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The economist John R. Commons is considered one of the founding fathers of institutional economics. He played a leading role in the developing of the labor economics field by establishing some core principles in his book Institutional Economics: Its Place in Political Economy (1934). Besides, as Kenneth Boulding (1957) stated, Commons’ ideas as a social reformer were very influential in shaping the New Deal and the American labor legislation and social security toward a welfare state.

It is worth noting that some generations of institutionalists in labor economics can be identified since then (Champlin and Knoedler, 2004). After the first generation of Commons and the Wisconsin School, the second generation emerged in the 1950s and included those economists, such as John Dunlop and Neil Chamberlain, who rejected standard economic textbooks and emphasized the role of institutional rules in structuring labor markets and industrial relations. Afterwards, the third generation focused on structural unemployment (e.g., Charles Killignsworth), segmented labor markets (e.g., Michael Piore). This generation also included post-Keynesian economists, such as Eillen Appelbaum.  From 1980 to the present, the fourth generation has been broadened in order to include contiguous fields and new methods of research. Institutionalism has been broadened further to include the new perspective of Ronald Coase and Oliver Williamson that has informed research and model building based on the concept of transaction cost.

Despite de differences between generations, which are the elements that explain the institutionalist labor approach?

  • The economic needs are culturally and historically situated.
  • The rules of economic behavior do not derived from universal laws of nature by are culturally, legally and socially situated.
  • Markets, as legal and cultural arrangements, are characterized by conflict, power relations and inequality.
  • Governments are considered major players within the markets.

Indeed, the theoretical construct in labor economics of an institutional nature considers that:

  1. The microeconomic neoclassical model of demand and supply is misleading as an explanatory device for the study of employment, wages and labor outcomes.
  2. The labor market is not self-equilibrating.
  3. Involuntary employment, interindustry and interfirm wage differentials, besides racial and gender patterns of employment are relevant features of the labor markets in the real-world.
  4. The behavioral models of human agent should consider imperfect competition, theories of market organization and structure, legal rules and social norms.
  5. The study of the labor markets should privilege both realism in economics and a multidisciplinary, social science foundation.
  6. The commitment on a normative level to welfare criteria should include ethical goals.

Considering the relevance of this topic in economics education, students should be aware of the differences bweteeen institutionalist and neoclassical economists. Neoclassical and institutional economics are not just labels, but represent different ways of conceptualizing economics and shaping economic policies.  

 

References

Champlin, D.P. and Knoedler, J. T. (2004) The institutionalist Tradition in Labor Economis. New York and London: M.E. Sharpe.

Boulding, K. (1957).  A look at Institutionalism. American Economic Review. 47:1-12.

 

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In the book Denationalisation of Money- the Argument Refined (1976), Hayek proposed the abolition of the government’s monopoly over the issue of fiat money in order to prevent price instability. In fact, his defense of a complete privatization of money supply stemmed from his disappointment with central banks’ management, which, in his opinion, had been highly influenced by politics. Thus, the ultimate objective of the denationalisation of money advocated by Hayek was related to avoid political interference on monetary policy.

Therefore, the denationalisation of money would be achieved by the complete abolition of the government monopoly over the issue of fiat money.  In the framework of a free market monetary regime, only those currencies that have a stable purchasing power would survive.  The basic idea is that the possibility of banks issuing different currencies would open the way to market competition. Banks could issue non-interest bearing certificates and deposit accounts on the basis of their own distinct registered trade mark and the currencies of different banks would be traded at variable exchange rates. This proposal would leave the way open for a comprehensive privatisation of the supply of money.

Hayek underlined that the main advantage of the free market competitive order is that prices will convey to the acting individuals the relevant information to make decisions to adjust their activities in face of the competition of currencies. He highlighted  the uses of money that would chiefly affect the choice among available kinds of currencies: i)  as ash purchases of commodities and services, ii)  as reserves for future needs; iii) as deferred payments, and iv) as unit of account.   In his opinion, these uses are consequences of the basic function of money as a medium of exchange and  the stability of the value of a currency as unit of account is the most desirable of all uses (Hayek, 1976: 67).

