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New economics is the study of human behaviour in social groups, influenced by culture, location and history, in pursuit of monetary gain. It emphasises institutions, uncertainty, altruism, diversity and ethics. It recognises consumer diversity, economics of specialisation and scale, uncertainty, bounded rationality, inherent technological change and the endogeneity of money as critical elements. It is distinguished from the old economics characterised by equilibrium, representative agents, certainty equivalence and determinism.

Other websites promoting new economics:

• New Economics Foundation (NEF)
• Institute for New Economic Thinking (INET)
• New Economics for Women (NEW)
• New Economy Coalition supporting USA sustainability
• Frans Doorman, sociologist, New-Economics
• Schumacher Center for a new economics
• Levy Economics Institute, New York State
• Institute for International Political Economy, IPE, Berlin
• Greenwich Political Economy Research Centre
• The New School for Social Research, New York
• Political Economy Research Institute, PERI, University of Massachusetts, Amherst
• Cambridge Political Economy Society
• New Economy group in Academia.edu
• Post-Keynesian Economics Society
• Econation for people and planet (a New Zealand site)
• Rethinking Economics

An economic system is an interacting dynamic system of consumption and (derived) production & trade of goods & services based on an institutional framework of norms and laws. Today the mixed market-based economic system has become globalised through international trade and the internet. Examples of a different system are the planned economies of North Korea or the former Soviet Union.

The whole-systems approach is that the behaviour of the system cannot be understood by focusing on the behaviour of its individual components alone. Interaction between components leads to outcomes at the system level that differ, in some cases diametrically, from the behaviour of individual components. Classic examples of such systems effects include Keynesian unemployment (Keynes, 1936) in which individual firms faced with a loss in demand reduce their employment, so that demand falls further. Other examples are the ‘tragedy of the commons’ (Hardin, 1968, 1998), and lock-in to inefficient technologies (David, 1985). The whole-systems approach recognises that interaction between individual components, the dynamics and the feedback effects are all part of the complexity of systems-level analysis.

The energy and climate systems have been influential in affecting economic thinking over time. Limits of natural resources, such as oil reserves or the climate’s carrying capacities, as well as human resources have created a debate on limiting economic growth. Moreover, the economic crises in the 1970s have challenged the validity of assuming a stable relationship between inflation and unemployment. In economic theory, this led to macroeconomic theory and modelling based on micro‐economic foundations, rejecting the Keynesian Revolution. However, the climate crisis and especially the 2008 global financial crisis, have led to further challenges to the basic assumptions of the neoclassical consensus, such as whether these micro foundations are valid, the existence of equilibrium, the separation of monetary and fiscal policy, and the economy as a closed system. The economy is an open system, integrated with those involving energy and the environment, requiring E3 approaches for robust consideration of economic management and policies.

Economic externalities are effects from an economic activity affecting other people’s wellbeing usually elsewhere and subsequent to the activity. The effects occur later through physical processes e.g. air and sea pollution are spread wider than the original activity. Externalities are all pervasive and have cumulative impacts on people, animals, vegetation, buildings and other infrastructure, now and in the future. They can be negative or positive. A negative externality is when the cost to a person or institution of their activity or decision is less than the social cost taking account of the impacts on others. The emission of harmful exhaust gases from vehicle use is a case in point. A positive externality is when the action or decision provides a social benefit, e.g. returning pasture to forestry. Institutions make use of, or manage, or capture beneficial externalities if it is either possible or viable, in the sense that organisations can provide and market services based on the externalities (e.g. a hotel in a particularly attractive location).

Interdisciplinarity is the bringing together of several disciplines in order to study a question of interest. Economics is a social science and hence intrinsically interdisciplinary: theorists & practitioners should, as scientists, acknowledge that social issues involve all the social sciences, especially political science and sociology. And the sub-disciplines of economic geography and economic history can be critical for a wider understanding of central economic issues such as inequality, underemployment and Brexit. Mitigation of climate change, in particular, involves engineering, economics, social psychology, politics and law.

Complex systems; Complexity economics

[This is closely related to the ‘whole systems’ section above]. The following challenges for complexity economics are summarised from the website Exploring-economics.

(1) Is this a new field or a tool for understanding and explanation, like mathematics?

(2) What is the role of mathematics?

(3) How complex should the models be in order to provide understanding? Humans are far more complex than can be modelled; hence radical simplification is inevitable, e.g. agent-based modelling where the agents adopt simple rules.

(4) How should agent-based models be replicated and validated? Should they explain stylised facts? Clearly there is a trade-off between simplicity of explanation and the matching with economic observations.

