Post 4/4 about Economic MethodologyFriedmanKeynes

Before Keynes, Classical Economic Theory (CET) was based on three principles. The First Principle is that Unemployment is automatically eliminated by the free market. The Second Principle is the Quantity Theory of Money, which states that money supply makes no difference to real economic outcomes. The Third Principle is that private investors automatically find the right investment opportunities to create the best economic outcomes for future. The realities of the Great Depression of 1929 clashed violently with these three principles which hold only in an imaginary world bound by axioms and logic. Keynes followed scientific methodology to create a new theory which rejected all three axioms of CET, so that Keynesian theory would match the experienced realities of the Great Depression. This is the distinguishing feature of science, that theories are devised and changed in light of experience. In contrast, Greek axiomatic-logical methodology disregards conflict with observational evidence.

The experience of the Great Depression showed that free markets cannot eliminate unemployment. The role of expansion of money stock in the boom, and of restrictive money in the recession, became clear to economists. Keynesian theory incorporates this experience and asserts the extreme importance of money in the real economy, contrary to the Quantity Theory of Money. Also, Keynes argued that the future was unpredictable. Investor sentiment and expectations about future governed their investment decisions, but these could become artificially depressed. This would choke off investment and badly affect the future of the economy. In such situations, the government should step in with investments to compensate for shortfalls in private investments. This type of fiscal policy would be able to restore full employment and generate growth. This Keynesian prescription is diametrically opposed to the Third Axiom of CET which argues that governments should not intervene in economic activity. Keynesian theories were “scientific” in the sense that they were based on observations and economic experiences, and conflicted with the Greek axiomatic approach of CET.

Banks had lost fortunes, and wiped out lifetime savings of many depositors in the Great Depression. Soon afterwards, a strong set of laws were enacted which sharply regulated financial institutions, prohibiting them from speculation, and placing many other restrictions on their activities. Financial regulation restricted the power of the wealthy to generate income from their existing wealth. This meant a sharp reduction in money generated by non-productive financial activities like interest based loans. At the same time, the main thrust of Keynesian theory was that the government had the responsibility to maintain full employment, and undertake investments necessary for growth. Investments flowed to the real sector, instead of the financial sector, and full employment meant that all the productive capacity of the economy was utilized. Empowering the working classes, investing in growth, and restricting the financial sector, led to decades of prosperity in the Western world.

In order to understand what happened next, we have to look at the dramatic impact of the three Keynesian policies of financial regulation, full employment, and government investments, on the income distribution in the USA. From 1930 to 1980, the share of wealth accruing to the bottom 90% increased from a low of 15% to a high of 35%. At the same time, the share of wealth accruing to the top 0.1% decreased from a high of 25% to a low of 5%. This reversal of fortunes was not acceptable to the extremely wealthy, who plotted a coup against Keynesian theories with patience and persistence. Their last bastion and stronghold was Chicago University, which was virtually solitary in its advocacy of free market economics in the days of dominance of Keynesian theories. In their paper “Winning Ideas”, Sabena Alkire and Angus Ritchie have provided detailed information about the campaign to spread, popularize and implement free market ideas. One key strategy was the utilization of economic and political crises and disasters to rush in with revolutionary changes. Naomi Klein has documented this aspect in her brilliant book “The Shock Doctrine: The Rise of Disaster Capitalism” which details how crises were used or generated all over the world as a means of introducing free market policies which could not be achieved by popular vote.

