Neoclassical Economics Incomplete
|January 9, 2007||Posted by Fred Foldvary under Progress Report, The Progress Report|
What’s Wrong With Economics?
by Fred E. Foldvary, Senior Editor
There is nothing wrong with economics, meaning the true science of utility, of wealth, and exchange, warranted or justified by full-spectrum reasoning. The problem lies with the economic doctrine known as “neo-classical,” presented as “economics” by today’s textbooks and major academic journals.
Much of neo-classical theory is quite sound. The problem with it is not so much that it is incorrect, but that it is incomplete. It is partial-spectrum economics. Where it is incomplete, it then is incorrect. Learning economics from typical textbooks is like putting a filter up in the sky that eliminates the colors green and blue, replacing them with gray. We would then think that we are seeing all the colors, because we would not realize what we were missing. Students in typical college economics courses think they are getting a true picture of the economy, and don’t realize that major chunks of the picture are missing.
The problem is even worse in graduate schools, where economists are trained. The students become indoctrinated into one or other school of economics. Unfortunately, economics is not a unified body of knowledge, but divided into schools of thought that are often radically different. The predominant neo-classical school is subdivided into subschools of macroeconomics, which studies the economy as a whole. We have demand-side New Keynesians, supply- side New Classicals, along with Monetarists and others. Graduate students get attached to some subschool, and then think that this is correct economics. Few are interested in challenges to their doctrine, since they first need to get their Ph.D degree, and then they must please the faculty they join in order to get tenure. By the time they get tenure, they have been working with neoclassical doctrine so long that they believe it is the only way to go.
A key example in what’s wrong with neo-classical mainstream economics is its treatment of the factors or resources of production. The classical economists of the 1700s and 1800s recognized the factors as land, labor, and capital. One current economics textbook tells students that “modern advanced” economics does not use these traditional categories because the division of national income among workers, landowners, and capital owners is not a central issue for economists today.
There are several problems with the proposition that the classical resource categories no longer matter. First, it begs the question of whether economists and the public *should* make this a central issue. Maybe it’s not central because of ignorance!
Secondly, when neoclassical economists say that nowadays workers, landowners, and capitalists (capital owners) are not distinct classes, this is irrelevant. The division of factors does not involve workers, for example, as persons, but labor as a resource. So a person can be a worker and a landowner and a capital owner. He then gets income as wages, rent, and returns to capital. The division of the income is not to specific classes of people, but to the resources owned by people.
Third, the division of resource has major and radical implications for economic policy. The taxing of wages and capital returns has a much different economic impact than taxing land rent, the former being a burden to the economy, and the latter actually being a benefit to the economy. In saying the divisions do not matter, economists don’t bother to study the difference!
One school of economic thought has continued to recognize the importance of the classical division of factors. This school of thought follows the theory presented by Henry George, the American economist and social reformer of the latter 1800s. This Georgist school has focused on the policy of using land rent for public revenue, unlike the other schools, incorporating also some theory from other schools of thought. Its adherents are now calling it “geo-economics” or “geoism.”
As an economist, I have been interested in promoting dialogue among the members of different schools of economic thought. I organized a session on “Dialogues in Economics” at a conference in 1995, which brought together representatives of various schools. I then edited a book titled *Beyond Neoclassical Economics* based on these presentations. Prof. Kris Feder of Bard College wrote the chapter on “Geo-economics.” My chapters discuss ways of synthesizing the theory of the various schools into a more complete, full-spectrum economic theory. For example, the Austrian school (originating in Austria, but now worldwide) has a theory of capital goods that is helpful in understanding the business cycle, when combined with the geo-economic theory emphasizing land.
Knowing that economics as taught and practiced today is incomplete, students who really want to understand the economy should be open to the ideas of other schools. Only when economists become full spectrum instead of adherents of particular doctrines will economics become a true science that can provide policies to heal and cure the social problems that plague our planet.
What’s your opinion about economics? Tell The Progress Report what you think!
Copyright 1998 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieveal system, without giving full credit to Fred Foldvary and The Progress Report.