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threebooksIn our PhD Economics program at Stanford, we learnt nothing about the history of major economic events of the twentieth century. Instead, we were taught the rather arcane and difficult skill of building models. In order to analyse what would happen in an economy, we learnt that you have to construct an artificial economy, populated by rational robots called homo economicus, who behave according to strict mathematical laws. At no point in our studies were we asked to match what happens in our models with any events in the real world; it was assumed that the two always matched. This process of economic modelling permits us to provide exact mathematical answers to a vast range of questions one might ask about the economy. This is undoubtedly a powerful technique, which has earned economics the name “Queen of the Social Sciences”. Our poor cousins in political science, psychology, sociology, geography, and so on, have to study the more complex real world, and cannot offer anything comparable. Nonetheless, the power of mathematical modelling derives from the extremely unrealistic assumption that real world events and human behaviour can be predicted by mathematical formulae. Thus, the precise predictions of economists are often dramatically contradicted by real world outcomes. As Nobel Laureate Paul Krugman remarked after the global financial crisis took economists by surprise: “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.”

My own education in economics began many years after graduate school, when I chanced across a copy of Economics and World History: Myths and Paradoxesby Paul Bairoch. Bairoch’s book challenged one of the holy cows of economic theory, that free trade is always a superior policy for all parties. Believing in free trade is a hallmark of economists — a recent survey showed that 90 per cent of economists believe in it, while only 20 per cent of the general public believe that free trade is always optimal. So it came as a shock to me when Bairoch discussed many historical episodes to show that free trade had caused harm to the less developed nations, by preventing development of industries, and also by creating unemployment. Many nations with strong industries had built them up under the umbrella of protection, contrary to free trade principles. This historical evidence was strongly in conflict with the mathematical demonstrations of superiority of free trade that I had learnt in graduate school. In bewilderment, I asked several of my mentors, very senior and respected economists, about this. I was even more surprised by the responses I received. None of them were familiar with the historical evidence, and furthermore, they did not find it relevant. They argued that if protection provided good results, then free trade would have provided even better results. The mathematical proofs were impervious to empirical evidence.

Economists do not study history because it is a record of particular events, while they search for universal scientific laws, which would be equally valid among the Aztecs and the Zulu, in the nineteenth century and in the twenty-first. I realised that the laws of economics hold only in an imaginary world populated by robots, and that to learn real economics, it was necessary to study history, which I had bypassed in graduate school. It was only after many years of detailed historical studies of real world economic events that I came to realise that nearly everything I had been taught in graduate school was wrong.

Recent historical events have shaken the faith of many true believers in free market economics. A landmark 2013 study by Autor, Dorn and Hanson, found that competition from China has destroyed jobs and lowered wages in many US industries, especially manufacturing. Contrary to economic theory, which states that the displaced labourers will find better jobs in different sectors, workers displaced by Chinese competition often went on the government dole. A large group of heterodox economists, students and laymen are becoming increasingly aware of the lack of realism, ideological bias, and lack of concern with poverty and inequality, which are hallmarks of modern economic theory. However, dissent is weak and dis-united, while orthodoxy is firmly entrenched in the halls of power. The task of creating a new economics remains as essential as it is undone. 

In my paper of this name (which has been published in Real-World Economics Review, issue no. 61, 26 September 2012, pp. 22-39), I show that the apparently objective concept of scarcity is built on THREE normative assumptions. This argument destroys one of the basic ideas strongly argued in most conventional texts, that economics is a POSITIVE study of facts of our economic existence, and does not involve value judgement. The three normative pillars on which scarcity stands as the fundamental principle of economics are the following:

ONE: Private Property.
This is a cultural norm. For example, the Cherokee constitution states that the lands of the Cherokee Nations shall remain common property. If there is a cultural norm of sharing public resources, then the issue of scarcity would not arise (or at least, would be much less frequent). Anthropologists have shown that there is no starvation in subsistence societies because of strong norms of sharing. If the society as a whole has enough food, then EVERYBODY will get to eat. Note the violent contrast with the private property norm. In conventional economics, the Pareto principle embodies the normative idea that the right to property takes precedence over the right to life. If a poor man is starving, the rich man is NOT obligated to provide for him.

TWO: Consumer Sovereignty
Economists argue the we SHOULD not question consumer preferences as to where they come from and whether they are legitimate. Also, economists argue that we SHOULD design an economic system which fulfills ALL preferences (to the extent possible). Obviously if we differentiate between legitimate demands, and idle desires, scarcity would be much reduced. As Gandhi said, there is enough for everyone’s need, but not enough for everyone’s greed. The noxious NORMATIVE idea that the right of the super-rich to private jets trumps the right of the poor hungry child to bread is what leads to scarcity becoming the foundation of economics. If we change our norms to advocate and encourage simple lifestyles, and also consider the goal of an economic system to be that of taking care of the NEEDS of ALL, instead of maximizing the wealth of the wealthy. the problem of scarcity would not arise.

