Sunday, February 5, 2012

…rethinking the wealth of nations

By kay.e.strong

This semester I’m diligently working at integrating new thinking into my macro principles course. My objective is to better match content with the current realities of the world we inhabit. I’m far from alone in believing that the field of economics needs an enema! I have an ally in the Institute for New Thinking (INET) < http://ineteconomics.org/ >.  The INET sprang from the failings of traditional economics during the great Global Meltdown—not unlike Keynesian economics following the 1930s debacle of classical economics.  The push for new economic thinking has one advantage British economist J. M. Keynes did not have; INET, a diverse global collaborative of thousands of trained economists, including Nobel Prize winners and others—teachers and students—“attracted by a promise of a free and open economic discourse.”  INET’s mission is “to nurture a global community of next-generation economic leaders, to provoke new economic thinking and to inspire the economics profession to engage the challenges of the 21st century.”

Just as Occupy Wall Street broached the topics of greed, economic exclusion and failed policies, INET is likewise destine to shake up traditional economic thinking and its benefactors.

For an illustration, let’s crack open Adam Smith’s tome, The Wealth of Nations, the cornerstone of economics.

Many are familiar with this oft quoted passage:

"It 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 self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

A brick in the foundation of laissez-faire economic policy which free marketers worship is typically traced back to this passage. Others tag the passage as the seed of the invisible hand metaphor attributed to Smith.
The invisible hand represents the undirected coordinating role that the price mechanism performs in guiding economic activity to its natural conclusion. The mantra of the invisible hand runs interference for all kinds of supposed ills such as government help which is likened to freshly chewed bubblicious lying on a hot sidewalk.
 
Traditional economics focuses on the efficiency story of economics.  Efficiency is about cultivating the optimal competitive environment to insure highest possible production from supposed scarce resources.  Production effects are divorced from distributional effects. And Adam Smith has become a bastion for all beneficiaries of traditional economic thinkers advocating a hands-off policy role for government.

But new economic thinking is emerging. The new story challenges traditional rhetoric.  The new story portrays markets and economies as directed networks.  This is the complexity story—process rather than the state of competition is at its heart. The complexity story is based on a dynamic framework involving evolutionary change overtime that is not directly controlled or controllable—where economic forces interacting with and reacting to social, political, technological, and environmental forces create outcomes. Some desirable—others not quite so.  

The metaphor of the invisible hand is given a makeover in the complexity story.   Here the invisible hand stands for the idea of self-organization in which the potential “chaos” of seven billion individuals unfolds into an elegant complex structure of order that fits together—with sustainability its innate goal.

In the complexity story markets are social constructs, that is, markets could not have existed had we not collectively created them.  We created them—we can uncreate them, too!  Markets are not sacred cows—have at that bubblicious gum.

The complexity story acknowledges that we have collective moods.  Market volatility, business cycles, economic growth, inflation, technological and institutional innovation are macro outcomes of our collective psyche at work. Old equations don’t add up in the new thinking of economics. You plus me makes three. Old policy formulae are the bubblicious gumming up the works of the market and economy.

New economic thinking advocates a new role for government. 

“The common finding that economic structures can crystallize around small events and lock in is beginning to change policy…toward awareness that governments should avoid both extremes of coercing a desired outcome or keeping strict hands off, and instead seek to push the system gently toward favored structures that can grow and emerge naturally. Not a heavy handed, not an invisible hand, but a nudging hand.” –Brian Arthur, Santa Fe Institute (Complexity and the Economy. 1999:4)

I sense that one day all this new thinking will seem like old hat!

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

2 comments:

  1. You are exactly right Professor, government involvement in the market is neither inherently good or bad, it is the extreme of that hand that is the problem, we tend as a society to wobble on our economic policy, from the extreme right to the extreme left, and while it tends to create and address the cycle, it does not offer stability , growth and innovation.We are always opposing forces, like 2 people learning how to canoe one constantly correcting for the other.
    I also have to again respond to the direction that efficiency definition leads us.IF I am a manufacturer and just focus on production with the best efficiency of my resources. I can put out a lot of product, but is it truly efficient if the resources I use pollute the environment, cause long term health issues for my employees and the community, and I pile up waste and dump it? I think we need to perhaps address the nature of that self-love , and impress that the negative effects of such behaviors are not in business own self-interests. Eventually those costs and burdens are borne by all.

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This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.