The critical role for economic theory is no longer simply to explain how the existing system works, but also to explore how the economic system can be changed to become more adaptive and resilient in the face of the challenges of the 21st century, and how it can be more directly designed to support human well-being, in the present and the future.
The economic theory that was accepted as standard in the non-communist world during the second half of the twentieth century erects serious impediments to meeting the challenges of the twenty-first century. These impediments include:
1. Inappropriate goals: standard economic theory prizes wealth creation above all, and most often defines this goal in terms of steadily growing GDP – instead of focusing on what economies should really produce, which is human well-being, in the present and the future.
2. A bias toward monetary values: application of cost/benefit analysis or a focus on narrow measures of economic success often lead to an effort to apply monetary measures to human values, such as dignity, health, or fairness. The focus on what can be submitted to the measure of money leads to an overemphasis on formal markets, and pays insufficient attention to essential unpaid economic activities.
3. Difficulty in dealing with the future: the standard use of discounting often leads to conclusions that make future concerns appear less significant than they are.
4. A de-contextualized view of the economy: economic systems are viewed as operating in a vacuum, without regard for the critical ways in which the economy affects, and is affected by, its ecological and social contexts.
5. Bias toward the status quo: a number of tools and concepts used in economic analysis accept the existing distribution of resources as “given” – not really up for discussion. These include the concepts of Pareto optimality, aspects of the Coase theorem, and a focus on aggregate growth indices at the expense of disaggregated inequality indicators. The strong assumptions of rationality at the root of the theory often are used to assert that the existing system is the best possible; if it could have been made better, it would have. (This is the basis for the joke about the economist who walks past a ten dollar bill lying on the sidewalk. When asked why, he says “it couldn’t have been real; if it were, someone would have already picked it up.”)
6. Bias against the public sector and in favor of markets: economists, business people and politicians have joined in a chorus of disparagement against government, buttressed by an increasingly blind, but fervent, belief that markets can solve all problems. In fact, while markets can be a part of the solution to many human needs, they rarely can be the whole solution. Markets need boundaries, rules, and safeguards against their internal tendency toward concentration of power and their lack of internal motivation to work for the wider good. In many situations markets are, in fact, the problem. Some attention to environmental concerns has led to the idea that, if there are market failures, they can be corrected by internalizing externalities. It needs to be emphasized that market actors have no inherent incentive to do this: that incentive has to come from outside the market system.
7. Methods of analysis that exclude non-economists: Students, policy makers, and other citizens frequently complain about economists’ increasing reliance on highly mathematized modeling techniques. These require extreme simplifying assumptions – such as perfect competition, perfect information, and complete markets – and create a mindset reluctant to grapple with issues that are not amenable to such modeling. Meanwhile, the very sophistication of the mathematics used in these models means that fewer and fewer people can participate in an ever more obscure – and less relevant – discourse.
From The New Economics Institute