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Theory
and Education Program
The
Conceptual Framework for GDAE's Theory and Education
Program
By Neva R. Goodwin - April 2006
The mission of GDAE's Theory and Education Program
area has evolved from work by GDAE economists who are
acutely aware of how the shortcomings in standard economic
theory exacerbate a variety of contemporary problems.
To cite a couple of examples, with broad ramifications:
- The neoclassical hegemony that created the "Washington
consensus" of the 1980s and '90s regarding macro
policies in industrialized, transitional, and less
developed economies can justly be accused of doing
significant harm (along with some good). That consensus,
and the policies it inspired, ignored institutional,
social, and environmental realities, and has fostered
inequality and a growing split between activities
that contribute to human and ecological wellbeing
vs. those that create vast financial profits.
- Standard, neoclassical economics pursues growth
in GDP (i.e., a nation's total domestic economic transactions)
as an ultimate goal, on the justification that this
permits continual increase in the consumption of marketed
goods and services. This narrow approach too often
ignores the ecological, cultural, social and spiritual
values that define more appropriate final goals for
individuals and societies. There are important differences
between the simple "GDP-growth" goal of
increasing a society's aggregate market transactions,
vs. other goals that embrace broader notions of human
wellbeing.
We believe that a more appropriately structured economic
theory would be oriented to a broader set of goals,
while not ignoring existing ones. It would include among
its primary goals not only material sufficiency but
also a fair distribution of goods and services among
different groups and individuals in the society, and
the ecological health and sustainable social structures
that are necessary for the wellbeing of future generations.
Concerns for social justice and for institutional
and ecological health have proven notoriously difficult
to incorporate into neoclassical models. The currently
dominant paradigm has made contributions of unquestioned
importance towards the efficient use of resources, but
the equally important goal of equitable distribution
of resources, in the present, and between present and
future generations, has remained the stepchild of neoclassical
economics. A variety of efforts have been made –
by economists described as institutionalists, or as
political, feminist, ecological economists, etc. –
to provide one or another of the missing pieces. The
strongest such offerings conflict in various ways (assumptions,
logic, methods, or ideology) with the overall structure
of the neoclassical paradigm. It is not possible simply
to insert corrections into the existing paradigm.
Recycling And Building Anew
The neoclassical paradigm may be imagined as a building
that has some flaws of internal inconsistency, but that,
for the most part, holds together very strongly; rarely
is it possible simply to take a brick out of this structure
and replace it with a different brick. What, then, shall
be done, if this building no longer serves our needs?
The answer: Knock down the whole structure, choose a
new building site nearby, and build a new foundation
(incorporating but going well beyond the simple psychological
axiom – "rational economic man maximizes
his perceived utility" – upon which, neoclassical
economists boast, their entire structure has been erected).
Then cart over to the new site the best of the old building
materials (perhaps 40% of the whole, when we include
methods, models and observations). Bring in the new
materials that have been supplied by the alternative
economists; and start reconstructing. The new structure
will go beyond material now available; there is need
for a creative process whose result will continue to
be improved long after the outline of the new building
is first evident.
Many good efforts at reform of the neoclassical paradigm
have failed because they tried to replace only one or
a few bricks of the neoclassical edifice. An example
is Harvey Leibenstein's concept of "X-inefficiency"
(the "slack" that occurs in virtually all
labor situations, where effort is at less than the,
usually indefinable, maximum). The recognition of X-inefficiency
should have blown a hole in the paradigm, because it
makes it logically impossible to achieve the stated
neoclassical efficiency goal of maximizing inputs for
a given quantity of output. However, since an alternative
paradigm did not exist into which to fit this important
reality, it has simply hung in space – recognized,
but not incorporated.
The dominance of the neoclassical approach among economic
theorists and teachers shows signs of weakening; there
is widespread, documented discontent with its limitations,
and a new openness to consider alternatives for theory
and policy-making. However, the adage "you can't
beat something with nothing" has been proven again
and again. Until an adequate alternative is available,
dissatisfaction on the part of teachers, students, policy-makers,
or employers of economists will only result in continued
decline in enrollments in economics departments and
in the role economists are asked to play in society.
The Close Connection Between Theory and Teaching
In the field of economics this is not a time for what
Thomas Kuhn, and others after him, have called "normal"
science. Under "normal" circumstances theoretic
change comes slowly; new theory is developed outside
of the education stream and is then gradually introduced
into educational materials. We are, however, living
at a time when pressure from the real world is building
to demand a paradigm shift in economics.
Given an urgent need, we believe that the most efficient
and effective response will be one that proceeds simultaneously
along several fronts. Much of the initial work of "Recycling
and Building Anew" has already been done, by many
hands. The old, neoclassical edifice has been torn down
innumerable times; internal inconsistencies, inadequacies,
and failures to perform as advertised have been described
with what would seem to be irrefutable logic and thoroughness.
