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Linked below is a 95m Video Lecture on the previous post on Simple Model Explains Complex Keynesian Concepts“. In Chapter 2 of General Theory, Keynes has two points against the classical theory of the labor market. He points out that laborers react strongly (with strikes) against wage cuts, but show no similar reaction to inflation. This means that the decision to supply labor does not depend on the real wage — instead it must depend only on the nominal wage. The SECOND point, which he regards as fundamental, is that the bargain between firms and laborers is conducted in terms of nominal wage — this decision does not determine the real wage. The real wage is an emergent property; it comes out of the system as a result of collective decisions of all, and is not controlled by any two parties. One of the KEY contributions of the SIMPLE MODEL discussed in the previous post, and in the video lecture below, is to show how this works — regardless of how the laborers and landlords negotiate and decide on the nominal wage, the real wage does not change. It is amazing that there is no understanding of this — which Keynes calls the “fundamental point” in the literature on labor economics. Current labor textbooks seem to completely ignore Keynes, and I am not aware of an explication of this anywhere else either [Readers: please provide pointers to clear explanations elsewhere if you know of some]. This can be considered as the main contribution of the simple model explained in the video lecture linked below (and the previous post, linked above).

THIS post (below the video lecture on previous post) is actually an assignment to the students to construct variations on the simple model. However, I start by discussing a crucial methodological issue: the relation between models and reality. I explain how this has been radically misunderstood by economists, due to some fundamental mis-steps in Western philosophical tradition. As a result the working concept of an economic model is disastrously different from what it is supposed to be. I provide a very brief summary of the differences between current western concepts and the correct notion of a model, and explain it with some simple examples. An extended discussion of this concept, and a 45m video lecture on it, are also linked below. This is followed by some exercises in model building for students.

95m Video Lecture on: Simple Model Explains Complex Keynesian Concepts

1      Models and Reality

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[[For a 95m Video Lecture on this post, and related materials, see:   Models and Reality  ]]

In the context of the radical Macroeconomics Course I am teaching, I was very unhappy with the material available which tries to explain what Keynes is saying. In attempting to explain it better, I constructed an extremely simple model of a primitive agricultural economy. This model has a lot of pedagogical value in that it can demonstrate many complex phenomenon in very simple terms. In particular, Keynesian, Marxists, Classical and Neo-Classical concepts can be illustrated and compared within our model. We will show the failure of all neoclassical concepts of labor, Supply and Demand, equality of marginal product, value theory —  the whole she-bang — in an intuitive and easy to understand plausible model of a simple economy.

An agricultural economy produces only one good, say corn, using a simple fixed proportions production function. One Laborer working on One Acre of Land can produce 10 units of corn. All the land is owned by Landlords, and they do not do any work themselves. Rather they hire laborers to work their land. The economy functions according to the following rules. At the start of the period, Landlords hire laborers and pay them the going market wage rates in money. Then goods are produced and the market for goods opens. The Landlords retain some of the goods for themselves – this is their profit, or equivalently, their rent. The rest of the goods are put up for sale in the market. The laborers are the only consumers and they purchase the goods with the money they have earned in wages. That ends the period.

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I have just started teaching the standard Macroeconomics course for our Ph.D. Sequence. However, I will be teaching it using a historical and qualitative approach, that was abandoned in the post-Samuelson era. The course will be “inverted classroom” so readings, video lectures, and other exercises will be assigned outside of class, while discussions will take place in class. This would make it possible for outsiders to follow the course at a distance, since the materials would be available.

An Islamic WorldView

Advanced Macroeconomics II:  Preliminaries to STUDY prior to the FIRST Class on Mon 10th Sep 2018 — Teacher: Dr. Asad Zaman, VC PIDE.

Introduction: All required materials and links are available from Google Website: Keynesian Macroeconomics (https://sites.google.com/site/az4macro). This course will be radically different from routine Macroeconomics courses being taught all over the world. It is our ambition to enable the student to understand real world economics like the impact of China on global trade, the petro-dollar, Causes and effects of the Global Financial Crisis, Why IMF promotes austerity even though it harms weak economies, Current BOP Crises in Turkey and Pakistan, and a whole host of related ongoing economic issues. As opposed to this, conventional courses will teach students models and mathematics which have no bearing on reality, and which often teach the wrong lessons about how to understand and manage the economy. As a simple…

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Traditional epistemological theories have fostered an endless debate on dichotomies characterized by forms of objectivism, on the one hand, and forms of relativism/skepticism on the other. Currently, among the deep global social and cultural challenges, the crisis in epistemology is characterized by a radical questioning of the whole matrix within which such dichotomies have been drawn.

