special kind of ideology, an ‘obsession’ with mathematics. Hodgson is mostly concerned to argue against the view that neoclassical theory is a pro-market ideology since it has been used to prove that socialist, centralised planning can work (2019, p. vi–viii). Whatever the case, as Hodgson argues, heterodox economists should perhaps take the view that ‘if you can’t beat it, join it’. Being aware that the dividing line is methodological, that the dividing line has fundamentally nothing to do with politics, could give heterodox economics a common paradigmatic–theoretic fundament, which Hodgson correctly points out it lacks. In my opinion, Shaik’s (2016) concept of ‘real competition’ and ‘turbulent regulation’ is an example of a way to model the dynamics of capitalism that could be a common theoretical basis for heterodox economics in the future. Shaik has an analysis of competition that is fundamentally common to Marx, Schumpeter and Hayek who all agree that what really characterises capitalism is a specific type of (dynamic) order emerging out of (dynamic) disorder.

Scientific and vulgar economics: The case of Walras and Pareto

The debate on the nature, that is the scientific relevance of the various utility value theories, is of course not new. Marx put quite some effort into studying and elaborating upon a critique of ‘vulgar economics’. It is far beyond the scope of this chapter to deal with that transition of economics as science into what Marx called ‘vulgar’ economics. I will be more specific and look at the way modern, orthodox economics emerged (which, in my opinion, clearly indicates that it was an ideology from the start), by quoting extensively from Philip Mirowski’s book, ‘More Heat Than Light: Economics as Social Physics, Physics as Nature’s Economics’ (Mirowski 1989).

Mirowski’s book is a study of the aspirations of the early marginalists in an endeavour to create a ‘social physics’. A social theory mathematically formulated has the enormous advantage that, if one accepts the axioms, if the deductions are correct, then you must just accept the results. Deduction is logic, and you ‘can’t argue with logic’. In Mirowski’s opinion, economics suffers from a century-long physics envy. Mirowski’s problem is that neoclassical theory, as he himself is the first to point out, did not and does not slavishly imitate, or creatively apply, either the conceptual or the mathematical developments of physics. This is obvious from the very beginning in the last decades of the nineteenth century, but the split is becoming more and more obvious as relativity theory, entropy, path dependency, chaos theory become important in modern physics, as Mirowski points out with admirable detail and clarity. The key point is that, when challenged by contemporary pro-capitalist physicists and mathematicians about the lack of dynamics in their economic theory, both Walras and Pareto flatly refused to seriously engage with the challenges. That is always a very good indicator that we are dealing with a fact-denying, ideological project. From the very beginning Mirowski points to the real motivation of Walras, Pareto and the Marginalist school, making very clear who they saw as their adversaries:

The Marginalists appropriated the mathematical formalisms of mid-nineteenth-century energy physics, which for convenience we shall refer to as ‘proto-energetics’, made them their own by changing the labels on the variables, and then trumpeted the triumph of a truly ‘scientific economics’. Utility became the analogue of potential energy; the budget constraint became the slightly altered analogue of kinetic energy; and the Marginalists Revolutionaries marched off to do battle with classical, Historicist and Marxian economics.

(p. 9)¹

Mirowski’s first conclusion is that,

to put it bluntly, economics finally attained its objective to become a science through a wholesale appropriation of the mid-nineteenth-century physics of energy … The seemingly simultaneous discovery [of neoclassical theory] was the direct result of the preceding watershed in nineteenth-century physical theory, and the fact that all of the progenitors of neoclassicism were trained in engineering level physics and subject to particular philosophical trends of the time.

(pp. 196–197)

This conclusion would be easy to accept, if it were not for the fact that this ‘appropriation’ was of a very peculiar kind, or as Mirowski puts it:

this increased dependence on science had a number of perverse side effects. The first was that the more fervent the invocation of science (physics) by political economists, the correspondingly lesser were their efforts in delineating precisely what those methods consisted of, or in finding out what it was that contemporary scientists actually did.

(p. 198)

But this ‘invocation of science’ without really caring about it – is that not just the same as using physics as mere rhetoric, just to give scientific credibility to an ideology? What real scientists do is no mystery, they create theories to explain observations, and – as Mirowski describes in his book at length – change those theories when new facts obviously are not explained well by their original theories. But this is precisely what neoclassical economists do not do – and have never done. The Great Depression, or the last financial crisis, are both outside the theoretical framework of static equilibrium theory. Crisis is not a concept in a theory where equilibrium and harmony are the only things that really exist. Twenty per cent unemployment is also outside this paradigm, since there is no concept of involuntary unemployment. The static core of the neoclassical paradigm has shown itself to be practically immune from even the most dramatic economic events. Is that science – or ideology?

