Re- creating the subject of economics

In 1919, Walton Hamilton coined the term “institutional economics” in the manifesto presented at the American Economic Association Conference where he emphasized the foundations of a new approach to economic theory. In his own words: “The thesis here set for is that `institutional economics´ is `economic theory´.”. The American economist defended institutional economics as an economic theory in the sense of a generalized description of the economic order. The “innovative” aspect of his analysis was to consider institutions as the proper subject matter of economics.  Indeed, Hamilton’s  suggestion was to search for generalized statements which would serve as a point of departure for more specialized inquires within a general descriptive framework that could give unity to the investigations on the economic order. Hamilton rejected the neo-classical analysis of the market centered on general laws and prices of equilibrium and proposed a new approach where the economic order could be comprehended with its particularities of social arrangements. The relevance of institutional economics to the comprehension of contemporary economic problems – the wealth of nations and welfare in modern industrialism- is based on a new understanding of human motivations and restrictions.  He highlighted the concern with the ideas of place, time and process in economics in order to avoid any mechanistic analysis. Under his perspective, the evolution of the markets is articulated to political forces that favor the creation of economic practices and norms. As a result, Hamilton presented a new conception about the rationality of the markets within a market price-system and pointed out a deep tension between the market rationality -that leads to increasing economic power- and the political nature of society. Considering the current challenges to Economics education, it is undeniable the relevance of rethinking Hamilton’s effort to re-create the subject of economics.  The main supposition is that the understanding of the economic phenomena is meaningless apart from the social and political order.

  1. A Supplement to The Economics Curriculum: Towards a Radical Reformulation edited by Maria A. Madi and Jack Reardon, WEA and College Pub. 2014.
    The following is not a review or response to this book. It is a supplement. The 12 articles highlight, correctly, different fundamental problems in economic education and curriculum. Reardon proposes a pluralistic approach to meet the many different areas of global society affected by current economic activity which can be traced back to education in economics. The authors manifest their support for such a position in offering their different views on what is wrong and what is needed as solution. They all agree that neoclassical economics is inadequate. The practice of modelling and it being out of touch with what actually goes on in economic activity is easily verifiable. Only a few focus on the issue of foundations being needed. Keen is quoted and he seems to hit more on the mark in his remarks such as neoclassical economics is “a prescience.” (Madi, Reardon 2014. 206-7, Keen, 2011.158) I would pick up on this to say that economics as it presently functions is not a science. It is analogous to alchemy, the precursor to chemistry. The discovery and formulation of the periodic table provided a standard model for chemistry and we have been enjoying the systematizing of the elements for over 150 years. We cannot say that about economics.
    Only a few seem to get to the basic problem which is the need for a systematic understanding of the actual activity in an economy. When we analyse what is actual going on we note that there are two circuits or flows of goods and services in any business. There are the goods we buy to manufacture some other product, such as bread. But the bread making machine will make many loaves of bread. The final market for the bread making machine is the bread making business. But one loaf of bread is consumed by the consumer. It is absorbed into the standard of living. They are two different forms of production flows, the bread machines for making bread and the making of the bread. As well there are two flows of money moving in the opposite direction to goods and services. These two flows of production and the two flows of money are blended in present modelling. These two flows are distinct and have different functions and yet are related to each other. They constitute a dynamic equilibrium. Those functions and relations need to be determined in order to understand a basic beginning in economics.
    These two circuits must be kept in equilibrium, but too often in times of inflation, one circuit is drained in order to keep the other circuit going causing disequilibrium. The relations between these two circuits extend all the way through to finance, credit, banking, international trade and more which brings in a redistribution center. All of this is too much for a brief response. My basic point is that once one recognizes these two different circuits, one not only is getting to the basics of economic activity but is also establishing the foundations of a science of economics. I refer the reader to Bernard Lonergan’s For a New Political Economy edited by Philip McShane, University Press of Toronto, 1998 for the detailed analysis. As introductions to this work I refer you to Philip McShane’s books on the topic: Economics for Everyone, 1998, PastKeynes Pastmodern Economics: A Fresh Pragmatism, 2002, Beyond Establishment Economics: No Thank-you Mankiw, 2002, Sane Economics and Fusionism, 2010, and Piketty’s Plight and the Global Future: Economics for Dummies, 2014. All these texts are published by Axial Publishing, Vancouver, BC, Canada at For more information see Philip McShane’s website at There are also two historical studies available on Bernard Lonergan’s discovery of the science of economics both by Dr. Michael Shute; Lonergan’s Discovery of the Science of Economics, 2010, and Lonergan’s Early Economic Research, 2010. Both are published with the University of Toronto Press.
    Too many economists and non-economists have claimed to have the solution to the problems that have elicited from the non-scientific character of economic curriculum. I make a similar claim, the difference is that I ask and invite the reader to check it out for her or himself. Check out a small local business and seek out those two circuits. In other words, be empirical, find the correct data and work out what is going on. Some of McShane’s texts are introductory and would be a help in getting to the basics of economics as a science. See especially (McShane 1998. 32-33) on the blending of both circuits. For an introduction to the two flows see McShane, 2010, chapter One.
    And finally, Madi’s and Reardon’s book is a step in the right direction. As a global community and economy, we are not doing well and if there is anyone who is unsure of the commonsense modelling and rationality related to neoclassical economics, this is the text for you. But it goes only so far. We need to take the next step which is to work out the basics of a science of economics and Bernard Lonergan established that some time ago but because of his background, he has been ignored and some have stated that his work is too difficult. Fortunately, physicists, chemists and neuro surgeons have not taken that route. I suggest that Economics 101 be an introduction to the distinction, functions and relations of the two circuits providing the foundation of economics required so that it eventually emerges as a science.
    Robert Henman
    Lecturer in Philosophy, ethics and Peace Studies
    Mount Saint Vincent University, Halifax, Nova Scotia

