A Realistic Economics

The unrealistic orthodoxy: Neoclassical Economics

(Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics)




The economic and financial crisis has been caused by unenlightened self-interest and fraudulent behaviour on an unprecedented scale. But this behaviour could not have grown so large were it not for the cover given to this behaviour by the dominant theory of economics, which is known as "Neoclassical Economics".
Though many commentators call this theory "Keynesian", one of Keynes's objectives in the 1930s was to overthrow this theory. Instead, as the memory of the Great Depression receded, academic economists gradually constructed an even more extreme version. (This began with Hicks's "IS-LM" model, which is still accepted as representing "Keynesian" economics today. It was in fact a Neoclassical model derived two years before the General Theory was published.}
As it grew more virulent, Neoclassical theory encouraged politicians to remove the barriers to fraud that were erected in the wake of the last great economic crisis, the Great Depression, in the naïve belief that a deregulated economy necessarily reaches a harmonious equilibrium. As Robert Lucas, one of the chief theoriests of the Neoclassicals, put it:

'Macroeconomics was born as a distinct field in the 1940's, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.'  (Lucas 2003 , p. 1 ; emphasis added)'

Regulators in its thrall—such as Alan Greenspan and Ben Bernanke—rescued the financial sector from a series of crises,  each one leading to another, until ultimately the Great Financial Crisis of 2008, from which no return to "business as usual" is possible. Neoclassical economics enabled and facilitated the collapse and continues to prolong the stagnation that has followed. It is time to succeed where Keynes failed, by eliminating this theory and replacing it with a realistic alternative.
Keynes was scathing about Neoclassical treatment of time, expectations, uncertainty and money, and the stability (or otherwise) of Capitalism:

I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future…. The orthodox theory assumes that we have a knowledge of the future of a kind quite different from that which we actually possess… The hypothesis of a calculable future leads to a wrong interpretation of the principles of behavior which the need for action compels us to adopt, and to an underestimation of the concealed factors of utter doubt, precariousness, hope and fear.  (Keynes 1937, pp. 215-222)

Keynes's failed in his attempt to overthrow Neoclassical economics. It was reconstructed in an even more extreme form in "Rational Expectations" macroeconomics (led by Robert Lucas). Far from simply dealing with the present "by abstracting from the fact that we know very little about the future", Rational Expectations deals with it by assuming we can accurately predict the future!

 

Prof. Keen wrote Debunking Economics to help prevent a Neoclassical revival after our current crisis is over, with the advantage of time over Keynes: when he wrote The General Theory  (1936). The flaws in Neoclassical economics were only vaguely specified—and Keynes himself retained some of the concepts (such as the marginal productivity theory of income distribution).
Since then, the flaws have been fully detailed, by critics like Pierro Sraffa. The intent of Debunking Economics was to make the many flaws in Neoclassical economics so well known that it would not survive should the economy ever experience another Great Depression.
 (for more, see Debunking Economics: the naked emperor dethroned?;or buy the book: Amazon USA; Amazon UK; Kindle USA; Kindle UK; Abbey's Australia).
I also provide critiques of conventional economic theory in my lectures, which I make more broadly available via Youtube videos.

Developing an alternative

The seeds of an alternative, realistic theory were developed by Hyman Minsky in the Financial Instability Hypothesis, which itself reflected the wisdom of the great non-neoclassical economists Marx, Veblen, Schumpeter, Fisher and Keynes, as well as the historical record of capitalism that had included periodic Depressions (as well as the dramatic technological transformation of production). Minsky argued that an economic theory could not claim to represent capitalism unless it could explain those periodic crises:

Can "It"—a Great Depression—happen again? And if "It" can happen, why didn't "It" occur in the years since World War II? These are questions that naturally follow from both the historical record and the comparative success of the past thirty-five years. To answer these questions it is necessary to have an economic theory which makes great depressions one of the possible states in which our type of capitalist economy can find itself. (Minsky 1982, p. 5)

Minsky developed a coherent verbal model of his hypothesis, but his own attempt to develop a mathematical model in his PhD thesis was unsuccessful. Using insights from complexity theory, Prof. Keen developed models that captured the fundamental proposition of the Financial Instability Hypothesis--that a market economy can experience a debt-deflationafter a series of debt-financed cycles. These models generated a period of declining volatility in employment and wages with a rising ratio of debt to GDP, followed by rising volatility, and then a debt-induced breakdown.

