Mainstream economics

Mainstream economics is the body of knowledge, theories, and models of economics, as taught across prominent universities, that are widely accepted by scholars in the field. It can be contrasted to heterodox economics, which are various schools or approaches that are only accepted by their expositors, with little influence on the majority of academic economists. Mainstream economics has been associated with neoclassical economics[1] and with the neoclassical synthesis, which combines neoclassical methods and a Keynesian approach to macroeconomics.[2]

United States

In the United States, mainstream economists are not generally separated into schools, but two major contemporary economic schools of thought have been the "saltwater and freshwater schools." In the early 1970s, so-called "fresh-water economists" challenged the prevailing consensus in macroeconomics research. Key elements of their approach were that macroeconomics had to be dynamic, quantitative, and based on how individuals and institutions make decisions under uncertainty. Many of the proponents of this radically new approach to macroeconomics were associated with Carnegie Mellon University, the University of Chicago, the University of Rochester and the University of Minnesota. They were referred to as the "freshwater school" since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakes. The established consensus was primarily defended by economists at the universities and other institutions located near the east and west coast of the United States, such as Berkeley, Harvard, MIT, University of Pennsylvania, Princeton, Columbia, Stanford, and Yale. They were therefore often referred to as "the saltwater schools". Today, mainstream economists do not, in general, identify themselves as members of a particular school.

History

Economics has always featured multiple schools of economic thought, with different schools having different prominence across countries and over time. The current use of the term "mainstream economics" is specific to the post–World War II era, particularly in the English-speaking world, and to a lesser extent globally.

Prior to the development of modern academic economics, the dominant school in Europe was mercantilism, which was rather a loose set of related ideas than an institutionalized school. With the development of modern economics, conventionally given as the late 18th-century The Wealth of Nations by Adam Smith, British economics developed and became dominated by what is now called the classical school. From The Wealth of Nations until the Great Depression, the dominant school within the English-speaking world was classical economics, and its successor, neoclassical economics.[3] In continental Europe, the earlier work of the physiocrats in France formed a distinct tradition, as did the later work of the historical school of economics in Germany, and throughout the 19th century there were debates in British economics, notably the opposition underconsumptionist school.

During the Great Depression and the following Second World War, the school of Keynesian economics gained prominence, which built on the work of the underconsumptionist school, and present-day mainstream economics stems from the neoclassical synthesis, which was the post–World War II merger of Keynesian macroeconomics and neoclassical microeconomics.

In continental Europe, by contrast, Keynesian economics was rejected, with German thought dominated by the Freiburg school, whose political philosophy of ordoliberalism formed the intellectual basis of Germany's post-war social market economy. Within developing economies, which formed the majority of the world's population, various schools of development economics have been influential.

Since 2007, the financial crisis of 2007–2010 and the ensuing global economic crisis has publicly exposed divisions within mainstream economics and significantly intensified controversy about its status, with some arguing for radical overhaul or rejection of mainstream economics, others arguing for evolutionary change, and others still arguing that mainstream economics explains the crisis.[4]

Term

The term "mainstream economics" came into common use in the late 20th century. It appears in 2001 edition of the seminal textbook Economics by Samuelson and Nordhaus[5] on the inside back cover in the "Family Tree of Economics," which depicts arrows into "Modern Mainstream Economics" from J.M. Keynes (1936) and neoclassical economics (1860–1910). The term "neoclassical synthesis" itself also first appears in the 1955 edition of Samuelson's textbook.[6]

Scope

Mainstream economics can be defined, as distinct from other schools of economics, by various criteria, notably by its assumptions, its methods, and its topics.

Assumptions

A number of assumptions may underpin many mainstream economic models, while being rejected by some heterodox schools. These include the neoclassical assumptions of rational choice theory, a representative agent, and, often, rational expectations. Much of modern economic modelling consists of exploring the effects that complicating factors have on models, such as imperfect and asymmetric information, incomplete markets, imperfect competition and transaction costs.

The starting point of orthodox economic analysis is the individual. People are generally defined as units with a common goal: maximisation through rational behaviour. The only differences consist of:

From this theoretical framework, orthodox economists derive that political action should not be used to solve the problems of the economic system. Instead, the solution ought to derive from an intervention on the above-mentioned maximisation objectives and constraints. It is in this context that economic capitalism finds its justification. Capitalism and its arguments seem logical because orthodox economics theories think of the aggregate economy as the sum of the agents trying to maximise their utility or profit through exchange.[7]

Methods

Mainstream economics has also been defined methodologically as work which mainstream economists are willing to engage, which requires conforming to the mainstream language of mathematical models,[8] featuring calculus, optimization, and comparative statics. Under this definition, areas of thought which are typically thought of as heterodox because they do not work under the typical neoclassical assumptions, such as econophysics, behavioral economics, and evolutionary economics, can be considered mainstream when they are engaged in the mainstream, using mainstream methods.[8] Geoffrey Hodgson has considered the possibility that evolutionary economics and institutional economics may eventually become a new mainstream.[9]

Additionally, some economic fields include elements of both mainstream economics and heterodox economics: for example, the Austrian economics,[10] institutional economics, neuroeconomics and non-linear complexity theory.[11] They may use neoclassical economics as a point of departure. At least one institutionalist has argued that "neoclassical economics no longer dominates a mainstream economics."[12]

A countervailing trend is the expansion of mainstream methods to such seemingly distant fields as crime, the family, law, politics, and religion. The latter phenomenon is sometimes referred to as economic imperialism.[13]

Topics

Mainstream economics includes theories of market and government failure and private and public goods. These developments suggest a range of views on the desirability or otherwise of government intervention.

