Introduction to Heterodox Economics

Marc Lavoie

University of Ottawa

Outline

• 1. Heterodox economics vs orthodox economics

• 2. Some examples

PART I

Heterodox schools

Introduction

• Being a specific, contemporary, and alternative theory, heterodox economics started in the 1960s but a coalescing theoretical core did not emerge until the 1990s;

• Being engaged in alternative theorizing, applied work, and economic policy analysis in a contested environment, heterodox economists often develop their arguments through critical engagement with mainstream theory.

• This gives the appearance (but without substance) that the only common element among heterodox economists is their critical evaluation and rejection of mainstream economics.

• Heterodox economics has its own agenda, its own theories, its own models, its own methodology.

• If neoclassical were to disappear, heterodox economics would still keep its relevance

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Heterodox vs Orthodox economics

• NON-ORTHODOX PARADIGM

• HETERODOX PARADIGM

• POST-CLASSICAL PARADIGM

• RADICAL POLITICAL ECONOMY

• REVIVAL OF POLITICAL ECONOMY

• ORTHODOX PARADIGM

• DOMINANT PARADIGM

• THE MAINSTREAM

• NEOCLASSICAL ECONOMICS

Brazilian Keynesian Association, Porto Alegre, September 2009

Dissenters and “the edge”

Heterodoxy Orthodoxy

Dissenters MainstreamCutting Edge

Macro-economics

Heterodox authors

Neoclassical school

Marxists CambridgeKeynesians

OldKeynesians

Monetarists

New Keynesians

New Classicals

RadicalsFrench

RegulationSchool

Post-Keynesians

KEYNES

Heterodox schools in economics• Post-Keynesians, Kaleckians, Sraffians (Neo-Ricardians)• Circuitists, Berlin school of monetary economics• Marxists, Radicals• Structuralists (Development, Latin-American school, Furtado, L.

Taylor))• French Regulation School, Social Structure of Accumulation (SSA)• Institutionalists (Old)• Social economics and Humanistic economics• Anti-Utilitarism (MAUSS)• Economists of « conventions »• Schumpeterians and Evolutionary Economics• (Some of) behavioural economics• Feminist economics• Ecological Economics• …. And no doubt many others (Ghandi economics, Henry George,

Gesell, Neo-Austrians (?), etc.)

What do all these heterodox schools have in common?• Differences between schools of thought and

their relative ranking have a lot to do with the sociology of the profession.

• Still, in my opinion there are broad features that characterize heterodox and orthodox schools.

• These are called the presuppositions of research programmes by philosophers of science: they are things that cannot be questioned

Paradigm

Presupposition Heterodox schools Orthodox schools

Epistemology Realism Instrumentalism

Method Holism, organicism Individualism, atomicism

Rationality Reasonable rationality Hyper rationalityOptimizing agent

Economic core Production, growth, income effects

Exchange, scarcity, substitution effect

Political core Regulated, tamed, markets

Unfettered market optimism

Presuppositions of the heterodox programme vs those of the mainstream

Distrust in unfettered markets

• « On the one side are those who believe that the existing economic system is, in the long run, a self-adjusting system, though with creaks and groans and jerks and interrupted by time lags, outside interference and mistakes … . On the other side of the gulf are those that reject the idea that the existing economic system is, in any significant sense, self-adjusting »

• Keynes, CW, xiii, p. 487 (1934)

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Holism: Some crisis-related macro paradoxes

Paradox of thrift (Keynes) Higher saving rates lead to reduced output

Paradox of costs (Kalecki) Higher real wages lead to higher profit rates

Paradox of public deficits (Kalecki) Government deficits raise private profits

Paradox of debt (Steindl) Efforts to de-leverage might lead to higher leverage ratios

Paradox of tranquillity (Minsky) Stability is destabilizing

Paradox of liquidity (Nesvetailova) Efforts to become more liquid transform liquid assets into illiquid ones

Paradox of risk (Wojnilower) The possibility of individual risk cover leads to more risk overall

Other heterodox principles or beliefs (according to Andrew Mearman 2007)

• Methodology helps to understand economics• Economic systems are complex, disequilibria• History and time are important• All economic theories are fallible• Multiple perspectives are advocated (pluralism)• Formal mathematical methods should be removed from their

perceived supreme position• Facts and values are inseparable• Power is a determinant of economic outcomes

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Heterodox economics – Fred Lee• The intellectual and theoretical roots of heterodox economics are

located in heterodox traditions of Post Keynesian-Sraffian, Marxist-radical, Institutional-evolutionary, social, feminist, and ecological economics, all of whom emphasize the social surplus, accumulation, justice, social relationships in terms of class, gender, and race, full employment, and economic and social reproduction.

• Hence, as a scientific research field, heterodox economics is concerned with explaining and proposing and advocating changes in the historical process of producing the social surplus that provides the flow of goods and services required by society to meet the reoccurring needs and promote the well-being of those who participate in its activities.

• That is, heterodox economics is a historical science of the social provisioning process, and this is the general research agenda of heterodox economists.

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Figure 1 The neoclassical indifference approach and the hesitation region

Y

F

A

B

C

B’

C’

D

D’

More preferredarea

Indifference area[hesitation region]

Indifference area[hesitation region]

Less preferredarea

f0

y0

Neoclassical:B > AC < Athere exists D = ADAD’ indifference curve

EcologicalHesitation areasIntransitive choices, weakly comparable

Figure 2Choices of a lexicographic nature with thresholds

Y

F

A

B

C

B’D

A’More preferredarea

Less preferredarea

Less preferredareaLess preferred

area

f0

y0 Threshold

B > B’ > A’ > A > D > CNo continuity: D not = A

qqfc qth

UC MC

UDC

p

qn

NUC

p.NUC

.UDC

80% 100%

Effective demand with constant returns: The post-Keynesian case

NeffD

NS

NNfeN1

T

(w/p)fe

(w/p)1

w/p

a1/T

w/p = T – a/N

Macroeconomic foundations?

• Y = Wages + Profits = Consumption + Investment•  • Wages + Profits = Consumption out of wages + Consumption

out of profits + Investment •  • Consumption out of wages = Wages •  • Profits = Consumption out of profits + Investment •  • Profits net of taxes = Consumption out of profits +

Investment + Budget deficits

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Conclusion: Future perspectives

• The financial crisis has clearly shown that there is a need for alternative economic views, as orthodoxy and the New consensus were useless guides during the crisis.

• Various heterodox schools of thought have come out with very similar explanations of the subprime financial crisis.

• What links are there between PK economists, who favour growth and employment, and ecological economists, who have similar methodological presuppositions, but who favour zero or slow growth?

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