Taking into account the evolution of Economics as a science, the need for a deep epistemological has already been pointed out by outstanding economists.  Joseph Schumpeter, for example,  rejected the kind of economic thought that mainly favours deductive methods of inquiry – based on mathematical reasoning- because this  habit  generates analytical unrealistic results that are irrelevant to solve the real-world economic problems. Also John Maynard 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. Today, Schumpeter’s and Keynes’s criticism could be certainly addressed to those economists whose beliefs ultimately privilege the adoption of a nominalist bias because the dialogue between the economic theories and the economic reality turns out to be abandoned not only in academic research but also in the policy making process.

Considering this background, the shift to Complexity in economic thinking can contribute to substantive epistemological insights in order both to face the contemporary theoretical and methodological challenges and to reject the Cartesian theorization of knowledge under an anthropocentric foundational model of rationality, complete order and truth.  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. 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.

Edward Fullbrook, in his  book Narrative Fixation in Economics, also highlights that 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.

Indeed, the dialogue between the economic theories and the economic reality is complex and a dialogical approach should be considered in any attempt to build realistic economic theories, as Keynes warned.

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.  In thruth, a shift to Complexity in economic thinking can favor the adoption of a realist standpoint that relates to

  • A non-anthropocentric approach
  • A social ontology that is rooted in actual experience
  • A new approach to rationality
  • An evolutionary approach based on the coexistence of laws and change
  • Ontological indeterminism
  • Epistemological fallibilism
  • An endogenous approach to norms and ethics

Considering the relevance of this topic in economics education, students should be aware of the consequences of different epistemological approaches. Complexity in Economics is not  just a new label, but represents a  way of rethinking economics as a science.  

 

 

Introduction of my article Challenging the Current Economics Curriculum: Creating Challengers and Change.”  Chapter 2 of edited volume: “Challenging the Current Economics Curriculum” editors Maria Alejandra Madi and Jack Reardon

Introduction:

How does it happen that we have given our quiet assent to a situation where the richest 85 individuals have more money than the bottom 3.5 billion? Where vultures wait for starving children to die, while others eat luxurious meals on private resort islands? Where horrendous military and commercial crimes leading to deaths, misery, and deprivations of millions are routinely committed by highly educated men with multimillion dollar salaries in luxury corporate suites and government offices?

A core component of the answer to these critical questions is that we have been educated to believe that this is a normal state of affairs, which comes about through the operation of iron laws of economics. Economic theories currently being taught in universities all over the world are an essential pillar which sustains the economic system currently in operation.  These theories state that we (human beings) are cold, callous, and calculating. Microeconomic theory says rational individuals are concerned only with their own consumption. They are callous; completely indifferent to the needs of others. They maximize, calculating personal benefits to the last penny. They are cold – their decisions are not swayed by emotions of any kind. All this theorizing is not without power – it creates the world we live in, and the rules we live by.

We have even been taught that laissez-faire automatically brings about the best possible outcomes. We are told that the rich are efficient wealth producers and deserve their wealth, just as the poor deserve their poverty. To create a labor market to sustain capitalist production processes, we have been trained to believe that our lives are for sale to the highest bidder.

Besides, we have been educated to believe that we are powerless to change things. We have been trained to laugh at the idea that human lives are infinitely precious. We have been made to forget that each moment of our lives is unique – each moment contains potentials which never existed before, and will never come into being again. Only by re-defining what is worth living for, and what is worth dying for, can we strike at the heart of the capitalist process of production.

When we talk about curriculum change, we are talking about creating new theoretical foundations to observe and intervene in the world we live in. This is not a project for the faint-of-heart, especially because the rich and powerful spend huge amounts of wealth and energy in preserving this status-quo, and resist efforts to change these social realities with all their might. The project of speaking truth to power is severely handicapped by our education which conditions our vision of the truth.Our theories of knowledge state that good and evil do not exist. We have been taught rules of intellectual discourse which forbid appeals to the heart and soul. We have thereby been deprived of our most powerful weapons in the eternal battle against evil. Modern education has turned us into soulless zombies, consumption and sex machines, human resources, and inputs into the production function for wealth. The vast majority of the populace has been paralyzed with poisonous ways of thinking, and the small minority which retains the capacity for thought and action has also been badly damaged by these same poisons.

