On the RWER Blog, Paul David would like heterodox economists to see reason — read and understand the original Keynes. Justaluckyfool would like us to read, understand and implement Soddy’s financial engineering. On the WEA Pedagogy Blog, Paul Grignon ridicules economists’ understanding of money, and offers an alternative. Egmont Kakarot-Handtke , Xavi Mir, and Jeff offer alternative axiomatizations, and principles which would fix the problems with neoclassical theories. Others who have not spoken up on these threads have their own solutions to the problems of the world.
I am trying to offer a meta-analysis here, as noted by davetaylor1. All heterodox economists agree on one thing, by definition of heterodoxy: orthodox economics contains (huge) errors. INSTEAD of explaining what these errors are and trying to fix them, I would like to stand back from the fray and try to examine what is going on from a distance. WHAT makes certain theories popular? WHY do most people come to believe in theories? WHAT causes changes in these beliefs? By studying the Methodology of Polanyi’s Great Transformation, I came to the understanding that theories can only be understood within their historical context. This understanding is violently in conflict with the conception of knowledge, based on positivist ideas, that I learned in the universities. Contrary to positivist ideas, to understand the process of emergence of theories, and how these theories change over time, one has to do analysis at three levels simultaneously:
LEVEL 1: The Historical Facts, the Context, The Various Groups engaged in the struggle for power, and their interests and ideological positions.
LEVEL 2: The THEORIES which are in use by different groups to analyze the historical experience. It is crucial to understand theories as the lens and framework used by different groups to understand history. Theories prescribe actions to be taken, and groups act to shape history in light of understanding furnished by (often false) theories.
LEVEL 3: Rise and fall of theories as a consequence of the shifting sands of political fortunes of different groups, as well as twists and turns of emergent historical events.
The simplistic and naive analysis which we usually follow is summarized by the maxim “Build a better mousetrap, and the world will beat a pathway to your door.” That is, if we come up with a better theory, it will automatically prevail. On the basis of this wrong idea, we wonder why nobody pays attention to our great theory, so much better than the dominant one everyone seems to be following. For example, Paul Grignon, Paul David, Jeff, Xavi Mir and others are firmly convinced that they have built better mousetraps and are annoyed that the world is not beating a pathway to their doors. The naive notion about emergence and adoption of theories can be summarized as:
STANDARD (logical positivist) THEORY OF KNOWLEDGE: A theory will be discarded once it is shown to be false. A theory will be adopted if it can be proven to be true.
On the basis of this positivist idea, we try to prove that dominant theories are false, and offer alternatives which we try to prove true. We think that if we are successful in this attempt, our theories will be accepted. Of all people, heterodox economists should be the first to understand that this theory of knowledge is wrong. They are witness to the long standing dominance and widespread acceptance of theories which are obviously false, and easily demonstrated to be wrong. Thus we need to move to a more sophisticated theory of knowledge. Foucault builds on Marx, and provides a very useful improvement.
POWER/KNOWLEDGE: Theories which are aligned with interests of power become accepted. Moreover, acceptance of these theories actually creates power — power and knowledge are entangled.
Thus, acceptance of neoclassical economics is very beneficial to the interests of the rich and powerful, and that is why it is the dominant theory. Universities serve to indoctrinate a select class to serve the interests of power. Based on this understanding of knowledge, we would not waste time trying to convince those in power of the truth and validity of our theories. Instead, we would appeal to those groups whose interests would be served by the theories we are offering as alternatives. We would focus on the benefits of believing our theories more than on the proof of their validity. The bottom 90%, those who are deeply in debt, those who are powerless, would be the natural target audience, who would listen to our theories because they are aligned with their interests.
I think Polanyi’s analysis of emergence and transformation of structures of knowledge goes further than this, and is more complex. We must understand human knowledge as a social construct — it comes into being because we agree to accept it, and consensus emerges. The agreement can be forced by powers that be using coercion and persuasion in different combinations. Truth is helpful in persuasion, and so it does matter, but it is not the only factor which is relevant. Many readings on the relation between power and knowledge are given on my webpage linked. Here let me just provide one example to illustrate the idea more clearly.
Consider the rise and fall of Keynesian economics. According to the standard theory of knowledge, implicitly or explicitly accepted by nearly all authors cited in the first paragraph of this post, we would understand this by the relation of Keynesian economics to the truth. We would consider whether or not IS-LM analysis is a correct description of economics. Alternatively, we would examine the validity of Paul Davidson’s understanding of Keynesian theories by matching them to macroeconomic behavior. HOWEVER, the analysis I am offering suggests that to understand Keynes, one must understand how Keynesian theory emerged in response to the Great Depression. Reading Steinbeck’s Grapes of Wrath is essential to understanding the historical background within which Keynes constructed his economic theories. The eclipse of Hayek and other liberal free marketeers in the post-war era, and the rise of Keynes in the post war era is related to how economists understood the historical experience of the Great Depression. The re-emergence of Friedman, Hayek, and others during and after the Reagan-Thatcher era is related to historical events, MORE than it is related to the TRUTH of these theories. It is in this context that we must learn the historical events (first level). Then we must learn how Keynesian theories were used to analyze and understand the Great Depression (second level). Then we must look at the power configurations to understand why Keynesian theories become dominant in the post war era, so much so that even Friedman said “We are all Keynesians now.” (third level). This way of thinking about economic theory is strongly in conflict with positivist myths that suggest that economics is a science — universal invariant truth which is valid across time and place, without any reference to historical context. Ken Zimmerman and Graccibros have offered comments which are historically situated, and offer insights into the relations between theories and their historical context.
TO REITERATE: It is easy to demonstrate the falsity of conventional economic theories. That was the second set of three points in my earlier post on Fundamental Flaws: consumer theory, producer theory, and supply & demand — these are all easily demonstrated to conflict with empirical observations of consumer behavior, firm behavior, and price behavior. One can find acknowledgements of these conflicts between theories and observations in the writings of leading conventional economists. However, they find various rationalizations to allow them to hold on to these theories in face of strong evidence to the contrary. It is clear that it is not the truth or falsity of theories which leads them to hold these theories.
Heterodox economists must dig deeper into understanding theories of knowledge: WHY are these obviously false theories dominant, and continue to be studied and taught at universities all over the world. WHY are demonstrably superior alternatives routinely ignored?
Taking the Power/Knowledge view might lead one to feel hopeless — if theories are shaped by those in power, then the only way to fix them is to first acquire power. However, there is another way to look at the matter. There is a complex interaction between power and theories. Theories create power, just as power creates theories. The truth can be a powerful weapon in shifting the balance of power. However the rise and fall of theories is much more complex than a simple analysis of truth/falsity of theories would suggest. Studying the historical context of the rise and fall of logical positivism as the dominant paradigm for knowledge in the twentieth century is very fruitful exercise in learning more about this central problem in the theory of knowledge. The many deep errors in this knowledge paradigm have penetrated and poisoned the minds of most if not all intellectuals. I know from this from personal experience, as I came to believe in the central propositions of positivism, and it required a long and painful struggle to free my mind from these misconceptions. If I get the time, I would like to open up a chapter of “Positivists Anonymous”; to help others struggling to free themselves. For the moment, I would just like to shift the focus our discussion from critiques of neoclassical theories to the relationship between real world events, political power of various groups, and the theories which emerge as a consequence of the interaction between these.