In the USA and UK, the oil crisis in early 1970’s created an opportunity which was seized upon by the Chicago School to create the Monetarist Counter-Revolution against Keynesian ideas. All economic troubles were blamed on Keynesian policies and financial regulation, and a strong push was made for financial liberalization, and for restricting the authorities and power of the government. One weakness of Keynesian theory was that while macroeconomics was scientifically based on observed behavior of real world economies, microeconomics was based on an axiomatic-logical Greek approach to consumer theory. Progress would have involved changing microeconomic theories to match observations of real world consumer behavior. Instead of this, the monetarist counter-revolution succeeded in dislodging Keynesian theory by arguing that these macro theories were not consistent with the axioms for consumer behavior in microeconomic theories. This return to Greek axiomatic methodology effectively divorced economics theories from reality. Keynesian Nobel Laureate Robert Solow remarked:  “Since I find the fundamental framework [of Chicago economists Lucas & Sargent] ludicrous, … I respond by laughing.” Financial liberalization together with repeal of Keynesian economics had exactly the effects desired by the wealthy. The share of the top 0.1% has steadily risen from its bottom at 5% to the current 25% and is steadily rising. The share of the bottom 90% has fallen from its top value of 35% to its current 15% and is steadily declining. The Global Financial Crisis has wiped out the middle classes and further enriched the wealthy financiers. The use of a Greek methodology which confines economists to the study of an imaginary world is extremely helpful in perpetuating the current state of affairs as it prevents the public from noticing essential aspects of the economic system. This is why scientific methodology, which would be based on close observations of contemporary realities of the economic system, is shunned by economists.

Posts on Diverse Topics:My author page on LinkedIn. Other works: Index . More material on Science & Scientific Methodology. Articles on the Nature of Human Knowledge.

Michal Kalecki’s (1899-1970) theoretical contribution elucidates how profits grow throughout cyclical fluctuations and economic crisis when the capitalist class strengthens its power relative to workers. Besides, the Polish economist shows how the evolution of income distribution affects the evolution of aggregate income.

His theory of effective demand focuses on the relationship between spending, prices and income distribution. In his model, the variables of spending (capitalist consumption Ck, investment I and workers’ consumption Cw) are related to economic sectors where firms produce final goods: capitalist consumption goods (DI), investment goods (DII) and workers’ consumption goods (DIII).

Kalecki explains not only the level of total production the decomposition of production in each economic sector in the form of profits (P1, P2 and P3) and wages (W1, W2, W3). His point of departure is an economic matrix based on three economic sectors defined by categories of demand. Key assumptions include: there are two social classes and two categories of income (wages and profits); workers do not save; the economy is closed with no government activity, and no stocks of finished products remain unsold.

Kalecki’s  economic matrix

D1 D2 D3
P1 P2 P3 P
W1 W2 W3 W
I Ck Cw Y

 

The dynamics of income and employment in D1 and D2 mainly depends on the level of   spending of the capitalist class. Given the income distribution in each economic sector, “the capitalists earn what they spend“.  However, the aggregate level of the workers’ consumption is subordinated to the consumption and investment decisions of the capitalist class. That is why Kalecki states “the workers spend what they earn”.

Besides, Kalecki’s   analysis of the oligopolistic trends in contemporary capitalism sheds light on important distributive issues at the micro level. As Kalecki (1954) says the “relative share of wages in the value added is determined by the degree of monopoly”. The analysis of the role of the markup over prices introduces distributive challenges – not just between capitalists competing for market shares but also between capitalists and workers.  Indeed, the evolution of prices depends both on the market power of firms and on the trade unions’ struggles to win higher nominal and real wages.

Observing the performance of current capitalist economies, in which the oligopolistic  market forces prevent prices to follow a fall in nominal wages, the reduction of nominal wages  (while the mark up remains unchanged) is, in general, not associated with the expansion, but with the decline of employment and income in D3 – that is to say in the production of consumption goods for workers.

In other words, a fall in nominal wages  (while the mark up remains unchanged) turns out to reduce the workers’ consumption of goods and the aggregate income.

 

 

 

Post 3/4 – Continuation of Emergence of Science
EconMeth

A well-known historian and philosopher of science Pierre Duhem reflects the typical Eurocentric attitude: “There is no Arabian science. The wise men of Mohammedanism were … faithful disciples of the Greeks, (and) … destitute of all originality.” It is amazing how prejudice can blind historians to the vast original Islamic contributions to mathematics, medicine, chemistry, optics, astronomy, as well as a wide range of technological developments. In contrast, Briffault in The Making of Humanity, writes that  “The experimental method of Arabs was by Bacon’s time widespread … throughout Europe. Science is the most momentous contribution of Arab civilization to the modern world.” Our focus in this essay is not on the injustice, but on the misunderstanding of science that results partly from minimizing the Muslim contributions.

