Thinking like a Political Economist in the ordinaryEND business TIMES of life Timothée Parrique, [email protected] Economics is everywhere “I don’t care who writes a nation’s law - or crafts its advanced treatises - if I can write its economics textbooks.” Learning Economics as a Foreign Language Paul Samuelson (1915-2009) Ideology is everywhere “...valuations are always with us... Disinterested research here has never been and can never be. Prior to answers there must be questions. there can be no view except from a viewpoint. In the questions raised and the viewpoint chosen, valuations are implied.” (1978) Gunnar Myrdal (1898-1987) Today • Part I: What is the difference between the different economic schools of thought? • Part II: What does it mean to think like an economist? • Part III: What does it mean to think like a political economist (in the end times)? PART I Seven Samurai (1954) The Ideological Landscape of Economics The Ideological Landscape of Economics economic sociology Philonomics classical Evolutionary Marxist Gandhian Mainstream Sraffian Mainline Post-Keynesian Feminist Ecological Agent-based computational Radical Ethonomics Clionomics Environmental Austrian Experimental Abenomics Kudonomics Econophysics Economic history new Green sustainability Bionomics Shimomuran Institutional Happiness psychological Anarchist Neuroeconomics Complexity Steady-State Socioeconomics Economic geography Political economy Degrowth behavioural Econometrics NeoKeynesian Neoclassical Modinomics monetarist Heterodoxy sustainability Marxian Mainstream (or orthodoxy) Green Ecological Bionomics new institutional Sraffian Degrowth Post-Keynesian new keynesian Steady-State new behavioural old behavioural neoclassical Feminist environmental Classical neuroeconomics Austrian Institutional econophysics Gandhian economic sociology economic history economic geography Mainstream Heterodoxy 1890 Neoclassical Economics Individuals know what they are doing, so leave them alone - except when markets malfunction • Inspired by Jevons, Walras, Marshall • Subjective theory of value 1. Micro > macro (methodological individualism) 2. The economy is made of rational and selfish individuals (no classes, only Homo Economicus) 3. Self-equilibrating markets, and invisible hand • High degree of precision and logical Paul Samuelson (1915 - 2009) clarity because heavily mathematical 1867 Marxian Economics Capitalism is a powerful vehicle for economic progress, but it will collapse, as private property ownership becomes an obstacle to further progress • Inspired by Marx but not the same as Marxism • Labour theory of value and surplus • The economy is made of classes • Focus mode of production, and its power relations (‘historical materialism’) • Criticise capitalism as a system • Study work, and technological Michel Aglietta (1938) innovation 1870s Austrian Economics No one knows enough, so leave everyone alone. • Inspired by Carl Menger, F. Hayek • Only individuals choose (‘methodological individualism’), but they have limited rationality • The world is complex and uncertain • Institutional frame matters (e.g. private property) • Cost and utility are subjective • Prices economise on knowledge • Markets are spontaneous orders, so free market is best Steve Horwitz (1964) 1898 Institutional Economics Individuals are products of their society, even though they may change its rules • Inspired by Thorstein Veblen, John Commons, Wesley Mitchell • ‘evolutionary economics’ (Darwin) • Focus on habits and institutions • Habit/Routine = non-deliberative propensity to engage in a previously adopted pattern of behaviour • Institution = way of thought or action embedded in the habits of a group • Agents are both producers and products of their circumstances • Rationality is not given but shaped by the social Elinor Ostrom (1933-2012) environment 1970s (1936) Post-Keynesian Economics What is good for individuals may not be good for the whole economy • Inspired by Keynes • The future is fundamentally uncertain • Government should take an active role • Social conflict between classes • Macro > micro • History matters Steve Keen (1953) 1980s (1966) Ecological Economics Nature knows best; economists should spend more time in their gardens • Inspired by Nicholas Georgescu-Roegen, Kenneth Boulding, Eugene & Howard Odum • The economy as a subsystem of the planet; limits to growth • Interdisciplinary (biomimicry) • Follow the laws of thermodynamics, and acknowledges complexity • End goals = sustainable scale + efficient allocation + fair distribution • Development rather than growth Herman Daly (1938) • Biocentrism; intra- and intergenerational justice 1990s Feminist Economics Who do you think cooked Adam Smith’s