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by Edward Fullbrook

eBook A Guide to What's Wrong with Economics (Anthem Frontiers of Global Political Economy) download ISBN: 1843311488
Author: Edward Fullbrook
Publisher: Anthem Press; 1st edition (October 12, 2004)
Language: English
Pages: 332
ePub: 1421 kb
Fb2: 1280 kb
Rating: 4.2
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Subcategory: Business and Finance

In June 2000, several Parisian economics students circulated a petition calling for the reform of their economics curriculum.

In June 2000, several Parisian economics students circulated a petition calling for the reform of their economics curriculum. Their complaint was the inability of the neoclassical economics they were studying to satisfy their need for a deep understanding of the operation of real-life economies. They called for a reform of the university curriculum that would tolerate analytical diversity and foster critical dialogue across contrasting approaches to economics.

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This book addresses key issues in development economics, from . Series: Anthem Frontiers of Global Political Economy (Book 1). Paperback: 554 pages.

This book addresses key issues in development economics, from macroeconomics, finance and governance to trade . 'Journal of International Development'.

Anthem Frontiers of Global Political Economy

Anthem Frontiers of Global Political Economy.

Series: Anthem Frontiers of Global Political Economy. Published by: Anthem Press.

Details (if other): Cancel. In clear and engaging prose, 'A Guide to What's Wrong with Economics' shows how interesting, relevant and exciting economics can be when it is pursued not as a defence of an antiquated and close-minded system of belief, but as a no-holds-barred inquiry looking for real-world truths.

Anthem Frontiers of Global Political Economy. Wimbledon Publishing Company.

Answer: Is economics becoming mathematics? .

This book is an effort to bring economics back to reality. Given the influence that economists often have on public policy, this is an important task. This book should be required reading for students taking economic classes and for heterodox economists who want to create a better economics. David F. Ruccio, Professor of Economics & Policy Studies, University of Notre Dame  .

Anthem Frontiers of Global Political Economy (4). Collections: Show more. This book reflects on the innovations that central banks have introduced since the 2008 collapse of Lehman Brothers to improve their modes of intervention, regulation and resolution of financial markets and financial institutions.

During a time of accelerating momentum for radical change in the study of economics, 'A Guide to What's Wrong with Economics' comprehensively re-examines the shortcomings of neoclassical economics and considers a number of alternative formulations.

Comments: (7)
In June 2000, several Parisian economics students circulated a petition calling for the reform of their economics curriculum. Their complaint was the inability of the neoclassical economics they were studying to satisfy their need for a deep understanding of the operation of real-life economies. They called for a reform of the university curriculum that would tolerate analytical diversity and foster critical dialogue across contrasting approaches to economics. Their demand was taken up by large numbers of students, and a similar demand was formulated by Ph.D. students at Cambridge University in the UK the next year. This reform movement has grown in Europe, under the rubric of "post-autistic economics." This volume presents their case, but with voices of professional economists rather than students.

The central critique in this edited volume of post-autistic economics papers, repeated by virtually every author, is that neoclassical economics does not describe real-world economies, and must be replaced by or supplemented with other approaches, among which are mentioned Marxism, institutional economics, post-Keynesian economics, and approaches based on Critical Realism. Authors arrive at this result by analyzing the undergraduate university curriculum, with some regard for the introductory graduate economics offering. It is indeed correct that the undergraduate curriculum should be far broader, with less stress on arcane analytical issues in microeconomic theory and greater stress on real-world economic phenomena and performance. The critics are also correct in complaining that attention to a broader variety of economic philosophies would benefit students, especially if offered in the context of the history of economic development and comparative economic systems. Moreover, it is sad that most economic majors are incapable of reading The Economist and have little sophistication in their understanding of economic issues. It is a sad fact that most economics departments support an undergraduate curriculum geared towards the few students who go on to do graduate work, whereas a special track could easily accommodate such students without the need for totally distorting the undergraduate curriculum.
This is much is a critique of pedagogy, not of economic theory. But, the post-autistic economists are just as concerned to present a critique of economic theory on the professional level as well. Unfortunately, they not only do not succeed, but they actually hurt their own cause. They treat standard economic theory as "unrealistic," when in fact, on the professional level, 99% of economists, starting with their Ph.D. dissertations, deal directly with real-world economic issues and problems. Very few young economists take the Walrasian general equilibrium model seriously, or use Representative Agent models in macroeconomics, or use microeconomic price theory except in the most elementary sense. Thus, the post-autistic critique comes off as seeming seriously misdirected.
A more gutsy critique would be to say that neoclassical economics is incorrect, not simply "unrealistic," and to provide alternatives precisely where the theory is incorrect. But, what alternatives? Marxism, Keynesianism, Institutionalism, Syndicalism, Austrian economics, and other non-neoclassical models all developed strongly for a while and then foundered. They certainly do not present analytically interesting alternatives to neoclassical economics. Of course, neoclassical economics is not the only credible starting point for serious economic analysis, but alternatives that are old, warmed-over theories that have not stood the test of time will not succeed in displacing the current orthodoxy. The pleas for democracy, toleration, and pluralism by the "heterodox" is simply an admission that they can't win the intellectual battle by having better theories, only by having more troupes.