By a strange paradox, while the accomplishments of modern science are bright as the sun, philosophical attempts to understand the nature of science and the scientific method remind us of the parable of the blind men and the elephant. Different schools of thought contend with each other, and each school has a fragment of the truth, but there is no coherent overall picture, and massive confusion prevails. Pre-Islamic Greek science was based on axioms and logic, much like Euclid’s geometry. The radical innovation of the Muslims was to drop axioms, deductive logic and thought experiments, and base science directly on observations and real experiments. Eurocentric accounts omit this chain of transmission of knowledge – an internet biography states: “Bacon took up Aristotelian ideas, arguing for an empirical, inductive approach, known as the scientific method, which is the foundation of modern scientific inquiry.”  In fact, most propositions of Greek Science were later proven to be false; it has been argued that Aristotelian ideas created a huge obstacle to the emergence of science, since his enormous prestige made people afraid to oppose him. Bacon actually opposed Aristotelian ideas, arguing strongly in favor of the observations and experimentation that were part of Islamic science. However, Bacon missed the crucial importance of the formulation and testing of hypotheses, which is a core scientific activity. In the early twentieth century. the logical positivists added to the Baconian mistake by asserting that facts and observations were enough by themselves; there was no need of hypotheses. Both Bacon and the Positivists missed a vital component of scientific activity. Science is founded on careful observations, but reaches beyond them to arrive at the hidden reality which drives the observations. The proverbial apple of Newton provides a perfect illustration of this aspect of science. Science involves going beyond the falling apple, to see the invisible force of gravity which was responsible for this fall. Centuries before Copernicus, Abu Raihan al-Biruni hypothesized that the earth goes around the sun, and used precise geographical measurements to deduce the existence of an unobserved continent, later discovered by Columbus. What makes science interesting and exciting is that reasoning about the invisible reality is always fraught with danger, since one can never confirm this reasoning by direct observation. Karl Popper picked up on this aspect of scientific theories, that they can never be proven true, since they deal with unobservable structures. Popper came to the mistaken conclusion that the defining characteristic of scientific theories is that empirical evidence can falsify, or disprove, them, but they are impossible to prove. Thomas Kuhn studied the history of science, and realized that it proceeds by revolutions. One dominant hypothesis is often rejected and replaced by another entirely different hypothesis about the hidden structure of reality. However, the Kuhnian picture of science created many un-resolved puzzles which continue to vex philosophers of science.

Major confusions about the nature of scientific methodology led economists to mistake the Greek axiomatic & logical methodology for science, in the early twentieth century. Modern economic theories of consumers, firms, and equilibria are based entirely on axioms, logic, and thought experiments, which often directly contradict observations of real world consumers, firms, or markets. In effect, economists rejected in toto the Islamic contributions, and went back to their Greek ancestors. Just as the Greeks were singularly un-successful in understanding nature, so economists have been singularly unsuccessful in studying economic systems.  It was not prejudice against Islam that led economists to reject science in favor of Greek methodology; the substantially more complex reasons will be discussed in later columns.

Above 700 words published in Express Tribune on 15th May 2016 with title: “Confusing Greek Methodology”. Additional clarification and evidence for the main thesis given below.

Greek methodology gives primacy to axioms over observations. Scientific theories are generated in response to observational evidence, as an attempt to match the evidence. Consider for example, neoclassical utility theory, which describes consumer behavior. Economic methodology gives primacy to an axiomatic description of human behavior. The axioms dominate empirical evidence. Contradictions with observed behavior are ignored as irrelevant. Theory dictates the you maximize utility, and whatever you do or say does not count as evidence against the theory.  At the heart of the scientific method is an attempt to create theories which explain observations. Thus Prospect Theory, which attempts to match observed behavior of humans in situations of uncertainty, is a scientific theory. Any theory which has the goal of trying to match observed patterns of empirical evidence is scientific — the issue of whether the theory is right or wrong does not matter for this purpose. Scientific methodology involves trying the match the empirical evidence. It is manifestly clear that economic theory does not do this. Empirical observation of human behavior is massively in conflict with the economic axiomatic utility theory, as demonstrated in Empirical Evidence Against Neoclassical Utility Theory: A Survey of the Literature. A scientific response to observations of conflict between empirical evidence and theory would be to attempt to modify the theory to match the evidence. That was the position taken by Kenneth Arrow – he appreciated my “well argued and thorough critique” and said that the remaining question is, “what should take the place of this theory?” However, leading journals to which I sent this paper, which destroys the central pillar on which conventional economic theory rests, rejected it, saying that it was “too insulting to economists”. Here is a delicious quote from a referee report (who got it exactly right!):