    • Macrocompassion said:

      I am glad to see that apart from myself, others are rightly complaining that the subject of macroeconomics is not (yet) a science. However those whose minds should be attuned to doing something to make it more scientific are not exactly making much headway, and in fact the subject is still being badly taught and worse understood. There are a number of stages in turning a subject such as this into a science and these involve the setting of axioms (always taken to be true) the taking of assumptions (temporally taken as applicable, yet subject to later change), definitions (so that we know exactly about what we are describing) and some analysis. In our case the subject appears to be so complicated that the assumptions must be aimed at simplification of the details and consequently that the perspective from which the whole subject is viewed should be broad and distant.

      These thought have been incorporated in my new book: “Consequential Macroeconomics–Rationalizing About How Our Social System Works”. Here, the 240 year old problem of making macroeconomics a true science at last has been solved! Past macroeconomics theories have never properly modeled our social structure. Their over-simplified results are unsatisfactory, whilst more recent computerized models are too complicated and unsuitable for student understanding.

      This book presents a formal, logical, scientific, compact, but complete theory about how our social system actually works, viewed from sufficient a distance so as to capture all of it, whilst providing a good picture of its various activities. The assumptions and definitions allow construction of a seamless model, logical in its development and complete. Details given are of the circulating money, goods, services and valuable documents, with many original ideas in the subsequent analyses. The book is suitable for students of economics who wish to avoid the confusion of past explanations. They should have some acquaintance with economics and high-school mathematics, to include elementary matrices and the notation of the calculus. This book is useful for teaching purposes, because of its more general terminology (with definitions) than before. The development also opens the way for research.

      If anyone wants a reviewers e-copy please send me a message at: and tell me who you are and/or where you interest lies.

  2. Maria Alejandra Madi said:

    Many thanks for your interesting comments and suggestions for further reading!


  3. Hopefully some will take the time to read my suggested texts and authors.

  4. davetaylor1 said:

    Maria, I found your post very interesting. The meaning of the word ‘institution’ is very vague, and you have helped me begin to see institutions as active centres with flows in and out. I am with Robert on the significance of Lonergan, not least because in the 1940’s he was using flow diagrams rather than graphs, which is the way to link up separate studies of institutions. I’ve gone a lot further. Lonergan got somewhat lost trying to equate money flows within a closed system, whereas today we are very much more aware of (a) limited physical inputs to the system from the earth and the need for ecological recycling, and (b) the creation and destruction by banks of monetary inputs, which are no longer “valuable” gold but information which can be true or false: in exchange for which a shadow monetary economy is legally but dishonestly demanding securities of real value. Putting Hamilton and Lonergan together, the paths between institutions are on the one hand the world’s transport infrastructure, and a multi-user information channel which can be thought of as fibre-optic broadband. But here’s the key. The active component in the institutions is people, whose brains form part of the information channel. Understanding how these work and differ and are motivated/activated is thus a necessary preliminary for the ability to understand specialisation and institutionalisation in the the economy. Over fifty years my work enabled me to make fundamental discoveries that satisfied myself as to how brains and languages work and mature, these serving to explain and justify the findings of the Myers-Briggs personality indicator developed from Jung’s personality theory. (I’m dropping names here as starting points for readers to look up). Exploring the dominance of one (misguided) point of view in economic practice, I also discovered how a narrow an understanding mathematics economists of all shades have; I would strongly recommend W W Sawyer’s “Prelude to Mathematics” as required reading.

    • Maria Alejandra Madi said:

      I am pleased to know the ideas posted have helped you to rethink aspects of your studies. It would be fabulous if you could expand the Hamilton- Lonergan interesting connection.

      Thanks for dropping names in order to foster further discussion on the topics discussed. Indeed, the decision making process need to be thought beyond rationality and within real institutions.




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