Competition and profit maximisation would lead to market equilibrium where only those banks that pay a competitive return on liabilities to their clients could survive. Since currency corresponds to non-interest-bearing certificates, the crucial requirement is the maintenance of the value of the currency.  Under Hayek’s theoretical framework, the market forces would determine the relative values of the different competing currencies. In other words, the exchange rates between the competing currencies would float freely. So, in equilibrium, only currencies guaranteeing a stable purchasing power would exist. People would not want to hold on to the currency of an issuer that was expected to depreciate relative to one that was expected to hold its value in terms of purchasing power over goods and services. The marginal costs of producing and issuing a currency (notes and coin) are rather low (close to zero) and the nominal rate of interest would be driven (close) to zero. Banks that failed to build up stability for the value of their currencies would lose customers and be driven out of financial business.

After reading this proposal, the question that arises is: are current digital currencies bringing to reality Hayek’s ideas?

In the last ten years, mainly aftyer the 2008 global crisis, the increasing digitalization of financial transactions is also related to changes in the banks’ competitive environment, where the intense growth of the startups called fintechs, especially since 2010, has revealed a new articulation between finance and technology. As a result of the advance of  new non-bank competitors (fintechs), big banks have begun to establish collaborative partnerships with selected fintechs in order to produce new technological solutions in the areas of payment systems, insurance, financial consultancy and management, besides digital currencies.

In this digital environment, new technologies – such as advanced analytics, blockchains and big data, in addition to the use of robotics, artificial intelligence, besides new forms of encryption and biometrics – have been enabling changes in the provision of financial products and services that could challenge current central banks’ patterns of policy and regulation.

 

References

HAYEK, F. A. von (1990 [1976]) Denationalisation of Money: The Argument Refined, 3rd. edition, London: Institute of Economic Affairs.

Reproduced from:

Zaman, Asad: Book Review of Friedrich A. Von Hayek’s Road to Serfdom, Journal of Islamic Business and Management, vol 3, no 1, 2013. road2serfodom

The Road to Serfdom is the book written by the famous economist F. A. Hayek (1899-1992), the recipient of the US President’s Medal of Freedom in 1991 and co-winner of the Nobel Memorial Prize in Economics in 1974. Originally published in 1944, the book is among the most influential and popular expositions of market economy, selling over two million copies, and remaining a best-seller. F. A. Hayek warned of the danger of tyranny that may result from government control of economic decision making through central planning. He argued that the abandonment of individualism and classical liberalism inevitably leads to a loss of freedom, the creation of an oppressive society, the tyranny of a dictator and the serfdom of the individual.  A classic work in political philosophy, intellectual and cultural history, and economics, The Road to Serfdom has inspired and infuriated politicians, scholars, and general readers for over six decades.

However, The Road to Serfdom has been criticised as well on the ground that unfettered markets have undermined the social order and that economic breakdown had paved the way for the emergence of dictatorship. The present review is also a critique on the book taking evidence from the history that the facilitator’s role of the State requires the rulers / regulators to take remedial measures for the promotion of social interest, if individual interest is in conflict with it.  The classical individualism and liberalism promote selfishness that must be distinguished from the value based ‘self interest’ which requires that one should be conscious of the interest of others and should avoid hurting them. The State is required to adopt a policy mix of market based competitive system along with the core value of justice and fair play.

Historical Background

Western social science is intimately tuned to Western history. The emergence of Social Science in the West was coincident with the loss of faith in the West, referred to as “Death of God” by Nietzsche. Loss of Divine Guidance forced fresh thinking about human nature. Hobbes thought that the natural state of humans was a “war of all against all”; the state or government was necessary to intermediate this conflict and bring about a peaceful outcome. In contrast Locke granted rights to men and thereby limited the rights and powers of the government. These early philosophers became the precursors of substantially different views on the crucial of issue of the appropriate balance between the powers of the government and individual liberty.