This is one example of what I believe to be a theme running through the paper which is “economists are blinkered idiots who are willfully ignoring the way in which people behave when they build their models, and therefore say all sorts of stupid things”

… Well, some of my best friends are economists… and they are quite smart! Similarly, Aristotle was also extremely smart. BUT the axiomatic deductive methodology blinds you to observational evidence. The only use of observations is in framing the axioms. After that logical deductions are CERTAIN, and cannot conflict with facts. After proving the Pythoagorean Theorem, you are perfectly JUSTIFIED in ignoring someone who claim to have drawn a triangle which violates it. Observation reports of something which contradicts a logical deduction is simply not admissible.

This adherence to Greek Axiomatic-Deductive methodology systematically blinds economists to all empirical evidence in conflict with economic laws. The theory of the firm is based purely on axiomatics, without any observations of actual firm behavior. Equilibria are deduced by logic, without any reference to reality. Real world observations of consumers, firms, and markets are deeply and directly in conflict with supply and demand, profit maximization, equilibrium, and other economic theories. No attempt is made to make theories conform to empirical evidence. The theoretical physicist Richard Feynman put it best: “It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with the experiment, it’s wrong.” This is the founding principle of science, but it has no relation to the methodology of modern economic theory, which is firmly set in the “ostrich” mode of ignoring all conflicting empirical evidence.

Posts on Diverse Topics:My author page on LinkedIn. Other works: Index . More material on Science & Scientific MethodologyNext post  4/4: The Keynesian Revolution and the Monetarist Counter-Revolution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The WEA Online Conferences format, designed by Edward Fullbrook and Grazia Ietto-Gillies, makes full use of the digital technologies in the pursuit of the commitments included in the World Economics Association Manifesto: plurality, competence, reality and relevance, diversity, openness, outreach, ethical conduct, and global democracy. The WEA On-line Conferences seek to also engage graduate and undergraduate students considering: (a) the variety of theoretical perspectives; (b) the range of human activities and issues which fall within the broad domain of economics; and (c) the study of the world’s diverse economies.

The current conference is CAPITAL ACCUMULATION, PRODUCTION AND EMPLOYMENT: Can We Bend the Arc of Global Capital Toward Justice?  It is being led by distinguished professors Gerson Lima and Jack Reardon. This conference focuses on various aspects of global accumulation, production and employment from a broader perspective of examining their interlinkages with other economic, social, and political processes. Concerns with social inclusion extend well beyond purely economic account of justice and fairness, since the degree of economic inequality also affects social cohesion and political stability, and can also have negative implications for economic growth and democratic institutions. Considering the current social and economic challenges, Peter Radford has suggested the need to constrain capital and make it work for all people. In his own words: ‘We can bend the arc of capitalism to our will if we wish”.

In truth, this conference calls for a deep examination of current power, politics and economics in a social context where democratic institutions are being threatened. This attempt also involves critical thinking of theories of justice in light of applied challenges: What kind of justice should we bend the arc of global capital to? What are justice conditions and criteria, given the concern about capital accumulation, employment, and production?