The Wikipedia definition is excellent. The IMF (2000) identified four basic aspects of globalization: trade and transactions, capital movements and investment, migration of people and the dissemination of knowledge. Global heating and the financial crisis of 2008 are both global phenomena.

Justice has always attracted as much serious attention as utility in the theory of ethics. Economics is not ethics-free. “…basing economics on the ethics of individuals assumed to be entirely self-interested can go badly wrong, and that ‘willingness to pay’ is invalid as a means of valuation” (Broome, 2008).

Social justice is proposed in Rawls’ theories of justice and fairness (1971, 2001). His principles of justice are:

(1) “Each person has the same indefeasible claim to a fully adequate scheme of equal basic liberties, which scheme is compatible with the same scheme of liberties for all”; and

(2) “Social and economic inequalities are to satisfy two conditions: first, they are to be attached to offices and positions open to all under conditions of fair equality of opportunity; and second, they are to be to the greatest benefit of the least-advantaged members of society (the difference principle).”

Consider two population groups: a well-off urban majority burning fossil fuels, and a subsistence rural minority, in danger of losing access to food and water if the climate changes. There is a triple injustice in climate change:

• The rural minority has not been responsible for the greenhouse gas concentrations causing climate change, nor has it benefited from the comfort & power provided by fossil energy services.
• The rural minority will suffer the most from climate change because of droughts & floods, and it cannot buy its way out of the problem.
• The cost-benefit neoclassical approach to the problem sets aside the equity aspect and under-represents the harm caused to low-income subsistence minority in its proposed policies.

Economic inequality is now recognised as a major problem in many economies, including regional economies (Arestis at al., 2011, Milanovic, 2017)). Although global inequality, as measured by the Gini coefficient on real incomes, has generally fallen over the last few decades, this is largely due to the rapid increases in incomes in China and other newly industrialised countries. Within country inequalities have generally increased, especially for the very rich compared to others. The causes are many and are inter-related, including deregulation, reductions in high rates of taxation, financialisation both international and national, tax avoidance (IMF, 2019), rent-seeking by the rich, and an intrinsic feature of capitalism (Piketty, 2014) of nominal wealth growing faster than nominal income. The effects are mostly deleterious for society and the economy (Wilkinson and Pickett, 2009). Proposed solutions are wealth taxes (Wolff, 2017), higher top-rate income taxes, reform of the taxation of international corporations on to a country-by-country basis, a financial transactions tax, and re-regulation.

UNICEF says gender equality “means that women and men, and girls and boys, enjoy the same rights, resources, opportunities and protections.” Gender equality is one of the sustainable development goals of the United Nations.

The IMF shows how gender inequality is correlated with income inequality and real GDP per capita growth. Macroeconomic outcomes are affected by gender inequalities, and gender inequalities are influenced by macroeconomic policies. Clements (2019) explores how gender inequality affects the UK labour market.

Uncertainty is intrinsic and pervasive in understanding economic behaviour. Knight (1921) distinguished quantifiable uncertainty as risk, in the sense of being amenable to a statistical analysis using historical or experimental data, and fundamental uncertainty, that is intrinsic and unknowable. The recognition of fundamental uncertainty is a critical feature of Keynesian economics, which distinguishes it from neoclassical economics, which assumes that agents can characterise uncertain outcomes by well-defined probability distributions.

Correlation does not imply causation when interpreting statistical relationships between economic variables. This is especially problematic for investment and skilled-labour demand. Both are needed for production to take place and must precede the goods & services produced and consumed. Yet this future consumption is the driver of the earlier production. Proving evidence of causality is important in the econometric estimation of relationships. In the absence of expectations, temporal causality, i.e. one set of events occurring systematically after another set of (causal) events, may be sufficient proof. This is the basis of Granger’s Causality Test.  Unless variables are properly defined, errors in causation can be very damaging e.g. expansionary austerity policies appear to have been based on errors in methods leading to reverse causality between public-sector deficits and GDP growth.

In a monetary economy, supplies of goods and services are derived from demand. Suppliers aim to manage demand (through pricing, advertising, offers, availability) but in a free market, consumer & government demand drives the economic system. Supply equals demand in accounting terms, but Say’s Law (supply creates its own demand) does not hold. However, supply must necessarily precede demand in time, so that suppliers must anticipate and envision demand in a trial & error process having profound implications for economics. The supply-demand curves in elementary neoclassical economics are highly misleading and wrong

These continuous curves are a diagrammatic representation of equilibrium in neoclassical economics, with the advanced mathematical form (with assumptions of continuity, constant returns to scale and representative agents) being Dynamic Stochastic General Equilibrium (DSGE) models dominating macroeconomic literature. These are misleading or wrong for many reasons.