Criticisms

Since the financial crisis of 2007–2010, considerable conflict has arisen, among both economic theorists and a wider cross-section of the public, regarding the status and future of mainstream economics.[4][14] Some critics have argued that potentially promising approaches have been excluded in major mainstream publications by a focus on problems amenable to formal modeling.[15][16]

Chartalists, who are generally considered part of the Post-Keynesian school of thought, criticise mainstream theory as failing to describe the actual mechanics of modern fiat monetary economies. Chartalism focuses on a detailed understanding of the way money actually flows through the different sectors of an economy. Specifically, Chartalism focuses on the interaction between central banks, treasury and the private banking system. Chartalism rejects critical mainstream theories such as the loanable funds market, the money multiplier, and the utility of fiscal austerity.

Some economists, in the vein of ecological economics, believe that the neoclassical "holy trinity" of rationality, greed, and equilibrium, is being replaced by the holy trinity of purposeful behavior, enlightened self-interest, and sustainability, considerably broadening the scope of what is mainstream.[8] Ecological economics addresses sustainability issues, such as public goods, natural capital and negative externalities (such as pollution).[17]

Energy related theories of economic concepts also exist within energy economics relating to thermodynamic concepts of economic thinking, such as energy accounting.[18] Biophysical economics relates to this area.[19]

References

  1. ↑ David C. Colander (2000). Complexity and History of Economic Thought, 35.
  2. ↑ Olivier J. Blanchard (2008), "neoclassical synthesis," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  3. ↑ The precise distinction and relationship between classical economics and neoclassical economics is a debated point. Suffice to say that these are the ex post facto terms used to refer to successive chronological periods of an interrelated group of theories.
  4. 1 2 The state of economics: The other-worldly philosophers, The Economist, 2009-07-16
  5. ↑ Paul A. Samuelson and William D. Nordhaus (2001), 17th ed., Economics
  6. ↑ Olivier Jean Blanchard (1987), "neoclassical synthesis," The New Palgrave: A Dictionary of Economics, v. 3, pp. 634–36.
  7. 1 2 Himmelweit, Sue (1997). "Chapter 2: The individual as the basic unit of analysis". In Green, Francis; Nore, Peter. Economics an Anti-text. London: McMillan. pp. 21–35. ISBN 0333212029.
  8. 1 2 3 Colander, D. C.; Holt, R. P. F.; Rosser, J. B. (2004), The Changing Face of Economics, University of Michigan Press, ISBN 978-0-472-06877-7 Description and preview links.
  9. ↑ Hodgson, G.M (2007), "Evolutionary and Institutional Economics as the New Mainstream", Evolutionary and Institutional Economics Review, 4 (1): 7–25, retrieved 2009-11-21.
  10. ↑ A Companion to the History of Economic Thought (2003). Blackwell Publishing. ISBN 0-631-22573-0 p. 452
  11. ↑ Colander, David; Holt, Richard P. F.; Rosser Jr, Barkley J. (2004). "The Changing Face of Mainstream Economics" (PDF). Review of Political Economy. 16 (4): 485–99. doi:10.1080/0953825042000256702.
  12. ↑ Davis, John B. (2006). "The Turn in Economics: Neoclassical Dominance to Mainstream Pluralism?". Journal of Institutional Economics. 2 (1): 1–20. doi:10.1017/s1744137405000263.
  13. ↑ Lazear, Edward (2000), "Economic Imperialism", The Quarterly Journal of Economics, 115: 99–146, doi:10.1162/003355300554683
  14. ↑ Krugman, Paul (September 2, 2009). "How did economists get it so wrong?". The New York Times Magazine. The New York Times.
  15. ↑ Schiffman, Daniel A. (November 2004). "Mainstream economics, heterodoxy and academic exclusion: a review essay". European Journal of Political Economy. Elsevier. 20 (4): 1079–95. doi:10.1016/j.ejpoleco.2004.06.003. Pdf.
  16. ↑ Lawson, Tony (July 2006). "The nature of heterodox economics". Cambridge Journal of Economics. Oxford Journals. 30 (4): 483–505. JSTOR 23601875. SSRN 1095572 Freely accessible. doi:10.1093/cje/bei093. Pdf.
  17. ↑ Nadeau, Robert (Lead Author); Cutler J. Cleveland (Topic Editor). 2008. "Environmental and ecological economics." In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment). First published in the Encyclopedia of Earth December 12, 2007; Last revised August 26, 2008; Retrieved October-6-2009
  18. ↑ Staff writer. "Science Notes: Energy Accounting and Balance". Environmental Decision Making, Science, and Technology, Carnegie Mellon University. Archived from the original on May 22, 2003. Retrieved October 6, 2009.
  19. ↑ Cleveland, Cutler (Lead Author); Robert Costanza (Topic Editor). 2008. "Biophysical economics." In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment). First published in the Encyclopedia of Earth September 14, 2006; Last revised November 18, 2008; Retrieved Oct-6-09.
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