The conference is organized into 4 “sessions”, broadly covering the following themes:I 

I. Finance, investment and production

II. Investment trends and the competition among countries for busines

III. Challenges to working conditions

IV. Economics and democracy

 

The Discussion Forum is now open. Submit your comments: http://capital2016.weaconferences.net/papers/

SESSION I Finance, investment, production and employment

  1. Global business models and labor challenges
    Maria Alejandra Caporale Madi
  2. The tendency of effective demand to lag behind the supply of full employment
    Arturo Hermann
  3. Late Marx and the Conception of ‘Accumulation of Capital’
    Paul Zarembka
  4. Money: a social contract or an “invisible hand” of inverted totalitarianism?
    Raymond Aitken

SESSION II Global trends: economic dynamics and sovereignty

  1. Global Dynamic Efficiency (Towards a Long-Term Strategy)
    Stephen I. Ternyik
  2. Monopoly Capital and Growth
    Kieran Crilly
  3. Capital, Nationality, and State Sovereignty: New Links for the 21st Century
    Marc Morgan-Milá
  4. The Other Half of Macroeconomics and Three Stages of Economic Development
    Richard C. Koo
  5. Identifying the determinants of secular stagnation after the Great Recession: Learning from Hansen´s historical approaches and Harrod´s model along 1938-1952.
    Adrián de León-Arias

SESSION III. Working conditions and social problems: challenges and perspectives

  1. Employment in a Just Economy
    John Komlos
  2. Economic Solutions for the Social Problems of Mass Migration, Persistent Alienation and Wanton Terrorism
    Steven H. Kim
  3. Can We Bend the Arc of Global Capital toward Justice by Investment in Human Capital?
    Arnold Packer
  4. The Role of Human Capital Resource in the East African Economic Growth
    Worku R. Urgaia
  5. Evolving Wealth Inequality in Kerala: Mapping the Winners and Losers
    R. Yadu and Satheesha 

SESSION IV Economics and democracy

  1. Real World Non-Equilibrating Supply and Demand Theory
    Gerson P. Lima
  2. Economic power, employment and economic theory
    Rubens R. Sawaya
  3. Elite appropriation of economics – the case for (r)evolutionary political economy
    Deniz Kellecioglu
  4. The British Labour Party and the ‘New Economics’
    Lyn Eynon

 

{Continuation of previous post: Misconceived Project of Social Science}

GreekArabsss

Historical accidents have shrouded the emergence of science and the scientific method behind multiple veils of mystery. Misunderstanding the nature of science has led to seriously defective methodologies in modern social science, especially economics. The first barrier to understanding is created by Eurocentric history which states that roots of modern sciences originate with the Greeks. According to this account, the Muslims preserved Greek knowledge, and passed it on to Europe, without making any significant improvements. The Europeans took up the mantle of their Greek ancestors and have since made fantastic progress. The myth that “Europeans are unique in their capacity for rational and scientific thought” has been debunked effectively by many historians, notably Blaut in “Eight Eurocentric Historians.” Nonetheless, these ideas have been widely propagated, and permeate public consciousness.

Jack Goody in “The Theft of History” has shown that many inventions of other civilizations were appropriated by European historians and attributed to Europeans to create a Eurocentric History. Even though it is transparently obvious that the light from the advanced civilization of Islamic Spain ended the dark ages of Europe, one will not find any mention of this in the standard historical accounts. No one knows about “The ‘Arabick’ Interest of the Natural Philosophers in Seventeenth-Century England” which led to creation of endowed chairs of Arabic in Oxford and acquisition of vast numbers of Arabic books in special libraries.  Similarly, conventional histories gloss over the breeding of corn by the master botanists among the Incas (which feeds half the world today), the crucial inventions of papermaking, printing, gunpowder and compass by the Chinese, development of calculus by the Kerala school of mathematicians (C.K.Raju documents the transmission chain to Newton/Leibniz), and the diverse and extensive contributions of the Islamic civilization in many fields. Quite apart from the injustice in this distortion of history, this process of negating the Islamic contribution to development of science results in a loss of understanding of the nature and significance of the contribution. If we peel apart the veils of these historical distortions, it becomes crystal clear that science and the scientific method originated in the Islamic civilization. The discovery of the experimental method by the Muslims was such an important advance on Greek science that it has been termed a conceptual revolution which was “greatest idea of the second millennium.” Our goal is to explain the nature of this advance.

The Greeks originated the first systematic study of Geometry, via the famous axioms of Euclid. The tremendous value and importance of these methods is obvious because these methods are still taught in schools and universities. The purely axiomatic and logical structure of these methods leads to iron-clad certainties which do not require empirical verification. When the Greeks turned to the study of nature, they tried to use the same method that had been so successful. Aristotle argued that induction from observations could be used to frame axioms, but the laws of science must be based on logic, parallel to geometry. Logic reveals grand universal truths, while observations can only reveal lowly “contingent truths” which are valid within a particular historical context under specific circumstances.

