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Title: Beyond Markets Critical Approaches to Economics By: Institution: Course: Instructor: Date Mainstream economics Economics in the recent times have always featured several schools of economic thoughts with divergent schools having unusual prominence across countries over time…
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Beyond Markets Critical Approaches to Economics By: Mainstream economics Economics in the recent timeshave always featured several schools of economic thoughts with divergent schools having unusual prominence across countries over time. Mainstream economics is a specific school of thought to the post World War II era, specifically in the Anglosphere and to a lesser extent globally (Wrenn, 2004, pp106). Mainstream economics is associated with neoclassical economics which combines Keynesian approach and neoclassical methods macroeconomics. Mainstream economics follow rational choice theory, which makes assumptions that individuals make decisions that will maximize their own utility. It utilizes mathematical and statistics models to demonstrate theories and evaluate various economic developments. Mainstream economics is a theory clearly defining about the work of the economy; however this story is theoretically disjointed (Matthaei, 1984, pp82). That is, it is composed of a core set of schemes-such as equilibrium, scarcity, preferences, rationality and methodological individualism and derivative beliefs, symbols, vocabulary and parables, while there is a variety of heterogeneous theoretical developments that go beyond the core that never call into question the core itself in totality (Lawson, 1997, pp102). Heterodox economics Heterodox economics is the theories to communities and economic theories of economists that alternate, in various ways, to mainstream economics. In other term, it is the analysis and study of economic concepts considered outside of orthodox and mainstream schools of economic thought. Heterodox economics include Marxism, socialism, post-Keynesian and Austrian, and most of the times it combine the macroeconomic outlook present in Keynesian economics with approaches critical of neoclassical economics. It provides an alternative approach to the mainstream economics and therefore it is critical in explaining the economic phenomenon that doesn’t receive widespread credibility. In addition, this branch of economics seeks to include historical and social factors into analysis, as well as relevant evaluation on the effects of individuals and societies in the development of market equilibriums (White, 2004, pp520). The Fundamental Difference between Mainstream and Heterodox Schools Of Thought There have always been major conflicts, theoretically, between the two schools of thoughts. The main reason why heterodox economists are critical of the mainstream economics, despite numerous modifications mainstream economist have added to their core framework, is because there is always an inference that, in the absence of various real world frictions, the economic factors and the general economy will function perfectly (Power, 2004, pp6). That is: assuming that there is mobility of economic agents, perfect information, no unions, flexible prices and wages, the full employment will be achieved by the economy, with near perfect utilization of resources, unless there are mild external economic shocks (O’Hara, 2002, pp608). Mainstream economics can be regarded as distinct from other schools of economics notably by its assumptions, topics and its methods. Several assumptions may strengthen many mainstream economic models, while being rejected by some heterodox schools (Lee, 2001, pp10). This comprise of neoclassical assumptions of representative agent, rational choice theory and rational expectations. In the current economic modeling, there is the element of exploring the effects of complicating factors on models, such as incomplete markets, asymmetric information, transaction costs and imperfect information. Methodologically, mainstream economics is considered as the work which mainstream economists are wiling to engage in to properly conform to the mainstream language of mathematical models, featuring optimization, calculus and comparative statics. It also includes theories of government and market failure, and public and private goods (Lee and Keen, 2004, pp13). These developments suggest various views on the desirability or otherwise of government intervention. According to the mainstream welfare and policy approaches, free trade is generally beneficial for both developed and developing countries. Economic development is principally a consequence of the spread of free markets. Therefore, individual is the perfect