dinner? Production is only the tip of the iceberg • Inspired by Mary Wollstonecraft, J.S. Mill, Harriet Taylor Mill • Denounce androcentrism in ME • Focus not only on production, but on reproduction (unpaid labour) • Logic of accumulation vs. logic of sustaining life • Economic analysis should focus on gender; Institutional structures create gender inequality Julie A. Nelson (1956) • Econ. = the ‘provisioning of life’ POLITICAL ECONOMIST Which school of thought is currently being understood as ‘mainstream economics’? Neoclassical Monetarism economics Post-Keynesian Keynesianism economics If I criticise the assumption that individuals are fully rational, I am likely to be… A neoclassical A orthodox economist economist An heterodox economist Which of the following schools does NOT acknowledge the existence of fundamental uncertainty? Neoclassical Ecological economics economics Post-Keynesian Austrian economics economics Which of the following schools seek to explain the functioning of the economy by looking at routines and social rules? Institutional Feminist economics economics Austrian economics Marxian economics Which of the following schools does not hold methodological individualism as a core axiom? Post-Keynesian Neoclassical economics economics Austrian economics Which of the following axioms is NOT characterising the theories of the neoclassical school? Homo Economicus Spontaneous orders Methodological Equilibrium individualism Which of the following objectives is NOT part of ecological economist core principles? Efficient allocation of Fair distribution of resources wealth Equilibrium with Optimal scale natural ecosystems Which of the following schools is likely to see its members described as libertarians? Austrian economics Feminist economics Post-Keynesian Marxian economics economics Which of the following schools of thought is more likely to dismiss the occurrence of unequal exchanges? Ecological economics Marxian economics Neoclassical economics Feminist economists argue that most of economic activity is rendered invisible by mainstream economics. True False Neoclassical economics PART II A Beautiful Mind (2001) Thinking Like an Economist 1) People face trade-offs The Matrix (1999) Scarcity • Resource = anything that can be used to produce something else • Scarce resource = when there’s not enough of it to satisfy our wants “People must make choices because resources are scarce” 2) The cost of something is what you give up to get it Opportunity Cost • What is the cost of our decisions? • As a result of scarcity, choices have to be made; the opportunity cost is the cost of those choices. • Opportunity cost = the best alternative that has to be sacrificed when you choose to do something “The opportunity cost of an item - what you must give up in order to get it - is its true cost” The Gold Rush (1925) 3) Rational people think at the margin Marginal Thinking • How do we make “how much” decisions? • Marginal cost = the additional cost above what you’ve already incurred • Marginal benefit = the additional benefit above what you’ve already received “How much decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more or a little bit less of an activity.” The Economic Decision Rule: Cost Benefit Analysis (CBA) if Mb > Mc, Do it! - if Mc > Mb, Don’t do it! Marginal Thinking 2 laws: 1. Law of diminishing marginal utility: more is not always better 2. Law of increasing marginal cost: we always pick the low-hanging fruits first. 4) People respond to incentives Jaws (1975) Incentives • Incentives are factors that encourage or discourage various types of behaviour, actions or activities. “People usually respond to incentives, exploiting opportunities to make themselves better off.” 3 Types of incentives: 1. Financial (a tax) 2. Social (a law or custom) 3. Moral (feeling of guilt) Lords of War (2005) 5) There are gains from trade Trade • Why do the choices I make interact with the choices you make? • Division of labour (specialisation) generate the gains from trade. “There are gains from trade.” • Same at the international level: Theory of Comparative Advantage (Ricardo) 6) Resources should be used efficiently to achieve society’s goals WALL-E (2008) Efficiency • What does it mean to use resources efficiently? • An economy’s resources are used efficiently when they are used in a way that has fully exploited all opportunities to make everyone better-off • PARETO efficiency “Resources should be used as efficiently as possible to achieve society’s goals.” 7) Markets are usually a good way to organise economic activity Casablanca (1942) Invisible hand • Who control that resources are used efficiently? • “If is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.”