Consider, for example, the well-known "theory of
the second best" that was put forward in 1957 by
Kelvin Lancaster (collaborator on GDAE's Russian text
project) and Robert G. Lipsey. These economists pointed
out that neoclassical prescriptions (e.g., for perfectly
free trade) lose their logical force in the presence
of market imperfections. Since market imperfections
almost always exist, the neoclassical edifice should
have crashed in 1957. That it did not do so was not
because the theory of the second best, or other equally
forceful arguments, have been refuted; they have simply
been ignored – because there has not been a sufficiently
complete paradigm available to replace the old one.
Although many pieces are available for assembly in
a new paradigm, the next step, of putting them into
a coherent whole, is not simple or obvious. Much of
GDAE's activity has been devoted to this constructive
task. In the process we have discovered that the creation
of educational materials poses a challenge which is
ideal for forcing us to confront the full scope of the
need for theoretic "recycling and building anew."
Those who create educational materials are forced (if
they are intellectually honest) to deal with the whole
theoretical context. When something like the theory
of the second best, or Leibenstein's X-inefficiency,
cannot be denied, but does not fit the paradigm, appropriate
curricular materials must propose broad enough alterations
– even up to a complete rebuilding – so
that the theory ceases to conflict with observed reality.
Out of this effort has come our elaboration of contextual
economics.
The first goal of contextual economics is to provide
the most reliable understanding of the workings of local,
national and global economies and economic forces. We
believe that such an understanding is only possible
when the economy is perceived within its full social/psychological
contexts – including human motivations, ethics,
culture, norms, history, politics, and institutions
– as well as the physical contexts, which include
technology and the built and natural environments.
The second goal of contextual economics is to help
students and practitioners to relate their understanding
of the economy to issues of greatest human concern.
As laid out in our textbooks (Microeconomics in
Context, Houghton Mifflin, 2005; Macroeconomics
in Context, Preliminary Edition on the GDAE website),
contextual economics uses the concept of human well-being
as a touchstone by which to compare and assess various
measures (such as GDP, Genuine Progress Indicator, etc.),
clarifying the purposes for which each is best suited.
It does not take for granted the standard economic goals
of growth in consumption and output, but considers these
in relation to their well-being implications for employment,
equality, security, care for those who need care, leisure,
and individual happiness. It makes it possible to analyze
the varying sources and impacts of economic growth in
different situations, within and among nations.
GDAE's Intellectual Heritage
The intellectual progenitors of GDAE's theoretic work
are far too many to be listed in full. Confining ourselves
to those who have had particularly close personal relationships
with the Institute or its members, we especially wish
to acknowledge the following:
- John Kenneth Galbraith, Robert
Reich, Tibor Scitovsky and
Amartya Sen have written forewords
for volumes in GDAE's 6-volume series, Frontier
Issues in Economic Thought.
- Nobel Laureate Wassily Leontief,
until his death in 1998, was on the GDAE Board of
Advisors, and was an instigator and supporter of GDAE's
Russian textbook project, to which Kelvin
Lancaster also made essential contributions.
- In Leontief’s honor GDAE has annually awarded
the Leontief Prize for Advancing the Frontiers of
Economic Thought. The first two recipients were J.K.
Galbraith and A.K. Sen. Other recipients of the Leontief
Award include: pioneering ecological economist Herman
Daly; Richard Nelson, noted
for his contributions to understanding the links between
technology and development; Robert H. Frank
and Juliet B. Schor, path-breakers
in understanding the consumer society; Nancy
Folbre, leading feminist economist; and Alice
Amsden, Ha-Joon Chang, Paul
P. Streeten and Dani Rodrik,
who are each in important ways rethinking the theory
needed to understand the realities and the equity
issues in international trade and development.
Many of GDAE’s intellectual mentors and progenitors
serve on the Institute’s External Advisory Board,
which has the following composition:
- Alice Amsden, Professor of Political
Economy, Department of Urban Studies and Planning,
Massachusetts Institute of Technology
- Nancy Birdsall, President, Center
for Global Development
- Brent Blackwelder, President, Friends
of the Earth
- Sissela Bok, Distinguished Fellow,
Harvard Center for Population and Development Studies
- Lincoln Chen, Professor of International
Health and Director, Center for Population and Development
Studies, Harvard School of Public Health
- Nancy Folbre, Professor of Economics
at the University of Massachusetts, Amherst
- Robert H. Frank, H. J. Louis Professor
of Management and Professor of Economics,
Johnson Graduate School of Management, Cornell University
- Joshua Lederberg, Nobel Laureate
in Biology; Laboratory Head, former President, Rockefeller
University
- Jessica T. Mathews, President,
Carnegie Endowment for International Peace; Senior
Fellow, Council on Foreign Relations
- Mario J. Molina, Nobel Laureate
in Chemistry; Institute Professor at the Massachusetts
Institute of Technology
- Dani Rodrik, Professor of Political
Economy, Kennedy School of Government, Harvard University
- Juliet B. Schor, Professor of Sociology,
Boston College
- Amartya Sen, Nobel Laureate in
Economics; Lamont University Professor Emeritus, Harvard
University
- C. Peter Timmer, Senior Fellow,
Center for Global Development
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