From the perspective of economic theory and policy, this vision of a capitalist economy with finance requires us to go beyond that habit of mind which Keynes described so well, the excessive reliance on the (stable) recent past as a guide to the future. The chaotic dynamics explored in this paper should warn us against accepting a period of relative tranquility in a capitalist economy as anything other than a lull before the storm. (Keen, 1995)

The empirical data and the implications of these models led him to expect and warn of an impending serious economic crisis at a time when Neoclassical economists such as Ben Bernanke and Larry Summers were waxing lyrical about "The Great Moderation."
The cri­sis itself emphat­i­cally makes the point that a new the­ory of eco­nom­ics is needed, in which cap­i­tal­ism is seen as a dynamic, mon­e­tary sys­tem with both cre­ative and destruc­tive insta­bil­i­ties, where those destruc­tive insta­bil­i­ties emanate over­whelm­ingly from the finan­cial sector.


Source Ref Site
http://www.ideaeconomics.org/

Institute for Dynamic Economic Analysis (IDEA Economics)

Ideas

Economics is broken. Conventional economics has missed badly in its forecasts, provided an incoherent explanation of economic events and failed to produce effective policy. There is another way. An economics that incorporates debt and money. An economics that is proven by history and practice, statistics and theoretical consistency.

Prosperity, real growth and full employment are not myths or suddenly unattainable in the "new normal." They are necessary conditions hidden behind a regime of bad policy and bad practices. An economics that acknowledges that money is created through the credit process is not forever waiting for baffled central bankers to make a difference. We would not be stuck in neutral with our foot on the accelerator, creating enormous action in financial markets, but going nowhere in the real economy, where real people and businesses are struggling.

An economics that realizes a return to normal is not guaranteed in a dynamic system like the economy, but is a hope based on faith in disproven theory and unrealistic assumptions. We would be rapidly installing the alternative. Instead TINA rules. There is No Alternative.
An economics that realizes the centrality of debt devotes its attention to resolving this problem, no matter the difficulty. Instead, orthodox economics largely -- believe it or not -- ignores debt unless it is on the public balance sheets. But it is the enormous private debt that created the crisis and continues to burden it. That debt is not shrinking, but growing. Absent a direct confrontation with this debt, there is no recovery. In the way are interests of an enormously powerful financial sector protecting huge and fragile banks.

Tools

Minsky,  We will offer interface and instruction in this revolutionary free open-source computer program for building and simulating dynamic, monetary economic models. A vital tool for a new approach to economics, optimized for accounting-based, flow-of-funds analysis.
The book: Finance and Economic Breakdown. A comprehensive, foundational book that develops an explicitly monetary, dynamic approach to the analysis of capitalism and its periodic financial crises.
Data collection and management. IDEA will work to form partnerships with organizations to gather, validate and normalize economic data, particularly that relating to credit and debt, and make it available online.
IDEA is dedicated to an economics that works for investors, business leaders, policy makers and, most importantly, everyday people who have been denied proper insight into the forces shaping their real lives. Our approach builds on a long tradition of classical, Keynesian and Post-Keynesian thought. We will develop, support and promote the economics that makes sense, partnering with others to establish a definitive and functional alternative to the orthodoxy that has failed.
In this work, the appropriate appeal is to the evidence as judge, not to political visions nor academic speculation. History and data are the test of explanations and predictions. If the explanations are valid, the predictions will be valid. If not, they need to be revised. It is the scientific method, and it needs to return to economics. IDEA intends to be a destination source for relevant data, as well as for valid assumptions.


Blog Ref Link http://www.p2pfoundation.net/Transfinancial_Economics

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http://www.ideaeconomics.org/about/