The Liberal Tradition: Hayek is squarely within the liberal tradition, a particular kind of social and political philosophy espoused by British and Continental thinkers such as John Locke, Baron de Montesquieu, David Hume, and Adam Smith, and American thinkers such as Thomas Jefferson and James Madison.  In essence, these classical liberal thinkers were committed to three types of freedom: economic freedom, political freedom, and freedom of speech and religion.  For classical liberalism, freedom meant severely limiting the power and scope of invasive government, thus increasing the scope for individual and private action.
 “Unintended Consequences” of Socialist Policy: Hayek presents a sophisticated and subtle defence of liberalism, but could not escape the influence of the horrifying World War II which he lived through in formulating his philosophies. One the main themes of the RtS is the “the law of unintended consequences”. Hayek contends that well-intentioned German socialists created government controls to help the poor and bring about desirable social reforms. However these government policies, like Frankenstein’s monster, went out of control and led to the emergence of Nazi-ism. He foresees the same process occurring in Britain, and warns that similarly well-intentioned efforts to help the poor would lead to powerful governments and Serfdom in Britain. Part of his prophecies came true in that the Labor Party did come to power in Britain and did pursue and implement many socialist policies including nationalization of industries and socialized medicine. However, there was no apparent resultant loss of individual liberty in UK that Hayek thought would inevitably result[2]. Subsequently, the Thatcher government reversed most of the nationalizations but left the socialized medicine system intact.

Intended Consequences of Socialist Policy: While the “unintended consequences” Hayek warned about did not emerge, the intended consequences were very prominent. The lot of the sick in UK, Europe and Canada, with socialized medicine, is substantially better than that of the USA, where private medicine leaves a large proportion of the poor population uncovered in medical emergencies. Studies have shown that large proportions of people who fall into poverty do so as a result of medical problems. There is substantial evidence showing that quality of life of the poor is much worse, and their percentage much greater in the USA than in European countries which have adopted many socialist type policies for the benefit of the poor. Taken in the context of post World War II policy making, which is the narrow context for Hayek’s RtS, it seems clear that Hayek was dangerously wrong. Had Hayek’s warnings been heeded, the lives of vast numbers of the poor in Europe would have been miserable, and human suffering would have increased. European countries did implement socialist policies and provide substantially more support to the poor than USA, but none of them slipped into Nazi-ism or the Serfdom that Hayek thought would result. A glaring counterexample to Hayek is provided by the Scandinavian countries, and most prominently Sweden, who have most aggressively pursued socialist policies of the kind held to be dangerous and damaging both to long run economic performance and to individual freedom by Hayek. As a group, these economies have done better in terms of growth, unemployment and inflation, and also have had higher rankings in terms of various measures of political and individual freedom, than other European economies with less socialist policies [see Rosser (2004)].
The Larger Debate: Free Markets. We next consider the broader context for RtS, namely the debate about whether markets should be regulated by the state, or whether they should be allowed to operate freely as the liberals advocate. There is overwhelming empirical evidence on all aspects of this debate. It is clear that markets do well at some thing. In terms of creation of wealth, and efficient fulfilment of demands and desires of the rich and powerful, markets work very well. However, markets fail at providing equitable income distributions or adequate support to the poor. As the remarkable studies by Amartya Sen have shown, a fully functioning free market and adequate food supplies are perfectly compatible with famines which lead to death by hunger of large masses of people. The emergence of Keynesian doctrines in the 1930s was due to the Great Depression which showed again very forcefully to a very large number of people that market outcomes cannot be trusted to deliver the goods, i.e. economic welfare. This clear and overwhelming evidence was so strong that Hayek and all liberal thinkers were eclipsed until horrors of the depression had faded from memories. Only in the late 70’s, some 40 years after the Great Depression was there a revival of fortunes of liberal thought. It appears strange that these neoclassical liberals have learnt nothing from experience. They insist that markets equilibrate very fast, and that unemployment will be quickly eliminated by free market mechanisms. Even ignoring the Great Depression, the experience of Chile under the Chicago Boys, where unemployment remained at around 20% during fourteen years of ultra liberal policies is enough to show that this is not true (see Rayack (1984)). Similarly, liberals are still developing theories to account for the failure of Russia to respond quickly to free market mechanisms, and the subsequent economic disaster leading to massive poverty, heavy unemployment and a fall in productive output of more than 60%. The liberals make much of the argument that central planning requires information typically unavailable and hence leads to inefficiencies. However, they have never considered or calculated the time taken and the cost of reaching the efficient market equilibrium, which is borne by the poor and unemployed in the form of hunger, suffering and misery.