Richard Powers writes that “the most important idea of this millennium was (due to) Abu Ali al-Hasan Ibn ul-Haitham (who) … remains little-known … But the idea that Ibn al-Haytham championed is so ingrained in us that we don’t even think of it as an innovation, let alone one that has appeared so late in the human day.” Greek axioms and logic had led to two rival theories about vision, which had remained deadlocked for 800 years. One way of framing axioms led to the conclusion that light emanated from the eyes and struck the object, while the other led to the reverse conclusion. Ibn-ul-Haitham used observational evidence to definitively settle the matter. For example, he argued that staring at the sun burns the retina, establishing that light travels from the sun to the eyes. His striking innovation was that he made no appeal to theory, axioms or logic. Instead, he demolished a whole mountain of Greek theory with a single appeal to data.

The difference between axiomatic-deductive methodology of the Greeks and scientific methodology developed by Ibn-ul-Haitham and followers, is like night and day. This difference can be illustrated and clarified by a wide range of examples. Before discussing these, note that just like the Greeks did not take into account the burning of the retina by the sun, so economists do not allow contradictory empirical evidence to impinge on their theories — for evidence of this, see: Empirical Evidence Against Neoclassical Utility Theory.  Coming back to the difference between Greek and Scientific methodology, let us consider the discovery of the atom.

Often credited for discovery of the atom, Democritus followed the typical Greek method. He argued that  if we kept subdividing matter, we would reach the smallest possible particle, after which no further subdivision would be possible. This was seen as a logical necessity in a thought experiment, not as an empirical fact. If viewed experimentally, this logic is deeply flawed. The process of subdivision is constrained by human experimental capabilities, not just the properties of matter. Experimentation and observational evidence have led to knowledge which could never be achieved by axioms and logic. Advances in experimental techniques led to the splitting of atoms, clarifying the structure of matter in ways which were impossible earlier.  Our experimental techniques and capabilities of splitting matter have changed over time, and improvements in these techniques, and careful observation of consequences of trying to split matter have led to improved understanding of the structure of molecules and atoms. The experimental approach to splitting matter leads to different results at different times, as human capabilities in this regard changed drastically with time.  It was precisely this time-bound and contingent nature of experimental truths which repelled the Greeks. The argument of Democritus is based on a “logical” impossibility of infinite repetition of the splitting operations. Thought experiments and logic can never obtain the information that one gets by experimenting with actually trying to split matter, and observing the result. In contrast to Democritus, Dalton’s discovery of the atom reflects the scientific method. The observation that certain chemicals only combine in fixed proportions led Dalton to hypothesize that this was due to properties of the unobservable atoms which made up the chemicals. Dalton deduced properties of “atoms” from the observation of a particular fact which was impossible to derive from logic or from intuitive certainties. Similarly, observational evidence about electrons led Niels Bohr to scientific theories which appear logically impossible – that electrons jump from one orbit to another without passing intermediate stages. If economists had imposed their axioms for rational behavior on electrons, forcing them to behave in a logical manner, we would never have arrived at quantum theory. The essence of the scientific method consists of letting observations guide the construction of theory, regardless of how crazy the theory appears to be logically. Contemporary economic methodology is firmly based on the Greek conception of science, and gives primacy to axioms and logic over observations. The mystery of why economists use a prescientific methodology, and confuse it with science, will be resolved later.

Posts on Diverse Topics:My author page on LinkedIn. Other works: Index . More material on Science & Scientific Methodology. Next Post in this sequence: Economists Confuse Greek Method with Science.