Curiously, the authors are unaware of contemporary economic theoretical research, which addresses many of the serious problems with neoclassical theory. There is a short piece on behavioral economics, which has been one of the most vibrant areas in economics over the past 25 years, but the author assumes that behavioral economics is an alternative to neoclassical economics. Rather, it is a complement to economic theory and a source of empirical data that can be used to generate better models. Behavioral economics uses decision theory and game theory to critique the rational actor of traditional economic theory, but the profession is responding by revising the rational actor model, not by rejecting behavioral economics (see recent papers in Econometrica, the Quarterly Journal of Economics, and other journals).

The papers in this book generally present no challenge for the professional economist. Many are just superficial, and some are egregiously incorrect. Perhaps the most bizarre is the paper by Bernard Guerrien, "Can We Expect Anything From Game Theory?" Guerrien asserts, without evidence, that "game theory models are always `stories', like fables or parables, with no relation to real-life situations." Really? What about auction theory, which has been so successful in organizing the sale of bandwidth in many countries? How does one explain the role of game theory in revolutionizing Industrial Organization? Moreover, game theory is the basis for all of behavioral economics, and accounts for its experimental success in large part. Guerrien's description of game theory is quite faulty. "...players are supposed to choose separately and simultaneously one element of their strategy set...", says Guerrien, and launches a broad critique on that basis. But, he is just wrong. Evidently he never heard of extensive form games or behavioral strategies.
Post-autistic economics ignores the innovative work of many innovative, nonstandard, economists, including Ernst Fehr, Abijit Banerjee and Esther Duflo, Colin Camerer, Samuel Bowles, George Loewenstein, Daniel Kahneman, Benoit Mandelbrot, Edward Glaeser, David Laibson, Matthew Rabin, Bruno Frey, Elinor Ostrom, Barkley Rosser, Armin Falk, Simon Gaechter, Jean Tirole, Aldo Rustichini, and many others. It ignores neuroeconomics, econophysics, and the notion of the economy as a complex system, with its stress on agent-based modeling. These researchers transform analytical economics to meet the empirical challenges posed by new data. Some of them are extremely critical of neoclassical theory, and others are a bit more tolerant. Some of them call themselves behavioral economists, neuroeconomists, complexity economists, and the like, while others simply say they do economics, without the need to identify with a school of thought. Unlike leaders of the post-autistic school, however, they do not urge a retreat to philosophy or some defunct 20th century doctrine.
Fullbrook(F)has edited a collection of essays written by a group of heterodox economists belonging to the American Post Keynesian,Institutionalist,and Cambridge Keynesian schools of thought.Underlying most of the essays is the explicit or implicit belief that the use of formal mathematical and statistical tools by mainstream(neoclassical)economists has been counterproductive because the models used by such economists are not relevant to the real world.I will concentrate my review on Part V of the book,titled"Misuse of Mathematics and Statistics".First,there are a number of problems with the way in which particular mathematical and statistical techniques are used and applied(misused and misapplied)by mainstream(neoclassical)economists.Both J M Keynes and Benoit Mandelbrot pointed out that mathematical modeling in economics must allow for interdependencies,multiple equilibria,and feedback effects,while statistical applications to economics(econometrics)must first concentrate on the analysis of the data.An example would be to use a chi-square or Lexis-Q test for goodness of fit instead of just assuming that the normal(lognormal,binomial,etc.) distribution can be applied.Unfortunately,the essays by S.Keen and D.Gillies on mathematical economics and the essay by S.Ziliak on economic statistics and econometrics contain many unsupported claims,as well as errors of omission, that have little,if anything,to do with the attempts made by Keynes and Mandelbrot to convince economists to be much more careful and selective in their initial use of particular techniques .Ziliak(and his frequent coauthor, D.N. McCloskey)fails to realize that the problem facing econometricians is much,much more severe than just the apparent failure of most econometricians to successfully differentiate between the concepts of statistical significance and economic significance.The problem is that econometric practice is founded on the a priori belief that practically all analysis of economic data can be based on the assumption of normality.In fact,the reverse is the case.In general,the normal probability distribution does not come close to being a correct statistical approximation of most economic data.This was the major point made by Keynes in his 1939-40 exchange with Tinbergen on the logical foundations