New Economics as Mainstream Economics

The Cambridge Trust for New Thinking in Economics has organised a conference in January 2010 - details available here.


New thinking in economics is an interdisciplinary approach to economic problems that acknowledges and respects the insights and analysis from other disciplines, especially those from ethics, history and engineering as well as complexity and evolutionary theory. Four issues can be highlighted, each of which has been either ignored by traditional economic modelling of the problem or treated in a misleading way that discounts the insights from heterodox economics and other disciplines.

1. The economy is a complex, non-linear dynamic system with technological change inherent in economic growth. Many economic policy issues are potentially non-marginal changes to the system in the context of strong uncertainty.
2. Many issues of economic policy (traditionally called “welfare economics”) are primarily ethical-economics in nature, and should be informed by moral philosophy rather than economics in isolation. Traditional economic models adopt an extreme form of utilitarianism, with a questionable choice and use of discount rates, ignoring the philosophical literature and the concept of justice.
3. Engineering and history inform economics through studies of the production processes involving the supply and demand of materials, energy, skills and entrepreneurship. Economic history is critical in understanding the relationship between economics and technological change because the technologies evolve in response to economic conditions, e.g. carbon-price signals. Traditional models assume continuity and path independence.
4. The politics of mitigation implies unstable alliances and trade-offs between governments and political parties. By the use of the social welfare function (required for the calculus), traditional economists simplify social choices and pre-empt political negotiation, claiming an optimality for their subjective assumptions and market interpretations

What I appreciate best are the principles governing the work in the Trust:

(a) that economic behaviour is primarily social rather than individual;
(b) that economic behaviour is influenced by aesthetic and ethical values as well as economic values: and
(c) that the pursuit of self-interest in economic behaviour can impact adversely on both society and the environment.

Looking forward to reading more of their work. 

Empowerment and RTI

The Right to Information Act in India has managed to do wonders in ensuring that benefits of govt. programmes and policies reach the intended targets:
In an interview with Wall Street Journal, Aruna Roy, activist (former administrative officer and Magsaysay Award winner) explains how:

WSJ: On the Right to Information (RTI) Act, with which you've been closely associated since its inception 4 years ago, what is the progress so far?

AR: The RTI has become a lifeline for democracy in our country. Despite the failures of various state commissioners or government to implement Section 4. (This mandates the government to publicly disclose as many as 17 bits of information, including its budget, personnel, areas of work, etc.) That's why today the government can't touch the RTI without touching the whole of India. Because it's been used by a variety of people for a variety of reasons, with reasonable success. Sharing information is sharing power and nobody understands this better than the bureaucracy and the politicians, in that order.

But the people are now asking for their, for our share of governance, our share in decision-making, in fact if the tribals of India had had RTI 40 years ago, the situation that we face today wouldn't have happened. Wherever I travel, people feel the RTI is their Act and they own it. This is a fundamental change from what existed years ago.

Of course, a number of problems remain, of infrastructure, non-delivery, of systems not being in place, information commissioners not being trained, etc. But on the whole, the Act has worked.

WSJ: But despite its success, the government wants to amend it. Why?

AR: The government wants to put all file notings under wrap. Meaning, all discussions, consultations, all reasons for decision-making should become secret. Which means you'll know nothing about the process, just the end decision.

WSJ: But so far the process has been open?

AR: Yes, so far the process has been open, although they now want to close that. The Department of Personnel & Training which comes under the Prime Minister's Office, which is responsible for the functioning of the RTI, is now saying that the "consultative process" as well as anything that protects the "candour" of people expressing their opinion, will not be revealed. Behind this move to amend the Act and to kill its spirit, is the bureaucracy.

WSJ: So the government which gave the RTI to the people four years ago is now taking it away?.

AR: Equally horrifying is that all applications which are "frivolous or vexatious" will be disallowed. Now who is going to decide what that is? Possibly, the policeman or the 'patwari' (village revenue official) or the 'sarpanch' (village headman)… Naturally, everything will be "vexatious"…The move undermines the entire Act itself.

WSJ: You've been involved with the NREGA on the ground, how well do you think it has worked?

AR: I will say that this is the first rural development service where people know what they are receiving so they can monitor it, where there has been concurrent evaluation, where we know what the losses or gains are. So, every time I read about corruption in the NREGA I am thrilled, not because there is corruption but because for the first time, so many people are protesting against waste of public money. India should be proud.

WSJ: Give me an example…

AR: A women's group in Sitapur, Uttar Pradesh, has got 1400,000 rupees ($29,710) as unemployment allowance because they applied for work and didn't get it. According to the Act, you have to get work in 15 days within five kilometers of your village, and if the government can't give you work, it has to pay you unemployment allowance…Could you ever think of something like this before?

WSJ: But what about the enormous leakages and lakhs of rupees down the drain…

AR: For the first time, we know where the money has gone, even if its down the drain. We know who's swindled it and how it has been swindled. In Bhilwara, in Rajasthan, we have just completed a social audit. We used RTI to access public records and bring them out into the public domain, share it with people whose names are on the records and took a public meeting to testify whether their names were rightly or wrongly there.

You see, RTI is a mandatory provision in the NREGA, which means transparency and accountability on the part of government functionaries is now mandatory. That's how you find out what's going on, because now the people can't be refused information. It's mandatory for every 'panchayats' to do a social audit before the next installment of money is released by the government.

Read more about social audits and government-public relations in the interview.



