In 2005 Richard Werner published The New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance. And although it’s published four-years-ago the books prologue, even though it’s almost 30 pages long is worth reading – it describes and debunks neo-classic economics, which we’ve been subjected to for more than 50-years – longer than I’ve been alive.
A large number of prominent national and international bureaucrats, journalists, politicians and other ‘opinion-makers’ had either been trained in the discipline or had otherwise become its followers. As a result, the views proposed by it came to dominate public policy debate by the mid-1980s, permeating the discussion of issues affecting individuals, communities, companies, the nation and the international community. This school of thought is better known by its key tenets than by its name. Its key beliefs are that the pursuit of individual self-interest will lead to a better society, that government intervention beyond the narrow maintenance of law and order should be minimized if not eliminated and that the powers of unfettered markets should be unleashed in virtually every part of society, at home and abroad. For this purpose, structural reforms are recommended to deregulate, liberalize, privatize and open up as many industries and aspects of the economy as possible, as the beneficial forces of the invisible hand, if only allowed to operate freely, would improve people’s lives, create wealth, produce prosperity and lead to maximum happiness.
The name of this school is less well-known: neoclassical economics.
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Probably the most important of the premises needed by neoclassical economics for its tenets to hold is the assumption of perfect information. It is so crucial, because even simple market clearing – a very fundamental tenet of much of modern economics – requires it. Joseph Stiglitz, who became the most influential economist to turn against mainstream neoclassical economics, started out his research by ‘relaxing’ just this one assumption that was presented as fairly innocuous by neoclassical models. Many trained economists had become so familiar with the assumption of ‘perfect information’ that ‘relaxing’ it seemed an unusual thing for them.
Since the fiction of ‘perfect information’ is a standard assumption, most economists have become thoroughly hardened to its enormity. To assume perfect information is a monstrous distortion of reality. It creates a fictional world that is not just a little different from reality, but one that is diametrically opposed to what constitutes the very essence of the world we live in. All economic activity is based on the very fact that information is not perfectly and equally distributed. To realize the far-reaching implications of the assumption of perfect information, consider what a world would look like if the neoclassical assumption of ‘perfect information’ indeed held true.
If there was perfect information…
* There would not be meetings at companies, government agencies and other institutions. In actual fact, much activity at any organization is taken up by holding meetings in order to inform, communicate, discuss, decide, motivate, and so on;
* There would be no need for firms to exchange information. In actual fact, gathering information is crucial for businesses. Since medieval times, trade fares, product shows, conferences, symposia and events are well documented as important engines of growth and innovation: such growth depends on information flows, on firms getting to know other firms, meeting customers, and so on;
Richard Werner.
Werner has plenty more examples and ends his extensive list writing the list could go on.
Reading the prologue, how on earth did socialist parties such as the UK’s Labour party ever become enthralled to this economic model? It belies commonsense.
Hat Tip: Duncan’s Economic Blog.
Alternative prologue download here.
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