of econometrics.It has been one of the major points made by Mandelbrot since the mid 1950's.Nowhere in Ziliak's essay will the reader get these points because neither Keynes nor Mandelbrot are mentioned anywhere.Gillies' article is marred by his failure to point out that the mathematics of field theory,electron spin theory,string theory and super string theory in mathematical physics ,like much of neoclassical economics,has little or no empirical and/or experimental support now or even in the distant future.Gillies' claim that Keynes's footnote on p.280 of the General Theory meant that the mathematical analysis in chapter 20 could be ignored reveals Gillies' mathematical innumeracy and ineptness,since this chapter provides the mathematical proof of Keynes's claim that stable unemployment equilibriums, with associated involuntary unemployment levels,could occur due to the multiple equilibrium nature of capitalist economies.Of course,Keynes had explicitly provided his readers in chapter 19,pp.261-262,with the major result of his theory,that only in the case of a marginal propensity to spend with a value of 1(or if the mpc+mpi=1=mpc+mps,where the mpc is the marginal propensity to consume,mpi is the marginal propensity to invest,and mps is the marginal propensity to save)will a full employment equilibrium occur.Chapters 20 and 21 provide the interested reader with the formal mathematical derivation of the result stated by Keynes in chapter 19.Keynes successfully generalized neoclassical theory in chapters 20 and 21.Hence the footnote at the bottom of p.280.A reader who is not interested in the manner in which Keynes derived his result can skip this part of the chapter.In conclusion,Gillies' claim that the General Theory is a qualitative theory without any mathematical foundation is simply false(Gillies,p.197).Keynes's general theory is specified by the condition that w/p=mpl/(mpc+mpi),where w/p = the real wage.Keen's article claims that the theory of the perfectly competitive firm is based on a mathematical error.This claim is simply false.The theory is based on the subjective assumption by the owner of such a firm that it is impossible for him to raise or lower his price.Given this assumption,the firm's demand curve will appear as a horizontal line,which is the only way you can economically model such a firm.The conclusion is that he will receive the same price for different amounts of his output.Only after the basic economic assumptions have been specified will a mathematical representation consistent with the economic assumptions be supplied.The best exposition is in the third edition of C E Ferguson,1972,Microeconomic Theory,pp.123-124,251-253.Section 8.4,pp.255-270.Keen is correct that the 1957 article by Stigler in the Journal of Political Economy contains a mathematical error.Ferguson was well aware of this article(see Ferguson,1972,p.317).He correctly ignores Stigler's attempt to provide a purely mathematical foundation for the perfectly competitive firm without first specifying the economic assumptions that must go first.What is wrong with economics is the failure of the economics profession to grasp the mathematical proof that Keynes constructed in the GeneralTheory in chapters 20 and 21 or comprehend the optimality condition spelt out by Keynes on pp.261-262 of the General Theory. None of the authors in this book have the slightest clue about what Keynes did.It is better to go and buy a copy of the General Theory than purchase this book in its current form.
This book is a useful and quick read for those interested in why academic economics sometimes seems to make so little sense. It is not about what is wrong with economics, it is more about what is wrong with neoclassical economics. However, in the public's mind and in most economics department neoclassical economics is economics. Unfortunately, the monopoly position of neoclassical economics leaves many students bewildered, especially those who are at least somewhat familiar with the ideas of the 19th century political economists.

The book is a collection of essays by a wide variety of economists, many with heterodox views.

The essays vary wildly in style, relevance, and value, but reading the book is justified not by the analytical excellence of every single essay, but by the few stand out essays which will allow the reader to pursue interesting strands of heterodox thought. In particular I found the essay by Steven Keen to be particularly worthwile. After reading it I decided to immediately buy his book "Debunking Economics."

It is vitally important that those studying economics have at least a passing familiarity with heterodox views, whether or not they agree with them. What heterodoxy provides is a better way of understanding, critiquing, and ultimately expanding and strengthening the current paradigm in economics. In other words, even the staunchest neoclassical economist will gain from reading this book because it will challenge one to think more critically about underlying assumptions. Of course, there is the possibility, ever so remote, that one strand of heterodox thought may succeed in overthrowing the dominant paradigm and become the new king of the hill in economic thought.