Before talking about curriculum change, we must redeem our souls. How can this be done?The first step in curriculum change requires the creation of teachers who have a clear understanding of the challenge that we face. These teachers must de-program themselves to cleanse their hearts. Given that we battle against overwhelming odds, our teachers must be rocks of courage, fortitude, and stamina. Also essential is a sense of humor to enable us to laugh at the massive forces arrayed against us – without this, we would die of despair. Also required is a deep commitment to the cause, which is giving hope to and enriching the lives of billions living, entirely un-necessarily, in abject conditions. Our hearts must be full of compassion, and feel the sharp pangs of the pain felt by the parents who have to choose between buying expensive medicines for the sick child, or food for the family. We have to empower ourselves, and believe that we can make a difference.

The world we live in is constructed from structures of thought that we have internalized, far more than bricks and concrete. Unfortunately, many of these dominant structures are poisonous to our own happiness as well as general welfare of mankind. Changing our ways of thinking is not just a matter of reading and understanding. Rather, the process involves acquiring new ways of looking at the world and new tools for manipulating reality – eerily parallel to the taking of a reality pill in a popular movie. Healing ourselves requires time, effort and cooperation of like minded friends.  A first step in creating a new curriculum must be detoxification of our own minds and hearts. In terms of the Gandhian precept, we have to  ‘Be the change that you wish to see in the world.’  This requires analyzing the nature of the toxins we have ingested, and their removal. Some of the broad areas which require work are listed below:

[For the full article, see pre-publication draft Chapter 2: Creating Challengers & Change of edited volume: “Challenging the Current Economics Curriculum” editors Maria Alejandra Madi and Jack Reardon]

Table of Contents (Section Headings:)

  1. Rethinking the human being: Redeeming the Heart and Soul 3
  2. Rethinking the Nature of Human Knowledge 5
  3. Goals and perspectives for human existence 6
  4. Rescuing Morality in Economics 7
  5. Overcoming Market Mentality 8
  6. The Metaphor of the Machine 10
  7. Conclusions 11

Scientific epistemology is a serious business in economics—as it is in any science. Not surprisingly, therefore, discussions about value-ladeness tend to focus on theoretical and methodological issues within the discipline, while the question of the social consequences of science is approached with more reservation. And for many good reasons, one may say, because it is not entirely up to scientists how will the scientific product be disseminated and interpreted in society, or how will it be used by policy makers. Or, that’s not the job of the scientist, one could reason, to determine and be ready for all possible applicative scenarios.

Since the last few decades, research practices have undergone a far-reaching transformation at the interface between science, policy and society. It involves an increased engagement of science in problem solving and policy advice, and the enhancing role of participatory research methods in problem-based approaches. The social consequences of science become therefore more readily visible, opening up new perspectives on debates about facts and values dichotomy, or the relationship between knowledge, truth, and values (cf. Kitcher, 2001). One way of looking at the transformation of scientific practices focuses on the criteria of scientific rationality with regard to scientific knowledge and the very process of knowledge production, echoing a Weberian contrast between instrumental and axiological rationality of social action (Weber 1968). Specifically, the scientific rationality criteria have been extended in the process from purely (i) internal rationality, that can be defined as a conventional scientific rationality approach focused on disciplinary epistemology and methodology, to (ii) external rationality that pertains to axiological, ethical, and societal elements of knowledge and its production (Kiepas, 2006). 

There are many reasons for including external rationality in scientific practices. For one thing, all applied sciences can be considered as value-laden in virtue of their goal-oriented values (Pullin, 2002). Furthermore, many contemporary problems, as subjects of research, are radically complex. They are laden with systemic uncertainties, meaning that “the problem is concerned not only with the discovery of a particular fact (as in traditional research), but with the comprehension or management of a reality that has irreducible complexities or uncertainties” (see more in Funtowicz & Ravetz, 1994, p. 1882). They also pose future incalculable risks in an unprecedented scope. For example, in the context of complex, adaptive problems such as climate change, uncertainty in science follows (Brown, 2013). Scientific uncertainty regarding the severity and scope of the problem fuels general disagreement about the appropriate actions to undertake. Attempts to accurately assess all the possible climate change impacts and to exhaustingly assign an economic value to alternative courses of action are bound to fail (Jamieson, 2010). That being the case, the policy-relevance of standard economic analysis as the sole knowledge-base for environmental decision making is limited.