Power/Knowledge: Given overwhelming empirical evidence that unregulated markets often deliver disastrous outcomes, leading to misery, hunger, death and exploitation for masses of people, what accounts for repeated insistence of liberal theorists that “markets work”? Surely this message, frequently made with emphasis in nearly all standard economic textbooks, deserves some qualifications and refinements, together with some explanation of contrary empirical evidence. However, typical texts sweep all contrary evidence under the rug, rather than treat it with intellectual honesty. This leads one to reluctantly consider Foucault and his explanation of the link between (actually the identity of) Knowledge and Power. The naïve view is that Knowledge consists of understanding phenomena, and validity or truth of the knowledge depends on how accurately it describes the reality. Many case studies done by Foucault and his followers show that Knowledge consists of rules of manipulating reality to achieve desirable results (Power). When considered in the context, the repeated re-emergence of liberal thought, despite repeated and massive failures on the empirical front, makes perfect sense. In all ages, social requirement of justice, equity, compassion for the poor and other social norms (including environmental issues) place powerful restrictions on the scope of actions available to the rich and powerful. Liberal thought, and the message that Laissez Faire leads to optimal social outcomes, is a strategic tool which is helpful in removing these restraints. The rich and powerful have access to media, can fund colleges and think-tanks etc. and therefore produce “knowledge” that will enhance the power of this group.

An Ironic Twist: Recent post 9/11 US experience provides an ironic twist on the central message of Hayek’s RtS. Nearly all of the signposts on the Road to Serfdom identified by Hayek can be found in some form or the other in the curtailment of personal freedoms in the USA, supposedly as a defence against terror. People have been arrested and imprisoned for talking against US policies. The radical curtailment of individual freedom in the “Patriot Act” is a source of concern to many liberal thinkers. The irony is that the apparent cause of this path to Serfdom in the USA is not socialist policy but the pro-free market and laissez faire policies pursued to the extremes in the USA. Relentless pursuit of profits by US and multinational firms, unrestrained by any considerations of equity and fairness, has created tremendous amounts of social injustice, poverty, exploitation, etc.  The attempts to squelch popular protest against such market-friendly policies has led to police-state like policies in the USA bearing a striking resemblance to those described by Hayek as being signposts on the road to Serfdom. It has also been suggested that the market itself enslaves vast numbers of humans, reducing their lives to endless drudgery in the name of greater profits and production. It would appear that there is more than one road to Serfdom, and one of the roads is extreme laissez faire advocated by Hayek and his followers.

Lessons from European History: One important reason for considering the context for Hayek and its critique is to show that it is deeply grounded in European historical experience. It has been a European conceit that their experience is somehow universal, and hence lessons from it applicable to all societies. One of these lessons is that the liberal tradition, with maximum individual freedom, is the ideal state which all societies will ultimately achieve. Indeed, the collapse of Russia led to the (premature) celebration of “The End of History” by Fukuyama – history is about to achieve its goal of leading all societies to conform to the ideal European culture with maximum individual freedom for all.  [ see link for: Conclusions & References ]

For more material on the urgent need to develop an alternative to Eurocentric Social Science, which completely ignores humanity, morality and spirituality, leading to devastation of communities and environment, see: An Islamic Approach to Humanities. (also available from Academia)

 

 

In response to a comment by David Chester regarding Adam Smith and the Invisible Hand, I am reproducing the section in the paper which deals with this issue. This answers his question about how what is attributed to Adam Smith differs from what he actually said.
[Excerpt from the paper: Failures of the Invisible Hand]

Section 6: Recent Vintage of the Invisible Hand

The main goal of this section is to show that the modern interpretation of the IH is relatively recent. The idea that Mankiw (together with other modern economists) attributes to Smith is not actually present in Smith’s writings. In fact, modern writers borrow the authority of Adam Smith to provide weight to a very dubious idea of recent coinage.

We first note that modern interpretation of the “IH” is radically different from any interpretation of this concept that existed before the second half of the twentieth century. There is a growing body of literature (e.g., Grampp, 2000; Minowitz, 2004) which insists that the metaphor used by Smith was never meant to be anything more than a metaphor, and that the meanings inferred from Smith’s idea of IH by the modern economists support only their own interpretation of economic policies. Kennedy (2009) shows that three leading modern economists laud the IH as the “profoundest” and “most influential” contribution of Adam Smith. Nonetheless, their interpretation of the term and its significance is not supported either by Adam Smith or by readers of Adam Smith until the late nineteenth century.

