by From Steve Keen The pedagogic pressure from students and the wider community has to be matched by the accelerated development of alternatives to neoclassical economics. Though we know much more today about the innate flaws in neoclassical thought than was known at the time of the Great Depression (Keen 2001), the development of a fully-fledged alternative to it is still a long way off. There are multiple alternative schools of thought extant – from Post Keynesian to Evolutionary and Behavioural Economics, and Econophysics – but these are not developed enough to provide a fully-fledged alternative to neoclassical economics. This should not dissuade us from dispensing completely with the neoclassical approach. For some substantial period, and especially while the actual economy remains
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from Steve Keen
The pedagogic pressure from students and the wider community has to be matched by the accelerated development of alternatives to neoclassical economics. Though we know much more today about the innate flaws in neoclassical thought than was known at the time of the Great Depression (Keen 2001), the development of a fully-fledged alternative to it is still a long way off. There are multiple alternative schools of thought extant – from Post Keynesian to Evolutionary and Behavioural Economics, and Econophysics – but these are not developed enough to provide a fully-fledged alternative to neoclassical economics.
This should not dissuade us from dispensing completely with the neoclassical approach. For some substantial period, and especially while the actual economy remains in turmoil, we have to accept a period of turmoil in the teaching of and research into economics. Hanging on to parts of a failed paradigm simply because it has components that other schools lack would be a tragic mistake, because it is from precisely such relics that a neoclassical vision could once again become dominant when – or rather if – the market economy emerges from this crisis.
Key here should be a rejection of neoclassical microeconomics in its entirety. This was the missing component of Keynes’s revolution. While he tried to overthrow macroeconomics shibboleths like Say’s Law, he continued to accept not merely the microeconomic concepts such as perfect competition, but also their unjustified projection into macroeconomic areas – as with his belief that the marginal productivity theory of income distribution, which is fundamentally a micro concept, applied at the macro level of wage determination.
From this failure to expunge the microeconomic foundations of neoclassical economics from post-Great Depression economics arose the “microfoundations of macroeconomics” debate that led ultimately to rational expectations representative agent macroeconomics, in which the economy is modelled as a single utility maximising individual who is blessed with perfect knowledge of the future.
Fortunately, behavioural economics provides the beginnings of an alternative vision as to how individuals operate in a market environment, while multi-agent modelling and network theory give us foundations for understanding group dynamics in a complex society. They explicitly emphasise what neoclassical economics has evaded: that aggregation of heterogeneous individuals results in emergent properties of the group which cannot be reduced to the behaviour of any “representative individual” amongst them. These approaches should replace neoclassical microeconomics completely.
The changes to economic theory beyond the micro level involve a complete recanting of the neoclassical vision. The vital first step here is to abandon the obsession with equilibrium.
The fallacy that dynamic processes must be modelled as if the system is in continuous equilibrium through time is probably the most important reason for the intellectual failure of neoclassical economics. Mathematics, sciences and engineering long ago developed tools to model out of equilibrium processes, and this dynamic approach to thinking about the economy should become second nature to economists.