1) Demand and supply cannot be continuous for indivisible goods and services, i.e. lumpy items such as vehicles. Only money makes real goods appear continuous and divisible.

2) The institutions involved, the location and time are of the essence in understanding economic behaviour and outcomes. None are present in the diagram.

3) Markets clear in many ways (prices, availability, stockbuilding, wastage, reallocation, rationing). Clearing through prices is unduly restrictive. Equilibrium through pricing is imaginary.

4) Supply and demand is not independent and they are uncertain.

5) In identifiable markets, there are normally many goods and service and many prices, with limited information about quality.

Production refers to economic activities, usually marketed but including government services, classified in the UN System of National Accounts. These activities (outputs) generally require inputs of land, capital, labour, energy and other goods and services using technical knowledge for their production. Input-output tables show, for countries & regions, the inputs per unit of output for a specific period, usually a year. They are used in input-output models to allow for industrial structure and or intermediate demand.

The production function is a neoclassical concept that is contested as bogus and immeasurable in new economics.

Goods & services are tangibles and activities that are assumed to benefit purchasers or users in terms of their needs or wants.

Products are goods and services classified by producing industries.

Commodities are groups of similar goods, usually raw materials and foods.

Replicated goods and services are items indistinguishable to the purchaser by location and time, e.g. multiple items of supermarket shelves or internet checkouts.

Economies of scale (including those of specialisation, networks and over time) are pervasive in production and consumption. They are partly the result of the laws of physics (volumes increase faster than surface area as a body increases in size), but they also arise through sharing fixed resources. Economies of scale allow substantial reductions in costs and hence they are exploited if available and tend to dominate production. Constant returns to scale are by definition rare, but are chosen as an assumption in neoclassical equilibrium models to make them tractable.

Productivity measures the efficiency of production in terms of its inputs of resources such as labour, capital, energy or materials. It is the input into a productive activity per unit of its output. The productivity of a national economy normally refers to its output (GDP in real terms) per unit of labour use (hours worked). Technological progress has contributed to ongoing increases in national productivity. The slow-down in productivity growth since the Great Recession has been caused by changes in mix of production towards services, lower rates of investment, changes in the labour market weakening workers’ conditions and low wage growth relative to output-price growth.

Energy demand is usually correlated to income and price, neglecting the effects of behavioural factors, the environment and the macro‐economy. However, even psychological studies from the 1990s show that monetary measures are not considered the only important factors affecting energy demand and conservation. Consumption patterns are dynamic and multidimensional, affected by behavioural, institutional, economic, policy, environmental and technological factors, that could lead even to macro‐economic rebound effects or even backfire within the economy, as in case of internal combustion engine that enhanced the second industrial revolution.

Aggregation is a major problem in economics. Taleb in The Bed of Procrustes (2010) summarizes the central problem: “we humans, facing limits of knowledge, and things we do not observe, the unseen and the unknown, resolve the tension by squeezing life and the world into crisp commoditized ideas”. Economic theory deals with aggregates, such as the demand across consumers for a product (microeconomics), or total consumption in a national economy (macroeconomics). However, on further examination, there are vast numbers of products, consumers and firms in a complex dynamic network underlying these aggregates. The National Accounts brings order to the data, but inevitably they omit hard-to-measure or immeasurable aspects of human, animal and ecosystem well being.

Economics requires assumptions about the composition of aggregates, such as products, consumers & producers in a daily market. These aggregates are composed of many diverse goods, individuals or firms. Humans and human institutions have agency, i.e. choice, and can be assumed to follow common rules of behaviour as consumers or producers. However, there is a crucial difference between assuming that all the agents are diverse (heterogeneous, perhaps following a normal or other distribution) or identical (representative of the average). Diversity is an inherent feature of people and firms, according to age, culture, tastes, abilities, experience, and is essential for evolution and well being. However, the alternative assumption of identical representative agents makes modelling behaviour tractable and this assumption has become the basis of most neoclassical macroeconomic analysis, making it potentially misleading.

The problem for economic theory and application is how to represent the heterogeneity inherent in the world.

One approach is to disaggregate into institutional sectors sharing common characteristics. E.g. “industry” disaggregated into sectors using common technologies (electricity) or producing closely related products (aircraft). Another approach is to use statistical distributions based on the properties of the population of the aggregate.

See heterogeneous agents vs. representative agents above.)

Money is a resource with a set of characteristics that are embodied in different combinations in monetary assets (forms of money). The main characteristics of money are: trustworthiness, divisibility, maintenance of value over location & time, limitation of supply, and convenience. These characteristics allow money to be used in accounting and recording of transactions & wealth; and forms of money to be used as mediums of exchange and savings. Monetary assets include notes & coin, bank loans/deposits, credit & debit cards, and various government-backed and short-term bills of exchange.

