With One Hand Tied Behind My Back

Some economists sometimes say that neoclassical economics will be abandoned when a better theory is available. And they use this as an excuse for not pursuing, say, heterodox economics.

I am tempted to respond that a better theory already exists, for example, some combination of Post Keynesian and institutional economics. But two properties of most varieties of heterodox economics make it difficult for this answer to register for mainstream economists. Before I get to to those properties, let me caveat my answer.

Economists have a number of applied fields. Is heterodox economics developed to such a state that one can say economists would (or should) know how it should impact their work in every applied field? I cannot say how my concerns would apply to, say, transport economics, although I know that work exists there that draws on behavioral economics. Anyways, I doubt that many applied economists are aware of or concerned with how there work fits better with some approaches in heterodox economics. Much applied work seems to me agnostic between paradigms. For example, would you say that most work applying linear programming is Sraffian, even though the historical origins of linear programming are entwined with John Von Neumann's Sraffa-like, classically inspired growth model? How about work with National Income and Product Accounts (NIPA), which, to me, fit comfortably with the classical focus on the generation, distribution, and use of the surplus? Furthermore, I know of some applied fields to which heterodox economists have contributed. I doubt that I can count Walter Isard as a heterodox economist, but I think of economic geography and regional analysis as compatible with Sraffian economics. Wassily Leontief, as far as I am concerned, was a heterodox economist, although, as far as I know, he never commented on the theoretical controversies in which I am interested. I am fairly sure that Bertram Schefold has work in energy economics inspired by Sraffian theory. Is not Amartya Sen's work on the capabilities approach a heterodox contribution to welfare economics? Given Paolo Sylos Labini's importance to the field, I suspect that many models exist in Industrial Organization (IO) that are compatible with a broad definition of Post Keynesianism. To conclude, the connection between applied fields and debates about heterodox economics are not clear to me.

Anyways, heterodox economists tend to emphasize a need for open systems models in economics. This emphasis is the first property of heterodox economics that I want to mention that makes it difficult for mainstream economists to accept the superiority of much heterodox work. Tony Lawson has provided lots of elaboration on the need for an open systems approach to studying human society. But I do not need to go into such philosophy. My favorite approach to price theory takes the distribution of income as given for the most abstract theory of the prices of commodities. Likewise, the composition of final uses is exogenous in Sraffa's theory. The structure of the theory is open to elaborations at lower levels of abstractions that include inputs from other social sciences than economics. Consumption might be explained by a substantive theory, in contrast to the empty formal theory of neoclassical utility-maximization.

Second, heterodox economists tend to be skeptical of the possibility of economic laws applying to all societies across all of human existence. By contrast, Lionel Robbins' definition of economics as the study of the allocation of scarce means among alternative uses is often claimed to be universal. There is nothing in the mainstream about capitalism or how social norms might differ among societies. Contrast, for example, with Luigi Pasinetti's work on structural dynamics, in which the theoretical structure builds in a place for variations in institutions. Or look at suggestions in Sraffa's book that taking one of wages or the rate of profits as the independent variable might be more appropriate at different times or places. Or look at the emphasis on conventions in Keynes' analysis of investment. I could go on.

So, by adopting theories appropriate for the problem domain, heterodox economists have developed theories that are superior to many orthodox theories. But, because of this very appropriateness, mainstream economists are socialized to fail to perceive this superiority.

Dominance of Financial Capital in the United States

Profits by Selected Industry as Percent of Total Profits in the United States

The data for the graph are taken from Use tables for the United States. I am thinking of trying my hand again at some empirical exploration of input-output tables. When graphs for such start looking like those I know how to generate from Java code, I will have begun to start to make some progress. I have found a tool, Apache POI, for Java programs to read Excel spreadsheets.

Need For Engagement With Heterodox Economists

Some brief observations:

• Simon Wren-Lewis is asked to define K. His answer: "It is normally K(t) = δ K(t - 1) + I(t)." In times past, Wren-Lewis has seemed like he genuinely was interested in what heterodox economists have to say. But, with that kind of answer, he really needs lots more study to get up to speed.
• Noah Smith tries to provide an overview of contemporary economics. Many groups of economists I pay attention to do not exist for Smith, and I doubt he knows much about even the recent history of his subject. What would he make of, for example, Philip Mirowski's Machine Dreams?
• Matthew Yglesias alerts his readers to the existence of the Cambridge Capital Controversy. For Yglesias, the central question is the origin of returns to capital and the validity of marginal productivity parables organized around the idea of relative scarcity. I think this is a good account, given how terse this is.

Components Of United States GDP

Table 1: Components, As Percentage Of GDP

I thought I'd expand on a recent graph. I was curious to see how state and federal government spending break down in the United States. To draw the graphs in this post I performed some aggregation from the data:

• Consumption: Listed as "Personal consumption expenditures".
• Investment: Combines "Private fixed investment" and "Changes in private inventories".
• Trade deficit: Combines "Exports of goods and services" and "Imports of goods and services".
• Federal Government: Combines "National defense: Consumption expenditures", "National defense: Gross investment", "Nondefense: Consumption expenditures", and "Nondefense: Gross investment".
• State Government: Combines "State and local government consumption expenditures" and "State and local government gross investment".

I suppose I could find a price index, and plot absolute amounts, rather than percentages of GDP. Then you could see, for example, that GDP in 2009 is actually lower than the 2008 value, as a result of the global crash. Does the breakdown of government spending into consumption and gross investment components reflect the influence of Robert Eisner?

Table 2: Selected Components, As Percentage Of GDP

Some Points Of Agreement

Consider:

• "...there is a crucial distinction between financial capital and capital goods."
• "Interest is not the return to physical capital."
• "Interest is not the 'Marginal Product of (physical) capital'."

These quotes are from Robert P. Murphy. (See here also.) I have written about Murphy before, including his take on Sraffa.

Paradigming Is Easy

Some publishers have made it easy to get an overview of currently existing paradigms in economics, including non-neoclassical paradigms:

• Modern Cambridge Economics: Each book is by an expert on the selected topic. (Previous mention here.)
• Schools of Thought in Economics: From Edward Elgar, each book is edited by an expert and consists of reprints of important papers from that school.
• International Library of Critical Writings in Economics: From Edward Elgar as well, each book is also an edited collection. Many of these are more on a field than on a school, but I like number 21, on the Post Keynesian theory of growth and distribution.
• M. E. Sharpe: I do not have a book series for this important publisher of heterodox economics, including the journal Challenge.

The books in the Edward Elgar series are probably too expensive for most individual purchases. Perhaps you can request some of interest from an academic library. Some of these books are more than a decade old, with articles in the collections going back even more decades. But, by looking at authors and journals, you can can get a hint of where to look for more contemporary work in a school of interest.

Compare and contrast Paul Krugman on this topic.