GNP[Clarification — this is not the followup post to Misconceived Project of Social Science — that will be posted a few days later — however, it is part of sequence showing the serious defects of modern economic theory]

Observations of the real world massively contradict trickle-down theories, so economists generally do not admit to believing this idea that further enrichment of the wealthy will lead to prosperity for all. Nonetheless, trickle down is built deeply into the foundations of modern economics. The greatest illusion fostered on the un-suspecting public is that GNP per capita is the best measure of economic growth. The use of GNP per capita as a measure of growth is equivalent to the assumption of a trickle-down effect. The “per capita” means that this statistic is calculated by dividing total national income produced equally among all the people in the country. Unfortunately, the reality is starkly different from this fairy tale statistic, which assumes equal distribution of income. Since the 1980’s, an increasing share of all the income produced in the world has been going to a small elite minority within the top 1%. The starkest demonstration of this inequality is furnished by the recent research which shows a fifteen year gap in life expectancy between the richest 1% and the poorest 1% in the USA. Similarly, Oxfam published statistics showing that the bottom half of the world lost a trillion dollars, while the top 62 people, who own more than half the planetary wealth, gained half a trillion. The statistics furnish strong evidence for a vacuum cleaner effect: a powerful suction of wealth from the bottom to the top. This vacuum cleaner effect means that the GNP per capita furnishes an excellent demonstration of the famous aphorism: “Lies, Damned Lies, and Statistics.” This statistic is not just misleading, it is deliberately deceptive, and directs attention away from issues which are essential to progress and development.  It is a brilliantly crafted piece of propaganda in that it misleads people by measuring a fairy tale number: what would happen if we took all the national income and divided it equally?

Famous economist Joan Robinson said that “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” One the major weapons of mass deception in the arsenal of the economists is the GNP per capita measure. In the battle of ideas, achieving widespread acceptance of the idea that GNP per capita is the main measure economic progress has been a major victory for the wealthy. One cannot oppress the majority of the population without achieving their consent in some measure. False measures of progress are a key to victory. Today, governments all over the world are measured by their achievements in rate of growth. A thousand crimes are forgiven at the altar of growth, while tremendous accomplishments are ignored if growth is slow. Making GNP per capita the center of attention ensures that no one pays attention to where all this growth is going, which is in the coffers of the already wealthy.

It is very worthwhile studying the propaganda tactics used by economics textbooks to get innocent students to believe in absolutely incredible myths about how the economy works. In the entering class of graduate students in the Ph.D. Economics program at Stanford, most of us were motivated to study economics in order to solve the major economic problems we could see around the globe. We wanted to help solve problems of poverty, and create better lives and prosperity. During the course of our studies, we were taught to believe that free markets solve all economic problems automatically, and the main economic problem is do-gooders (like us) and governments, who wish to help. If everyone would pursue their self-interest, it would automatically lead to the best economic outcomes for all. The ideals of serving humanity were washed out of us, and replaced by the pursuit of personal ambitions. Julie Nelson has beautifully captured this brainwashing process in a paper entitled “Poisoning the Well: How Economic Theory Damages the Moral Imagination.” She states people would act in socially responsible ways, but are pushed by the economic theory of self-interested utility maximization to believe that it is permissible to be irresponsible, opportunistic, and selfish in when participating in markets. She describes the large number of ways that economic theory counters natural moral instincts, and the tremendous harm that has resulted to societies as a result of this immorality taught by economics.

Among the propaganda tactics used for this brainwashing, one of the most powerful ones is the creation of a single minded focus on GNP per capita as the primary goal of economics.  Every effort is made to ensure that economics students do not pay attention to distribution, so that the rapid and increasing income inequality, and the vacuum cleaner effect created by blind pursuit of growth, does not come to their attention. For example, Nobel Laureate Robert Lucas writes that: “of the tendencies that are harmful to sound economics, the most seductive, and in my opinion, the most poisonous, is to focus on questions of distribution.” Students can go through entire courses with the deceptive titles relating to Income Distribution, Inequality and Poverty. These courses go through a lot of mathematical material on how to measure inequality, and descriptive empirical material, but implicitly teach students to regard these as natural features of an economy. There is underlying message of indifference: inequality does not matter, and the best way to combat poverty is through economic growth. The use of the GNP per capita measure helps sustain these myths. The rapid transfer of trillions from the bottom billion to the top 100 people will not show up in the GNP per capita statistics.