judge on issues relating to his or her interest (Lavoie, 2006, pp90). New Keynesian and New Classical economists seem like bitter rivals, but their main area of contention is on which frictions should be present or not. In the original New Classical models, the economies were perceived as in equilibrium, constant preferences and perfect information. However, New Keynesian models incorporated the concept of imperfect information, transaction costs, sticky prices and much more (Keen, 2001, pp46). The current papers and models extend by including heterogeneous agents, changing preferences, and other frictions. Nevertheless, assuming a free economy- some specific characteristics/features-it would function in the same way to one of the vital Walrasian formulations (Lee, 2002, pp15). According to the heterodox economists, capitalism has intrinsic tendencies to unemployment, crisis and misallocation anyway (Dow, 2000, pp89). This is reflected in finance. In general, the mainstream analyses of why finance is unstable focus on externalities, irrationality, imperfect information and other modifications. If there is access to information, less transaction costs, if people are rational, then finance would be stable (Gruchy, 1987, pp78). Labor market offers another perfect example when taking about the differences between heterodox and mainstream economics. It is assumed that without sticky wages, search costs, oversized unions or firms; the economy will attain full employment. But heterodox economists disagree on quite a number of issues: wages are essential component of aggregate demand, therefore its reduction could also be counterproductive; the marginal value product theory is faulty and hence higher wages will not cause an increase in unemployment (Granovetter, 1985, pp67). In fact, according to Keynes, sticky wages were far from being a barrier to full employment; they actually helped in stabilizing the economy. If mainstream economics is to disappear today, heterodox economics would be largely unaffected. It would still incorporate the various heterodox and its heterodox research agenda of explaining the social provision process in capitalist economies and argue for social well being will still be on course (Bortis, 1997, pg56). For this reason, heterodox economics is not aimed at reforming mainstream economics but rather it provides an alternative to mainstream economics: in terms of explaining the social provisioning process and suggesting economic policies to promote social well-being. References Bortis, H. 1997. Institutions, Behaviour and Economic Theory. Cambridge: Cambridge University Press. Dow, S. C. 2000. Prospects for the Progress of Heterodox Economics. Journal of the History of Economic Thought 22.2 (June): 157 – 170. Granovetter, M. 1985. Economic Action and Social Structure: The Problem of Embeddedness, American Journal of Sociology 91 (November): 481 - 510. Gruchy, A. G. 1987. The Reconstruction of Economics: An Analysis of the Fundamentals of Institutional Economics. New York: Greenwood Press. Keen, S. 2001. Debunking Economics: The Naked Emperor of the Social Sciences. New York City: St. Martin’s Press. Lavoie, M. 2006. Do Heterodox Theories Have Anything in Common? A Post-Keynesian Point of View. Intervention: Journal of Economics 3.1: 87 – 112. Lawson, T. 1997. Economics and Reality. London: Routledge. Lee, F. S. 2001. Conference of Socialist Economists and the Emergence of Heterodox Economics in Post-War Britain. Capital and Class 75 (Autumn): 15 – 39. Lee, F. S. 2002. The Association for Heterodox Economics: Past, Present, and Future. Journal of Australian Political Economy 50 (December): 29 – 43. Lee, F. S. 2004. To be a Heterodox Economist: The Contested Landscape of American Economics, 1960s and 1970s. Journal of Economic Issues 38.3 (September): 747 – 763. Lee, F. S. and Keen, S. 2004. The Incoherent Emperor: A Heterodox Critique of Neoclassical Microeconomic Theory. Review of Social Economics 62.2 (June): 169 – 199. Matthaei, J. 1984. Rethinking Scarcity: Neoclassicism, Neo-Malthusianism, and Neo-Marxism. Review of Radical Political Economics 16.2/3 (Summer-Fall): 81 – 94. O’Hara, P. A. 2002. The Role of Institutions and the Current Crises of Capitalism: A  Reply to Howard Sherman and John Henry. Review of Social Economy 60.4 (December): 609 – 618. Power, M. 2004. Social Provisioning as a Starting Point for Feminist Economics.  Feminist Economics 10.3 (November): 3 – 19. White, G. 2004. Capital, Distribution and Macroeconomics: ‘Core’ Beliefs and  Theoretical Foundations. Cambridge Journal of Economics 28.4 (July): 527 – 547. Wrenn, M. V. 2004. What is Heterodox Economics? Ph.D. diss. Colorado State University. Read More
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