In case of economics, the shift in approaches to rationality can be seen in debates about reflexivity in economics, bounded rationality, or performativity of economic models, to name a few topics. But for the most part, ethical- and value-neutrality continue to feature much of economic research, such as in standard normative theories of decision making under uncertainty and risk. The burgeoning of economics as a separate discipline, accompanied by distancing from philosophy, build up strong methodological foundations to prevent any extra-scientific elements to interfere in its analysis (cf. Hausman, 1992).

The classic conceptualisation of uncertainty and risk in economics is very specific and differs from the above-mentioned, sociologically incrusted understanding. Following the paradigmatic distinction formulated by Knight (1921), uncertainty refers to situations of radical uncertainty that cannot be expressed as sets of probabilities, whereas risk is related to situations in which actions do not lead with certitude to specific outcomes, but the alternative outcomes and their probabilities can be discerned. 

The categories of uncertainty and risk, as considered here, lend themselves to complexity of many policy issues, and are associated with the transformation of postmodern societies due to technology, consequences of globalisation, and environmental crises that follow (Beck, 1992; Giddens, 1990). These circumstances, “external” to standard methodological practices, motivate the extension of scientific rationality criteria and rethinking the role of science by researchers themselves. An example of this transformative process is the so-called advocacy science for environmental justice. It represents a socially engaged, multidisciplinary research approach that emerged in response to environmental toxicity movements, and developed an alternative epidemiological paradigm based on participatory research methods (see, e.g., Ottinger & Cohen, 2011).

With regard to the interface between science, policy, and society and the extra-scientific aspects of uncertainty and risk, one can note that the assessment and acceptance of risk are not purely a matter of data analysis or applying the “right” indicators. The perception and interpretation of uncertainty and risk are influenced by a mixture of social, political, and scientific processes that interact with each other. Consider the relationship between environmental pollution and risk. While pollution appears to be solely as a matter of scientific measures, the question of what is an acceptable level of pollution and its risk for a given society, and whether there are cases of unacceptable risks, involves our pre-conceptions and assumptions about what constitutes a good quality of life, wellbeing, and sustainable development (cf. Evernden, 1999).

Why would an individual economist care about the science-policy interface, or about considering extra-scientific elements of her research practice? There are several reasons to seriously reflect on this question. For one thing, transparency about the value content of specific research programs may translate into more careful and accountable approach to complex problems of public policy and the remedying capacity of science and technological progress. Furthermore, Söderbaum (2000) argues that economics should be more properly approached as political economics to make clear the fact that each scientist, as the discipline itself, has an ideological orientation (in the sense of means-ends philosophy) that plays out in the problem-framing, and reflects on the performative features of economic expertise. To the latter point, the analyst’s conclusion that reduces the extra-monetary aspects of a given problem to monetary ones is not without policy consequences; it suggests certain framings and solution-imageries to economic agents and decision makers. Besides, academia itself is not free of subjective interests and rent seeking. But—I haste to add—this does not undermine the value of scientific expertise per se. Neither does it suggest that citizens and policy makers are passive or unreflective recipients of scientific knowledge. It rather suggests a double-edge approach to science that recognises the subjective, cultural, and societal components in scientific practices on the one hand, and the aspiration of scientific community to reach objectivity (understood broadly as a normative objective) on the other hand. Although scientific practices are saturated with theoretical pre-conceptions and cultural perspectives, it does not immediately follow that science has nothing to do with truth and objectivity (a subject that deserves a separate discussion). 

The double-edge approach to science calls for more explicit discussions about the social consequences of science and scientific literacy in society:

  • Concerns about the role of science and scientific expertise in society may facilitate disciplinary reflexivity. It may also feed into methodological approaches. In case of economics, instead of focusing only on expanding the standard framework of economic analysis onto new subjects, concerns about the social consequences of science create a platform for a more direct consideration of methodological alternatives. Especially for contexts in which standard economic tools of analysis display some limits (e.g., cost-benefit analysis in sustainable development planning), alternative approaches that directly accommodate non-monetary impacts and justice concerns are needed (Brown et al., 2017). 
  • According to a political scientist Frank Fischer, in face of technical and social complexity that characterises most of policy issues, citizens and politicians need to display a good level of competence (2009, 1). In this context, an urgent question arises: how to democratise science on the one hand, and how to prevent populism and the spread of fake facts to take the provenience of science (as a source of information about the world) on the other hand? While the aspiration of science to be the absolute truth holder has been widely challenged, it does not immediately follow that there is nothing to scientific knowledge that would make it somehow different from other forms of knowledge. No differentiation at all can give way to anti-science of dangerous kind, in which “facts” are matters of preferences or interests. A caveat here is in order: such differentiation does not imply that scientific knowledge is inherently better than any other form of knowledge.