It would be a critical victory for the bottom billions if we could shift the focus of the debate from GNP per capita to measures of poverty and employment. Before the well was poisoned by economic theories, it was clearly understood by all that it is our collective social responsibility to provide for education, health, jobs and social welfare needs of all members of society. If these statistics made the headlines, and governments were held responsible for improvements in the incomes earned by the bottom 25%, instead of the top 1%, there would be a significant change in policies. However, such changes will be strongly resisted by the wealthy, who benefit from widespread poverty in many different ways. This creates a wide pool of labor available for ready purchase to those who have the money. It is this money of the wealthy which drives think-tanks, research organizations, and universities to produce tons of research supporting the use of GNP per capita as the primary target of economic policies. Many have recently raised voices against the numerous deficiencies of this measure, most notably the Stiglitz-Sen-Fitoussi report which includes two Nobel Laureates among its authors. Deficiencies include neglect of damage to the environment, society, and many other issues which directly affect well-being of all members of the society. Unfortunately, while the gears of the statistical machinery are well-adapted to measuring GNP per capita, they have not been designed to measure the things which matter. One can only get shoddy and incomplete data on measures of inequality, unemployment, education and health which are of critical importance in assessing the welfare of nation. This is actually important to conceal the realities which would lead to revolt against the exceedingly unfair system. For instance, recently  researchers stumbled across an amazing statistic related to white US Middle class. In contrast with nearly every other social group, the life expectancy of this group has been rapidly decreasing. Why? It seems that the primary cause is suicide, either direct, or indirect by means of alcohol and drugs. As somebody remarked it is depressing and sad statistic. The question, why was this discovery accidental? A good set of statistical indicators would have picked it up right away, so that steps could be taken to cure the problem The answer is that inequality, misery, poverty are actually beneficial to a small number, who have learned to enjoy the benefits of creating crises which leave millions homeless while the financial elites reap trillions from the catastrophe. For them to create the consensus necessary to implement these cruel policies requires projecting certain types of statistics while hiding others from common view. Angus Deaton remarked that all statistics are political. Simply a display of the statistics related to social welfare of the public would be remarkably useful in the battle for justice. But it hard to prevail against status quo and ignorance.

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Considering the current global scenario, the search for financial stability is one of the main contemporary policy issues. In this context, teaching finance presupposes great heterogeneity among  national economic structures, institutions and social outcomes and its target is to enlarge the comprehension of the real- world in its economic dimensions.

What we should teach in undergraduate courses in order to deal with finance from a real-world perspective- both in microeconomics and macroeconomics curriculum?. The understanding of the current financial challenges requires the adoption of new perspectives in a significant learning process where the pillars should be a solid  theoretical background in economics  and a critical attitude towards the political, economic and social reality where the students live.

Finance is not just related to management techniques, procedures or product phenomena, but involves institutions, behaviours and policies. The existence of a monetary economy of production is founded on credit relations, organized markets of financial assets, speculation and uncertainty. Indeed, in a framework of uncertainty and speculation, a set of interrelated portfolios and cash flows between banks, income-producing firms and households may influence the evolution of credit, the pace of investment, and the valuation of capital assets.

The monetary and financial systems not only expand the access to finance, but also leans on the appropriation of social wealth. Finance fosters the capital accumulation process that develops through time and involves credit contracts. In this setting, financial innovations impact upon banks’ assets and liabilities, and they could provoke sudden changes in market dynamics. In a monetary economy, credit relations, speculation and uncertainty are decisive to affect the investment path, leading to financial fragility and credit crunch crises. In the context of a liquidity crisis, the Central Banks must restate the public nature of money.

In short, this approach to finance highlights the need to emphasize in the Economics Curriculum the “institutions-history-social structure” nexus instead of the “rationality-individualism-equilibrium” nexus. As a result, the study of the financial phenomenon will support an emphasis on the historical dimensions of economic dynamics. In this context, the economists are – recalling Marshall- able to deal with “mankind and the ordinary events” of business life so as to face the social and economic challenges of their generations.

The rejection of the “rationality-individualism-equilibrium” nexus is crucial to promote a change in Economics education. The main target should be the understanding of the ideas and practices that support the reproduction of material life for further policy interventions towards economic growth, financial stability and social justice.

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