Heterodox Economics

The various schools of thought within heterodox economics are overwhelmingly concerned with the analysis of economic reality. That is, they accept the guidance provided by capitalist logic, but introduce concepts that are intended to analyze capitalist economies in more depth, or with more accuracy, than standard concepts.

Heterodox economics is therefore focused on functional analysis, and will predominantly contribute to the functional framework of contractionary economics.

Heterodox economics has made significant advances in our understanding of economic behavior — that is, the manner in which people respond to economic incentives and constraints.

For many years this subject has been plagued by an extraordinary contradiction. Standard economists have used the individual as the basis for analysis, an approach they call methodological individualism.

On the other hand, marketing experts have used the group or social collective as the basis for their analysis.

It is clear to everyone outside the economics profession that the marketing experts are right: people are social beings rather than individual entities, and this is the basis for most of their economic choices.

This contradiction has given rise to the observation that if you want blue-sky theory, attend an economics lecture; if you want social reality, attend the marketing lecture next door.

Many critics have also speculated that this is major reason why many students drop economics as a field of study after taking one or two introductory courses.1

A key heterodox thinker about economic behavior is Paul Ormerod, who in 1998 published Butterfly Economics. In the preface to this book, Ormerod states his thesis:

In orthodox economics, individuals are not permitted to affect each other's behavior directly, and in circumstances where this is a good approximation to reality, this offers a powerful explanation of what goes on. But such circumstances are rather limited, and it is more usually the case that people or companies are influenced directly by what others do. This leads to a much more complex world, but one which offers a better description of reality.2

To develop a theoretical description of this more complex world, Ormerod uses a model developed by fellow economist Alan Kirman. This attempts to understand complex collective behavior by permitting individuals to modify their behavior based on the actions of others. As Ormerod says, "The key to the whole process is interacting agents."3

The resulting concepts have much in common with chaos theory, which is the reason for the book's title — a minor change in initial conditions (the flapping of a butterfly's wings) can lead to major changes in the ultimate effects (a hurricane thousands of miles away).

Ideas such as Ormerod's may hold great promise for understanding both collective economic behavior and seemingly irrational and unpredictable events like financial crises and stock market collapses. These ideas are therefore likely candidates for inclusion in the functional framework of contractionary economics.

An important aspect of social reality that is missing from models such as Ormerod's is the manipulation of consumers through advertising, persuasion, and other forms of social control.

The depth of this manipulation was described in 1928 by public relations guru Edward Bernays in his insightful little book, Propaganda:

…in almost every act of our daily lives… we are dominated by a relatively small number of people… who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind…4

Bernays urged business people to adopt the wire-pulling approach for their own purposes:

Mass production is profitable only if its rhythm can be maintained — that is, if it can continue to sell its product in steady or increasing quantity. The result is that while, under the handicraft or small-unit system of production that was typical a century ago, demand created the supply, today supply must actively seek to create its corresponding demand.5

Thus, while Ormerod makes a theoretical advance by moving from individuals to interacting agents, he fails to note that these interactions are largely predictable, have been studied extensively by those in power, and are consciously directed to capitalist ends.

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