Certainly there are many challenges to balancing the double-edge approach to science both within and outside of the scientific community, as there are multiple philosophical framings of the role and status of scientific expertise in society. To be continued!

References

Beck, U. (1992). Risk Society: Towards a New Modernity. London: Sage.

Brown, J. Söderbaum, P. & Dereniowska, M. (2017). Positional Analysis for Sustainable Development: Reconsidering Policy, Economics and Accounting. London: Routledge. 

Evernden, N. (1992). The Social Creation of Nature. Baltimore and London: The John Hopkins University Press.

Hasuman, D. M. (1992). The Inexact and Separate Science of Economics. New York: Cambridge University Press.

Fischer, Frank (2009). Democracy & Expertise. Reorienting Policy Inquiry. Oxford: Oxford University Press.

Funtowicz, S. O. & Ravetz, J. R. (1994). Uncertainty, Complexity and Post-normal Science. Environmental Toxicology and Chemistry 13(2), 1881-1885. 

Jamieson, D. (2010). Ethics, Public Policy, and Global Warming. In S. M. Gardiner, S. Caney, D. Jamieson & Henry Shoue (Eds), Climate Ethics. Essential Readings (pp. 77-86). Oxford: Oxford University Press.

Kiepas, A. (2006). Ethics as the Eco-development Factor in Science and Technology. Problems of Eco-development 1(2), 77–86.

Kitcher, P. (2001). Science, Truth, and Democracy. Oxford University Press, Oxford, New York. 

Knight, F. H. (1921). Risk, Uncertainty and Profit. Chicago: University of Chicago Press.

Ottinger, G. & Cohen, B. R. (Eds). (2011). Technoscience and Environmental Justice. Expert Cultures in Grassroots Movement. Cambridge: the MIT Press.

Pullin, A. S. (2002). Conservation Biology. Cambridge & New York; Cambridge University Press. 

Söderbaum, P. (2000). Ecological Economics. A Political Economics Approach to Environment and Development. London: Earthscan/Routledge.

Weber, M. (1968). Economy and Society. New York: Bedminster Press.

My paper is a survey of the huge amount of solid empirical evidence against the utility maximization hypothesis that is at the core of all microeconomics currently being taught today in Economics textbooks at universities all over the world. It is obviously important, because if what it says is true, the entire field of microeconomics needs to be re-constructed from scratch. Nonetheless, it was summarily rejected by a large number of top journals, before being eventually published by Jack Reardon as: ” The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature,”  in International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414.   Speaking metaphorically, my paper documents the solid evidence that the earth is a round sphere in world where educational institutions teach the widely held belief that the earth is flat. Readers of RWER blog will recall that when challenged on the failure of macroeconomics after the Global Financial Crisis, economists retreated to the position that while macro theory may be in a bad shape, at least Microeconomics is solidly grounded. My paper blows this claim out of the water. As a result, nothing is left of Micro and Micro, and of economics as whole. This supports my earlier claim that a Radical Paradigm Shift is required to make progress — patching up existing theories cannot work.

None of the several leading journals that I sent the paper to made any comments about any mistakes in my arguments. There were two main reasons which were stated for rejections. One was that the paper was “not appropriate” for the journal. This seems ridiculous; how can a paper which challenges the foundations of the subject be “inappropriate” (however, an explanation will be provided later). Two was that the results of the paper were well-known. I also sent the paper for comments to many leading economists. Kenneth Arrow, who was once a teacher of mine at Stanford, responded as follows “Thank you for the very complete and well-argued critique of the utility-maximization theory. Of course, the remaining question is, what should take the place of that theory?”.  This is just to document that the paper itself provides solid and irrefutable evidence against modern microeconomic theory. Given that the vast majority of economists continue to teach microeconomics based on utility maximization, and that this theory is widely believed by students of economics throughout the world, it would seem of great importance to document the empirical evidence against it and use it as a springboard for developing alternative theories, more consistent with empirical observations of human behavior. However, none of the mainstream journals displayed any interest in publishing this paper.

This leads to a puzzle, which requires some thought. As famous theoretical physicist Richard Feynman put it: “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.”  The experimental result — corresponding to the empirical evidence — is all important in physics, which is why there has been tremendous progress in physics. On the other hand, the economists display no interest in empirical evidence at all. This indifference of economists to empirical evidence which contradicts their theories has been noted by many; see previous post on “Quotes Critical of Economics” for the full quote briefly cited here:

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