This, in my opinion, ideologically based hostility to using the dynamic methods of natural and social sciences is well documented by Mirowski. He describes how Walras, in an article, boasts that his new

physico-mathematical science of the Elements uses precisely the identical mathematical formulas [as physics]. Walras then proceeded to scold physicists who had expressed scepticism about the application of mathematics to utilitarian social theories on the ground that utility is not a measurable quantum …

(p. 220, original emphasis)

Already here we meet the problem with the way the early neoclassicals ‘imitate’ physics. They are ‘scolding’ the leading natural scientists who have some comments/objections to that imitation.

As Mirowski points out, the ambitions of Pareto were, if possible, even greater. Pareto argued that

thanks to the use of mathematics, this entire theory … rests on no more than a fact of experience, that is on the determination of the quantities of goods which constitute combinations between which the individual is indifferent. The theory of economic science thus acquires the rigor of rational mechanics.

(p. 221)

As we will see below, Mirowski is not impressed by Pareto’s grasp of physics, be it rational mechanics or more modern theories.

But let us first look at the one person who clearly had all the mathematical training needed to get things right, Irving Fisher. Mirowski goes in detail through the efforts of Fisher to make a close analogy between mechanics and economics, where space in mechanics is the commodity in economics, force is a ‘marginal utility or disutility’, etc. (p. 224). After describing what Fisher tried to do, Mirowski is neither impressed nor amused: ‘Fisher, the most sophisticated scientist among the nineteenth-century neoclassical economists, still displayed an inadequate comprehension of the formalism of the energy concept and, as a corollary, lack of appreciation of the metaphorical dissonances involved’ (p. 228). Mirowski then goes through all of Fisher’s mistakes, which to a modern reader seem rather obvious: ‘At the top of the list, the identification of a particle with an individual is incorrect … Fisher’s next mistake is the conflation of two incompatible meanings of the term “work”’ (p. 229). But it is not only what Fisher wrote that fails to impress Mirowski, ‘the gaps in his lexicon of correspondences are more serious than that’ (p. 230). Again, we see this extraordinarily ‘amateurish’ imitation, even by people with superb mathematical skills. Is there really any other explanation than that the neoclassical school wanted their ‘results’ to be accepted as natural laws, that is, not to be opposed by anyone at all? Mirowski’s description of the reaction of Walras, Pareto and Fischer to the critique from the physicists and mathematicians clearly supports that hypothesis.

It would have been extraordinary for so many economists to mangle and misrepresent the energy model so frequently without eventually calling down the wrath of physicists upon their labours. Indeed, one of the skeletons in the neoclassical closet is that around the turn of the century, quite a number of physicists turned their attention to this species of upstart proto-energetics and pronounced it wanting.

(p. 241)

The reader probably already can guess what the reaction of the neoclassical core cadre was:

Time and again they [the neoclassicals] met these inquisitions with hurt, incomprehension, bluster, farrago, protests, the physics was irrelevant, and finally, a feeling of betrayal: How did it come to pass that those in the forefront of trying to make economics a science should be so abused by those whom they were trying to emulate?

(p. 241)

The last question is rather easily answered – the physicists were serious scientists, not ideologists, so they cared about conceptual consistency, mathematical rigour, empirical relevance as is amply demonstrated by Mirowski. The first man out is Joseph Bertrand, specialist in the mathematics of rational mechanics and the editor of the third edition of Lagrange’s Mecanique Analytique. Bertrand reviewed Cournot’s Recherches and Walras’s Théorie Mathématique de la Richesse Sociale. Mirowski sums up Bertrand’s view:

Most of his review centred on the thesis that the neglect of mathematical political economy in the French academy had been deserved, because the existing attempts had been devoid of any serious empirical content, not to mention their numerous mathematical and conceptual errors. … Bertrand observed that in general there would exist what in the modern literature is called false trading – namely, some exchanges are conducted at non-equilibrium prices in the process of trying to discover the market-clearing price. Bertrand pointed out, quite correctly...