Since commercial banks can generate loans if consumers or firms request them, the supply on money is endogenous to the monetary system.

Integrality is the property of goods or services that make them indivisible if they are to be fit for purpose. In economics, one characteristic of money is that the monetary value of indivisible goods or services makes them conceptually divisible. It is a basic problem in microeconomics that demand and supply is assumed continuous and divisible, when it is not, thus eliding monetary values and real quantities. This is a feature of economism – the tendency of economists to see the world in terms of demand and supply in equilibrium.

A monetary system is the dynamic interaction of institutions concerned with the provision and management of monetary assets designated as legal tender or otherwise regulated by the state. Today’s system of fiat money has as its main institutions: the Central Bank, commercial banks, the Ministry of Finance or Treasury, and the currency & bond markets.

Monetary assets are created by banks lending to customers, who then create more deposits or exchange the money for goods and services, so that others deposit the money and so on. The Central Bank does not control the supply of money; instead it imposes conditions on the commercial banks, such as a requirement to hold reserves in the Central Bank. They are paid interest on those reserves, which is decided by the Central Bank (Banks’ Base Rate). The commercial banks must maintain a balance between lending and borrowing to remain solvent.

Financialisation is “… the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.” Epstein (2005, p. 3.) The financial sector is Banking and finance, insurance, real estate, and auxiliary services. If financialisation is the increase in the share of this sector in current GDP, the process is apparent in the UK (10% 1976 -> 20% 2008), France (10% -> 13%), Italy (4% -> 11%) and the USA (5% -> 9%). The UK is the most financialised large economy, led by London as a world financial centre. Even social care has seen widespread financialisation in the UK (IPPR, 2019).

The sector has grown through a process of regulatory capture, starting from the Thatcher-Reagan “big bang” deregulation 1979 onwards. The process culminated in the Great Financial Crisis 2008-, caused by unrestrained creation of new financial instruments, excessive leverage and systemic weakness in re-insurance against losses. These problems remain.

Source: IMF (2019)

Traditional finance relies on the principles of modern portfolio theory, such as the efficient market hypothesis, assuming that all investors are rational and all available information will be interpreted correctly by investors, banking institutions and decision makers. However, project decisions are affected by individual behaviour and the institutional framework. There exist several biases that might affect investment decisions: anchoring, overconfidence, loss aversion, representativeness, aversion to ambiguity, endorsement effect. Capturing behavioural aspects as well as uncertainty, e.g. of energy systems, enable offsetting perfect foresight of optimization and equilibrium models.

Much of applied macroeconomics is about managing the economy by means of fiscal, monetary and regulatory economic policies. In new economics, all three types of policy should work together in a package depending on the problem to be addressed.  Within these broad types, specific economic instruments (e.g. the rate of VAT, the Central Bank’s base rate, or the carbon price floor) will have characteristics that should be taken into account when devising the policy package. E.g. interest rate reductions combined with a fiscal stimulus to offset a sudden fall in aggregate demand; or a tax on fossil fuel to offset the rebound effects of an energy efficiency programme.

A critical aspect of long-term economic policy is incentivising low-GHG and air-quality innovation and technological change. This can be done by fiscal policy e.g. a carbon tax or an emissions-permit scheme, or through regulations improving energy-efficiency or reducing emissions of pollutants. Historically many innovations have come through government projects and direct support and such investment may be crucial in large-scale, widespread transition to a decarbonised global economy.

It can be argued that economists who give advice to governments and business should have practical experience of economic activities. As Keynes (1930) remarked [the economic problem] “should be a matter for specialists-like dentistry.” Just as dentists must have successful experience to qualify, so professional economists should have some experience of the economy, not just as consumers but as business people operating in markets. If they understand money and business surely they should also be successful, as Keynes was in his stock market operations.

Post-Keynesian economics treats the economy as a monetary phenomenon, with output, employment and investment driven by expected demand by consumers. Full employment and full capacity utilisation are not guaranteed. Uncertainty and lack of information dominate decision making. Economic behaviour is social and institutional, and not necessarily rational. Unlike New Keynesianism, it rejects equilibrium and constrained optimisation of utility or profits as organising principles. Money is endogenous to the economic system and outcomes are path-dependent.

Economism is the tendency of (neoclassical) economists to see the world in terms of

1) demand and supply in equilibrium,

2) competitive markets and

3) rational self-interested behaviour,

when the world is

1) in flux,

2) with markets restricted in location and time, and many non-price ways of market clearing, and

3) altruistic behaviour as a critical component of social life.