The New Economics as ‘Mainstream’ Economics

This conference will explore new thinking in economics (“New Economics”), which may be regarded as now already the mainstream. The new thinking is concerned with institutional behaviour, expectations and uncertainty, as opposed to traditional economics with its emphasis on equilibrium, mathematical formalism and deterministic solutions. With the financial crisis brought on by the unrestrained pursuit of personal and corporate profit, sanctioned by traditional economics, now is the time to establish a new way of approaching economic understanding, based on new economic theory. It is also a good time to bring forward new ideas on the approach to policy across a wide range of areas, such as macroeconomic and global governance, employment and unemployment, social security and pensions).

New thinking in economics is an interdisciplinary approach to economic problems that acknowledges and respects the insights and analysis from other disciplines, e.g. those from ethics, history and engineering. It also recognises complexity and evolutionary theory as relevant to understanding economic systems and economic behaviour. Five issues can be highlighted to contrast new thinking with traditional theory:

1. A critical issue in economics is the treatment of uncertainty. This is one criterion that distinguishes the traditional and new economic analyses. For example, in the traditional cost-benefit analysis, the form of the expected probability function is simply assumed, converting any and all uncertainty into ‘certainty equivalence’ and subjecting the final model to a sensitivity analysis. The estimates prevalent in the literature can be highly misleading, because the studies disregard deep uncertainty in costs and benefits.
2. The economy is a complex, non-linear dynamic system with technological change inherent in economic growth. Traditional economics is organised around the concepts of equilibrium and marginal changes. Many economic policy issues, however, are potentially non-marginal changes to the system, in the context of strong uncertainty.
3. Many issues in 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 utilitarianism, with a questionable selection and use of discount rates, ignoring the philosophical literature and the concept of justice.
4. 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, as seen in carbon-price signals for example. Traditional models assume continuity and path independence.
5. The politics of macroeconomic policy implies unstable alliances and trade-offs between governments and political parties. However, 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 assumptions and market interpretations, which are actually subjective.

Traditional economics has developed an approach that has persistently ignored the conclusions and insights of other disciplines. The new economics is more pluralistic and more respectful of other disciplines. For example, cost-benefit analysis is formally replaced by multi-criteria analysis as developed in management science and applied to sustainable development in which socio-economic, ecological, and ethical perspectives are taken into account.

The above themes are suggestions of how we propose to bring together our approach. The point we wish to emphasise is that the new thinking in economics goes beyond the traditional approach, which is arguably no longer mainstream economics.