Heterodox economics is the opposing force to mainstream economic theory. Mainstream economic theory or Neoclassical economic theory has its principles, models and explanations on production, employment, prices, inflation etc. Heterodox economists do not subscribe to a lot of these principles as they view these as unrealistic. Some of the contentious mainstream principles are Rational expectations, Rational choice theory, sovereign consumer, utilitarianism, optimizing economic agents, crowding out effect, NAIRU etc.
Philips curve in Neoclassical theory
Heterodox economists also don’t like operating methodology of mainstream economic theory - exponential & boundless growth (ecological constrains are not recognized), production centric economic doctrine (raising production being the sole purpose of economic policy), instrumentality of neoclassical mathematical models (building complex models to legitimize policies which are based on unrealistic assumptions), ideological basis of policies (much of mainstream theory is driven by sub-conscious laissez-faire mentality rather than objective knowledge).
NAIBU curve from Post Keynesian theory. Figure illustration from Marc Lavoie.
Heterodox economic theory became a vast field that includes Post Keynesians, Marxists, Austrian school, Ecological economics, Feminist economics etc. Post-Keynesian economics is a major branch of heterodox theory which includes many sub branches (like institutionalists etc). Overall, the heterodox economic school developed its own working theories, operating principles and methodologies to explain the field of economics as an alternative to mainstream economic theory. Some of the theories of heterodox theory includes - satisficing economic agents, endogenous money, fundamental uncertainty, effective demand, NAIBU, conflict theory of inflation, theory of business cycles etc.
Now focus of this article is not really heterodox economic theory but rather a peculiar void in it. The lack of theory of the State. Read my last article. Politics, policy and economy is a single complex organism. Government and its institutions influence and shape the economy. Although the markets, private enterprises and free willed economic agents operate in economy, the government has major influencing role. To create laws, policies & regulations, institutions etc on one hand and using fiscal & monetary policy to support the economy on the other.
While heterodox economists have put forward so many theories on working of economy - on consumers, firms, banking, treasury, central banks, currency, trade, income distribution etc. Heterodox economic theory still misses out on theory of the State. How does modern State operate? How State thinks and arrive at decisions? What’s its purpose? What are its political constraints? What are actors in government and what motivates them? etc. Heterodox economic theory hasn’t given definitive answers to these question.
Here, most of the heterodox economists have left the explanation on concept of State on classical theory of democracy. How State works and arrive at decisions? How policies are created and which actors shape them? Heterodox economists leave these questions to electoral democracy and nothing beyond that. However, this is a great flaw. A flaw equal in proportion and magnitude as the flaws of neoclassical economic thinking.
Schumpeter can be treated as starting point on heterodox theory of democracy. Schumpeter’s thesis starts with debunking fallacies and unrealisticness of classical democracy. Then Schumpeter puts forward his own theory of democracy - how democracy functions? what are motivations and driving force of its actors? how democracy arrive at decisions? what are constraints of democracy? why and how democracy fails? etc - Schumpeter answers such pertinent questions.
Many heterodox economists think that they have transcended the dysfunctional mainstream economic theory by pragmatically creating vast field of heterodox economic theory which includes new ideas, better principles and more realistic models which are more robust and wider in scope than workings of neoclassical theory. However, heterodox economists still lack a proper theory of the state without which they suffer from similar narrowness and pigeonholed thinking the type of which mainstream thinkers suffer greatly.
Heterodox economic thinkers have strong criticism of mainstream principles like ‘rational choice theory’ and concept of ‘sovereign consumer’. Rational choice theory claims people take informed rational spending decisions based on qualitative and quantitative assessment of goods & services they consume. Sovereign consumer theory claims that consumers are market makers and markets bend to the wishes of consumers. Both these are highly flawed theoretical assertions as i explained in previous article and heterodox economists recognize this very well.
However, it’s puzzling to see why heterodox economists don’t expand the fallacy of rationality to political theory. An average voter in political democracy is as ignorant, as irrational and as sentimental just like an average consumer in market economy. Similarly, there’s no such thing as sovereign electorate in politics just like there’s no such thing as sovereign consumer in market economy. Sovereign electorate is merely a convenient facade to legitimize the political democracy. All this i have explained in my previous article.