THREE: WELFARE Lies in fulfillment of desires
Again this is a normative judgment about the purpose of life, which is taken to be fulfillment of desires. If we really study what makes us happy, we find a lot of surprises. Firstly the Easterlin paradox shows that if try to fulfill all desires, this does not lead to increased happiness. Because the normal level rises, and people judge their welfare relative to the average, this creates a futile rat race. Everybody works hard for increased wealth, but in the end no one is happier. Everybody would be better off if we followed the advice of Sonja Lyubomirsky who has written the “How of Happiness” and The Myths of Happiness — these show that the ancient virtues: kindness to others, gratitude for our blessings, compassion, sympathy, commitment etc. lead to long run happiness. The idea of selfish maximization of personal consumption with complete indifference to others lead to long term misery. The normative preference of the economists for the homo economicus model creates an unhappy and lonely society, for those who buy into these assumptions. See for example Lane: The Loss of Happiness in Market Democracies.

Abandoning these hidden normative commitments of economics, by allowing for more public spaces and common property, creating norms of social responsiblity, and encouraging simple lifestyles would remove scarcity as the central economic problem. I have argued this is much greater detail in the paper cited in the first paragraph.

QUOTE FROM FDR: “But while they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings. ”
— Societies CHOOSE the economic laws they live by, according to their normative judgments.

{Short Link for THIS post: http://bit.ly/1tSE9pP ;  Published in Express Tribune on 27 April 2015}. Summary below has been updated to include an additional point — the double movement of Polanyi — on 3 September 2016

An earlier post by Madi provided an introduction to Polanyi’s classic work The Great Transformation. This book is crucial to understanding both HOW and WHY we need to re-structure economic education today. Unfortunately, the book is quite complex, a bit dry and technical at times, and consequently hard to follow. Although many leading economists have praised it, I did not see any glimmer of understanding of its central arguments anywhere in orthodox arena. Even among heterodox economists, it is not frequently mentioned or cited.

Mostly for the purposes of understanding it for myself, I set out to write a compact summary of the key arguments in the book. The central theme of the book is a historical description of the emergence of the market economy as a competitor to the traditional economy. The market economy won this battle, and ideologies supporting the market economy won the corresponding battle in the marketplace of ideas. I quote from the introduction of my article:

The market economy has become so widespread that it has become difficult for us to imagine societies where the market does not play a central role. Yet, for reasons to be clarified in this article, this is the need of the hour. The unregulated market has done tremendous damage to man, society and nature. Bold, imaginative steps to find alternative ways of organizing economic affairs in a society are essential to our collective survival.

Below is a revised and updated version of the ORIGINAL POST. This revision below include some new information, and also provides some clarification of some common confusions related to original post:
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While there exist many books, journals and forums discussing improved teaching of neoclassical theories, our goal at WEA Pedagogy blog is radically different. Our goal is to change the teaching of economics in ways that will help all human beings on this planet lead richer and fuller lives, and enable them to realize the potential for excellence possessed by all humans. We would like to eliminate hunger, poverty, economic oppression and injustice, and move towards greater equality in standards of living. We would like all children to have equal opportunities for education, and access to health care.
Is it possible to do this by changing the way we teach economics? Many people, including myself, believe that it is. Indeed, among the major props which support the current extremely oppressive global economic system are the wrong economic theories currently being taught at universities throughout the world. Below I discuss three major obstacles to creating positive changes posed by conventional economics theories. Each of these obstacles provides us with a pedagogical goal: we should change our teaching of economics so as to remove these obstacles.

See link for collections of articles on UNLEARNING ECONOMICS.

FIRST Obstacle to improvements: Normative Positive Distinction

In my paper entitled “The normative foundations of scarcity,” published in issue 61 of Real World Economics Review (download pdf) I have shown that even what is currently taken to be the fundamental defining concept of economics is deeply normative. This is an application of an argument of Hilary Putnam, who showed that facts and values can be entangled in such a way that it is impossible to separate the two. Only after we come to the understanding that economics is not an objective and value-free scientific endeavor, does it become possible to formulate a goal for teaching and studying economics.

ACTION PLAN 1: To remove this obstacle, we need to show that norms are everywhere involved in current economic thinking. An excellent textbook for this purpose is Hausman and MacPherson: Economic Analysis, Moral Philosophy, and  Public Policy. We should try to make this text the basis of a compulsory course everywhere that we can. Where we cannot change the syllabus, we should introduce this as an optional course and popularize it among teachers and students. In addition, we should learn how to bring out and highlight normative assumptions hidden within the framework of the economic theories we teach. My paper referenced earlier makes a start on this aspect. This will allow us to bring normative concepts into discussion in virtually all economics courses.

SECOND Obstacle to improved pedagogy: A-historical Methodology

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