In a corpus of over a million words, the terms IH appears only twice in the economic writings of Adam Smith. It is used only once in the Wealth of Nations in very limited and narrow context. Rothschild (1994) analyses the controversy surrounding the meaning of IH and concludes that what Smith meant by this metaphor was only a “mildly ironic joke.” Blaug (2007) also shows that Adam Smith cannot be blamed for these ideas. He cites other references which state that:

Some economists regarded the Arrow-Debreu results [on the existence of general equilibrium] and the fundamental theorems of welfare economics as the modern expression of Smith’s invisible hand . . . . But Smith would be surprised at what is attributed to him today . . . . On careful reading Smith does not say that selfish behavior is praiseworthy, is bound to pay, or necessarily promotes the best interests of society . . . . The passage containing the invisible hand metaphor is not about general equilibrium theory: its purpose is to explain why merchants would continue to buy British products even if tariffs were removed.

Ashraf, Camerer, and Loewenstein (2005) make a detailed analysis of Smith’s pioneering work The Theory of Moral Sentiments to conclude that “For Adam Smith, a mixture of concern about fairness . . . and altruism played an essential role in market interactions, allowing trust, repeated transactions and material gains to occur.” In sharp contrast to the modern economists’ unwarranted understanding of the IH metaphor as a sanction for selfish behavior, Smith explains that justice is in fact only a rational behavior. Fear of retribution is likely to deter the people from committing injustice. He says: “Nature has implanted in the human breast, that consciousness of ill-desert, those terrors of merited
punishment which attend upon its violation, as the great safe-guards of the association of mankind, to protect the weak, to curb the violent, and to chastise the guilty.” See Smith (1759, p. ii, iii, 125). Realizing the crucial role of justice, especially in ensuring just behavior, he believes that justice is the “main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society . . . must in a moment crumble to atoms.” Fairness and justice have only recently attracted the attention of economists as providing justifications for many observed human behaviors in conflict with standard utility maximization theories, see Karacuka and Zaman (2012) for a brief survey.

REFERENCES:

Ashraf, N., Camerer, C. F., & Loewenstein, G. (2005). Adam Smith, behavioral economist.
Journal of Economic Perspectives, 19, 131–145

Blaug, M. (2007). The fundamental theorems of modern welfare economics, historically
contemplated. History of Political Economy, 39, 185–207

Grampp, W. D. (2000). What did Smith mean by the invisible hand? Journal of Political
Economy, 108, 441–465

Kennedy, G. (2009). Adam Smith and the invisible hand: From metaphor to myth. Econ Journal Watch, 6, 239–263

Minowitz, P. (2004). Adam smith’s invisible hands. Econ Journal Watch, 1, 381–412

Rothschild, E. (1994). Adam Smith and the invisible hand. The American Economic Review, 84, 319–322

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 WEA Conference Public Law and Economics: Economic Regulation and Competition Policies  aims to:

(i) discuss how sector regulators and competition authorities are interacting post-crises and how the economic analysis of law can help countries reach better regulation and competition policies;

(ii) contribute with practical and theoretical references on the limits of economic power and forms of state intervention;

(iii) deal with the uncertainties and challenges of the digital economy;

(iv) gather relevant case studies and

(v) identify new trends in Law and Economics that have arisen post-crises.

 

We invite you all  to read the following conference papers at http://lawandeconomics2017.weaconferences.net/papers/ and send your comments

 

 

As Edward Fullbrook highlights in his recent book Narrative Fixation in Economics, the Cartesian view of human reality has deeply shaped the way Neoclassical Economics theorizes about the economic and social existence (2016, p. 45). Indeed, while emphasizing the relevance of the pure thought of a disembedded human subject,  Neoclassical Economics has reinforced the relevance of the Cartesian method of inquiry  that moved the so called scientific (true) knowledge  out of the general flux of experience.

In the second part of the Discourse of Method, Descartes presented some principles that should be followed in order to acquire knowledge: 1) human beings cannot  admit any ideas that are not absolutely clear; 2) human beings must divide each problem in so many parts as appropriate for its best resolution; 3) human beings should apply deductive reasoning to organize their  thoughts from the simplest to the most complex ones 4) the analytical-synthetic process of reasoning leads to true knowledge.