While the RTI amendment is being fought, it is not being given enough prominence in the media. Peeyush Bajpai's blog post points to the role of media and RTI :

The power of RTI lies in the hand of the citizen- the “aam-aadmi”, it gives him the power to get the information.  In nine out of ten cases the information would concern specific issues to an individual or a small community.

Unfortunately, these amounts and issues are 'too small' to 'merit' national attention and reports fall by the wayside, even though there is so much happening on this front.

As Peeyush points out:

The media houses have always prided on their role as custodians of impartial information dissemination.  This is thus a challenge for the media to evolve a mechanism of disseminating such specific information in a focussed manner.

Meanwhile, we hope that blogs carry these stories forward.

Stabilities and instabilities in the macroeconomy

Axel Leijonhufvud's latest piece in Voxeu concludes:
(I have put some sentences in bold font to emphasise the most pertinent points being made)

There are four issues to watch for:

• Twin dangers looming ahead are Japanese-style stagnation on the one hand and Latin-American-style high inflation on the other. In more normal times, we would regard these prospects as both unlikely and very far apart on a spectrum of eventualities. High levels of public debt, large unfunded liabilities, and large current deficits mean that they are not at all far apart in the current situation. The apparent political difficulties in decisively remedying the public finances are likely to mean that this is not just a temporary predicament. The navigable channel between Scylla and Charybdis has become quite narrow.
• One overwhelmingly important fact should guide policy over the near-term future – since current bailouts and stimulus policies have stretched public finances to the utmost, governments do not have the fiscal resources to handle another bubble bursting. Policy, therefore, should be conducted in a fail-safe mode. The current policies of extremely low interest rates are not fail-safe. They are aimed at reflating asset prices just enough to stave off a deeper recession. This is a delicate operation, not a robust, fail-safe move. It is creating strong incentives for the banks to return to the tables and resume the game of maturity transformation at high leverage that got us into our current troubles in the first place. It is evident that the banks are responding promptly to those incentives
• High leverage has been the big culprit in the current disaster. To reduce the risk of another crash, we must curb leverage. But governments do not want the financial sector to deleverage now because the requisite falling asset prices and curtailed credit would deepen the recession. The question, of course, is: If not now, when?
• The central banks are planning “exit strategies” by which they mean returning their balance sheets, which are presently bloated beyond recognition with a mix of strange assets, to a condition more resembling that normal to central banks. This will not be easy. If they succeed, however, they will still face the prospect of having to engage in many of the same desperate, unconventional policies in a future crisis. Under present arrangements, the responsibilities of central banks have no well-defined limits. This problem can only be solved by regulation of the financial sector. At present, it does not seem that we know how to do it.

Whats wrong with modern macroeconomics?

Mark Thoma points to the conference on the theme 'Whats wrong with modern macroeconomics' at Munich last week.
Some excerpts from the comments on that
THOMA: One thing I learned from it is that I need to read the old papers by Sonnenschein (1972), Mantel (1974), and Debreu (1974) since these papers appear to undermine representative agent models. According to this work, you cannot learn anything about the uniqueness of an equilibrium, whether an equilibrium is stable, or how agents arrive at equilibrium by looking at individual behavior (more precisely, there is no simple relationship between individual behavior and the properties of aggregated variables - someone added the the axiom of revealed preference doesn't even survive aggregating two heterogeneous agents).


Roberto Cruccolini said... I think, this phenomenon of forgetting and/or neglecting former knowledge, e.g. the whole discussion and aspects of aggregation, which is really central to the methodology of modern macro, as the notion of microfoudations via optimizing agents was one of the core-arguments of New Classical Makro Revolution, is deeply unsettling. You could also add the oblivion of coordination & interaction problems, of discontinuities & emergence as probably central aspects of makroeconomics, which seem to be the reasons, why macro was once thought to be necessarily a different approach than micro.
There seem to be two ways to deal with this finding. One is to complain about the way modern macro has developed, and to suggest other/better solutions; this is, what we see most of the time right now.
That is of course worthwhile and understandable, but there remains a strange aspect: nearly all of nowadays criticisms were already mentioned 20 or 30 years before (recall Solow 1978 at the same conference as Lucas & Sargent, or Summers 1986 in response to Prescott, or Blinder 1987, or, which is sort of funny, Kirman 1989 & 1992 and - again - 2009,...)
And this leads to the interesting question, why modern macro/new classical methodology & thinking was so successful in conquering the field:
why did economists think, that Lucas 1976 said something new, given the reflections of Marshall how to theorize given ever changing structures, given Haavelmos ideas on the autonomy of economic relations, given the debates between Keynes and Tinbergen of econometrics and structural instability, and so on?
And why did they follow him in applying a Walrasian program using the representative-agent methodology given all these challenging aggregation results (see for the makro-production-function Fisher 1969 or Fisher&Felipe 2003 & 2006 and the bunch of literature to the Cambridge Capital Controversies and of course the literature interpreting the Sonnenschein-Mantel-Debreu results, f.e. Rizvi 1994 or 2006)
And in what sense does it make sense to describe modern macro models as "microfounded", if at the same time, you need some Friedman-1953-as-if argumentation to justify & make plausible your way of modeling, which is often referred to, that the inner functioning of your model is a black box and unknown, only built to generate predictions, not less. but certainly not more, in the sense that we think the way of modeling is reasonably realistic and corresponding to some mechanisms in the real world. Why should we, or why is this commonly called "microfoundations"??