On subject of political theory, Heterodox economists suffer from ‘projective thinking’ and ‘fallacy of composition’. Projective thinking is a type of thinking where you presume that other person’s thinking process is similar and parallel to yours. You project your own belief systems and method of thinking onto others and you believe that others also arrive at decisions just like you do.
I’ve also seen the flaw of projective thinking among many intellectuals and activists of democratic states. These intellectuals think that they have good understanding about policies, national discourse, political leaders etc and they generalize and extend the existence of this understanding to rest of the people as well. In fact, the greatest flaw of Democratic society is the belief that people are informed and rational, and can make logical & reasoned decisions in political system.
Then there’s fallacy of composition, the activists & intellectuals of democratic society generalize that the rest of the society has same uniform psycho-social structure. Meaning - the people in rest of the society rationally understand social-political-economic discourse just like the activists & intellectuals. A society is thus believed to be capable of taking sound and sensible political decisions through universal suffrage.
Here’s how projective thinking and fallacy of composition lead to failed political analysis. You may have heard an activist/intellectual/pundit claim that so & so politician will lose election because his policies are outright foolish and nonsensical. Activist or intellectual makes the blunder of believing that the voters are also informed about the wrongness of the policies. However, that politician wins elections and pundits are left astonished. This is what happened with victory of Donald Trump in America - twice, victory of Brexit movement, victory of many far right wing parties across the world. These political forces had outrageously destructive policies yet people chose to vote for them. Why? Because there is no rational electorate.
Another flaw of heterodox economists and especially Post Keynesian institutionalists is that while they fully recognize the role of government in shaping and influencing economy, they don’t have much to say about political structure of government and how it makes decisions. Institutionalists can tell you what sort of policy is conducive to economic development but they can’t tell you how a State can arrive at such policy - ie political mechanism of making State policy. Institutionalists analyze policies and working of institutions but not political mechanism behind the institutions itself.
In heterodox economic theory (except Austrian school), the State has critical role in economic policy. But much of the focus of heterodox economists is theorizing on economic principles - on production, employment, prices, income distribution etc - while little or no theory is conceptualized on political mechanism of State on how it creates policy (prescriptively & descriptively). Heterodox economists can explain the effect of policy but not its cause. For example, experts can tell that Brexit is a terrible policy and it will hurt UK’s economy, trade and industry. But experts can’t tell the cause of Brexit policy. Why UK’s political elites approved the suicidal policy of Brexit referendum? Why people voted on this self destructive policy? There’s no proper explanation to that.
Case of America is more severe. Trump regime is creating some of the most destructive and chaotic policies. All strand of economists - from orthodox mainstream to the heterodox - strongly criticize these policies and explain their terrible impact. But the relevant question is not - ‘Why Trump regime’s policies are bad?’. The real question is - ‘Why Trump regime exists?’ . Of course, the answer to this question is not very complicated but very uncomfortable for heterodox thinkers. A key part of the answer is that American democratic political system is failing badly.
Economists - orthodox and heterodox alike - hesitate to comment on politics behind policy (although arrival of Trump is changing this trend). Even worse, economists hesitate to discuss the political system. The crisis that America and some other nations face is a systemic crisis. It’s not just a crisis of bad policies or bad political actors. It’s actually a crisis of their political democracy. Economists - orthodox and heterodox alike - have this inherent bias towards liberal democracy so they can’t really acknowledge the failing of this system. Schumpeter gave four requisites for functional democracy and all of them have long evaporated from America. This is when Democracy fails. When a political system fails, everything fails including economic policy.
Economics field is actually a complex overlap of politics, science, culture, sociology, history and much more. Orthodox economic theory is a tunnel view of economy which reduced the field of economics to merely transactions and logistics of market economy. Hence, the heterodox economic field became the alternative to reductionist orthodox economic theory. While heterodox economists greatly contributed to understanding of economics, it has to go a step further by incorporating theory of the State in its conceptual framework.
I would conclude with another assertion of Schumpeter. Schumpeter said that Democracy could not keep up with pace of evolution of capitalism. The socioeconomic realities and material progress delivered by science changed our world greatly and rapidly in last century - in both good and bad ways. But the political system we have - the core of it - changed very little with time. The system is reaching the end of its life cycle yet we continue to drag it in 21st century. Now the system produces political elites like you see in America and UK.
Musical coda
Orchestra Una Mattina - Film ‘The Intouchables’