Introduction to Heterodox Economics Marc Lavoie University of Ottawa

Outline 1. Heterodox economics vs orthodox economics 2. Some examples

PART I Heterodox schools

Introduction Being a specific, contemporary, and alternative theory, heterodox economics started in the 1960s but a coalescing theoretical core did not emerge until the 1990s; Being engaged in alternative theorizing, applied work, and economic policy analysis in a contested environment, heterodox economists often develop their arguments through critical engagement with mainstream theory. This gives the appearance (but without substance) that the only common element among heterodox economists is their critical evaluation and rejection of mainstream economics. Heterodox economics has its own agenda, its own theories, its own models, its own methodology. If neoclassical were to disappear, heterodox economics would still keep its relevance Click View then Header and Footer to change this text

Heterodox vs Orthodox economics NON-ORTHODOX PARADIGM HETERODOX PARADIGM POST-CLASSICAL PARADIGM RADICAL POLITICAL ECONOMY REVIVAL OF POLITICAL ECONOMY ORTHODOX PARADIGM DOMINANT PARADIGM THE MAINSTREAM NEOCLASSICAL ECONOMICS

Brazilian Keynesian Association, Porto Alegre, September 2009 Dissenters and “the edge” HeterodoxyOrthodoxy Dissenters Mainstream Cutting Edge

Macro- economics Heterodox authors Marxists Radicals French Regulation School Cambridge Keynesians Post- Keynesians Neoclassical school Old Keynesians New Keynesians Monetarists New Classicals KEYNES

Heterodox schools in economics Post-Keynesians, Kaleckians, Sraffians (Neo-Ricardians) Circuitists, Berlin school of monetary economics Marxists, Radicals Structuralists (Development, Latin-American school, Furtado, L. Taylor)) French Regulation School, Social Structure of Accumulation (SSA) Institutionalists (Old) Social economics and Humanistic economics Anti-Utilitarism (MAUSS) Economists of « conventions » Schumpeterians and Evolutionary Economics (Some of) behavioural economics Feminist economics Ecological Economics …. And no doubt many others (Ghandi economics, Henry George, Gesell, Neo-Austrians (?), etc.)

What do all these heterodox schools have in common? Differences between schools of thought and their relative ranking have a lot to do with the sociology of the profession. Still, in my opinion there are broad features that characterize heterodox and orthodox schools. These are called the presuppositions of research programmes by philosophers of science: they are things that cannot be questioned

Paradigm PresuppositionHeterodox schoolsOrthodox schools EpistemologyRealismInstrumentalism MethodHolism, organicismIndividualism, atomicism RationalityReasonable rationalityHyper rationality Optimizing agent Economic coreProduction, growth, income effects Exchange, scarcity, substitution effect Political coreRegulated, tamed, markets Unfettered market optimism Presuppositions of the heterodox programme vs those of the mainstream

Distrust in unfettered markets « On the one side are those who believe that the existing economic system is, in the long run, a self-adjusting system, though with creaks and groans and jerks and interrupted by time lags, outside interference and mistakes …. On the other side of the gulf are those that reject the idea that the existing economic system is, in any significant sense, self-adjusting » Keynes, CW, xiii, p. 487 (1934)

Click View then Header and Footer to change this text Holism: Some crisis-related macro paradoxes Paradox of thrift (Keynes)Higher saving rates lead to reduced output Paradox of costs (Kalecki)Higher real wages lead to higher profit rates Paradox of public deficits (Kalecki)Government deficits raise private profits Paradox of debt (Steindl)Efforts to de-leverage might lead to higher leverage ratios Paradox of tranquillity (Minsky)Stability is destabilizing Paradox of liquidity (Nesvetailova)Efforts to become more liquid transform liquid assets into illiquid ones Paradox of risk (Wojnilower)The possibility of individual risk cover leads to more risk overall

Other heterodox principles or beliefs (according to Andrew Mearman 2007) Methodology helps to understand economics Economic systems are complex, disequilibria History and time are important All economic theories are fallible Multiple perspectives are advocated (pluralism) Formal mathematical methods should be removed from their perceived supreme position Facts and values are inseparable Power is a determinant of economic outcomes Click View then Header and Footer to change this text

Heterodox economics – Fred Lee The intellectual and theoretical roots of heterodox economics are located in heterodox traditions of Post Keynesian-Sraffian, Marxist- radical, Institutional-evolutionary, social, feminist, and ecological economics, all of whom emphasize the social surplus, accumulation, justice, social relationships in terms of class, gender, and race, full employment, and economic and social reproduction. Hence, as a scientific research field, heterodox economics is concerned with explaining and proposing and advocating changes in the historical process of producing the social surplus that provides the flow of goods and services required by society to meet the reoccurring needs and promote the well-being of those who participate in its activities. That is, heterodox economics is a historical science of the social provisioning process, and this is the general research agenda of heterodox economists. Click View then Header and Footer to change this text

Figure 1 The neoclassical indifference approach and the hesitation region Y F  A       B C B’ C’ D D’ More preferred area Indifference area [hesitation region] Indifference area [hesitation region] Less preferred area f0f0 y0y0 Neoclassical: B > A C < A there exists D = A DAD’ indifference curve Ecological Hesitation areas Intransitive choices, weakly comparable

Figure 2 Choices of a lexicographic nature with thresholds Y F  A     B C B’ D A’ More preferred area Less preferred area Less preferred area Less preferred area f0f0 y0y0 Threshold B > B’ > A’ > A > D > C No continuity: D not = A

q q fc q th UC MC UDC p qnqn NUC p .NUC .UDC 80%100%

Effective demand with constant returns: The post-Keynesian case N effD NSNS N N fe N1N1 T (w/p) fe (w/p) 1 w/p a 1 /T w/p = T – a/N

Macroeconomic foundations? Y = Wages + Profits = Consumption + Investment Wages + Profits = Consumption out of wages + Consumption out of profits + Investment Consumption out of wages = Wages Profits = Consumption out of profits + Investment Profits net of taxes = Consumption out of profits + Investment + Budget deficits Click View then Header and Footer to change this text

Conclusion: Future perspectives The financial crisis has clearly shown that there is a need for alternative economic views, as orthodoxy and the New consensus were useless guides during the crisis. Various heterodox schools of thought have come out with very similar explanations of the subprime financial crisis. What links are there between PK economists, who favour growth and employment, and ecological economists, who have similar methodological presuppositions, but who favour zero or slow growth? Click View then Header and Footer to change this text