According to Descartes, the first principle of his method focuses the importance of “never accepting something as true that I clearly don’t know as such” (Discourse of Method, Part II). Indeed, Descartes inspired himself in Geometry as a model of Science. As a result, he considered the postulates of Geometry not only as universal and necessary but also as clear and distinctive ideas related to intellectual intuition. Only these clear and distinctive ideas  are considered to be the pillars of true knowledge.

Based on the second principle, Descartes builds his research method of analysis that isolates the clear and distinctive ideas from the most complex ones. His emphasis on the order of thoughts strengthens the role of Mathematics in the Cartesian method of pure inquiry. Moreover, the third principle of his method leads to a special kind of organization of thoughts. In his own words, the organization of thought should start “with the simplest and easier to gradually rise, as if by means of steps, to the knowledge of the more composed, and assuming an order between the ones that don’t precede naturally each other” (Discourse of Method, Part II).

Departing from the mathematical method of reasoning, Descartes arrives at the notion of order in scientific thought, that is to say, once the human subject knows the simple elements of a problem, he can assume all the consequences that derive from those first ideas considered as absolutely certain. Those first ideas have the characteristics of clarity and distinction. Besides, they are known intuitively and constitute the pillars on which relies true knowledge.

Finally, Descartes reinforced the analytical-synthetic process of reasoning. Following the deductive method of pure inquiry, human knowledge grows throughout a rigorous chain of ideas. As a consequence, new thoughts arise while the human subject applies deductive reasoning so as to create a chain of ideas that links the most simple to the most complex ones. In this attempt, true knowledge can be obtained.

As a matter of fact, the Cartesian method presents the intellectual intuition and the deductive reasoning as crucial elements of the discovery and construction of true knowledge. Moreover, clarity, distinction and order overwhelmed the mathesis universalis that turned out to be considered as the pinnacle of the epistemo-ontological construction of Cartesian thinking.  The mathesis universalis is, according to the Cartesian epistemology, a general method of pure inquiry able to explain everything, regardless of the nature of the objects to be studied.

As E. Gilson (1945) highlighted, the Cartesian method represents an attempt to extend the mathematical method of inquiry to all of human knowledge in the form of the mathesis universalis.  Indeed, this extension is at the center of the a priori foundations of scientific knowledge in Neoclassical Economics.

 

 

 

References

DESCARTES, René.  Discurso do Método. São Paulo: Abril Cultural, 1973.

FULLBROOK, E. Narrative Fixation in Economics, WEA Books, 2016.

WILLIAMS, Bernard. Descartes: The Project Of Pure Enquiry. UK: Penguin, 1978

A relevant feature of the current crisis in economic knowledge is the recurrence of the  Ricardian Vice. Joseph A. Schumpeter coined this term in his book History of Economic Analysis when he criticized the habit assigned to Ricardo to represent the economy by a set of simplified assumptions and to use tautologies to develop practical economic solutions. Indeed, Schumpeter rejected the kind of economic thought that mainly favours deductive methods of inquiry – based on mathematical reasoning- because the  habit  known as the Ricardian Vice generates analytical unrealistic results that are irrelevant to solve the real-world economic problems.

Also Keynes warned that the understanding of the economic phenomena demands not only purely deductive reasoning, but also other methods of inquiry along with the  study of other fields of knowledge- such as History and Philosophy. In his own words:

The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.” (Keynes, Collected Writings, vol. X: Essays in Biography)

Today, Schumpeter’s and Keynes’s criticism could be certainly addressed to those economists whose beliefs ultimately privilege the deductive method of inquiry in Economics. Due to these beliefs,  mainstream economists favour the adoption of a nominalist bias. And as a consequence, the trouble is that the dialogue between economic theories and the economic reality turns out to be abandoned not only in academic research but also in the policy making process.

This dialogue is complex and should be considered in any attempt to build realistic economic theories, as Keynes warned. Indeed, the changing environment of real-world markets through time -that is irreversible-  refers to a certain degree of ontological indeterminacy that should be considered in realistic economic theories and in the study of Economics.