Question: Why are we using mainstream economic ideas rooted in the 19th century to deal with 21st century challenges to our global civilization and to our national economies? No wonder political debates can seem like running in mud. Progressives are constantly being dragged down into a fantasy world of perfect markets, balanced budgets, and very limited government intervention. Neoclassical economics was not designed to deal with the complexities of a global industrial civilization that is endangering its own existence ecologically with global warming and ecosystem destruction, and economically with an out-of-control financial sector. It wasn’t designed to solve the problems of the world central economy, the United States, and its seriously declining manufacturing sector.
Any efforts to extricate ourselves from outdated economic thinking gets the basic response: whatever needs to be done can’t and shouldn’t be done by the government. Should the government support a revival of manufacturing, which, as I argued previously is central to the economy? No, is the answer. The market will work itself out. And if the market has decided that manufacturing should be exported to countries outside the US, then the market must be right. Should we prepare for a society in which oil is much, much more expensive? No, comes the response. The market will take care of that, too. If oil becomes too expensive, something else will magically pop up to replace it. Should the government create new jobs since we have a huge unemployment problem? No, the market knows when to hire. In fact, the thinking goes, since taxes can only prevent the market from setting the best price, all taxes are suspect, and all regulation is, too, even for a financial sector that caused a global depression.
I will argue in this set of articles that the only way out of this intellectual straightjacket is to construct an entirely new paradigm of how the economy works. Here’s a start: what if the economy is really an ecosystem centered , say, on manufacturing? If we looked at it this way, we would think very differently about the way governments intervene in its functioning.
An economy has many parts – a financial system, a manufacturing sector, a transportation system, natural ecosystems, and many others. Each part is, in turn, made of many other parts. In the neoclassical world, the economy is divided up into individual firms – and these are not differentiated in any meaningful way. In every introductory economics class, the professor explains that many identical firms exist in a perfectly competitive industry, and that the interaction of these firms leads to a particular price for a product.
As Philip Mirowski showed in his classic work, “More Heat than Light”, the men who created neoclassical economics were very much influenced by the “hot” science of the day, statistical mechanics. If engineered properly, a gas or fluid system will remain stable. Such a system (for example, your plumbing) will settle back down to a stable state even after being disturbed. Statistical mechanics achieves its great power because it is able to treat each part of a system as identical. There are no categories or large, differentiated parts of such a system; all water molecules, for example, are the same.
What has this got to do with conservative economic activities, such as corporate lobbying against regulations? The lobbyists use the argument that, left alone, like a plumbing system, a market will settle down to “the best of all possible worlds” – left alone by the government, that is. Many economists began academic life in the physical sciences – Mirowski relates how Leon Walras, the creator of equilibrium analysis, the bedrock of current economics, was an engineer who kept a copy of a statistical mechanics textbook next to his bed. If many other branches of academia have “physics envy” – that is, they can’t predict with the precision and elegance of physics – then economists have grabbed the golden ring, and try to claim “scientific” accuracy.
Except, of course they aren’t accurate. As Dean Baker has pointed out numerous times, the vast majority of economists missed the recent housing bubble. Economies are not made up of identical parts – they are made up of a plethora of very different parts, and like ecosystems, these parts can be thought of as niches, that is, as functionally differentiated parts of an ecosystem, all of which are necessary for the growth and health of the whole. Even if a part of an ecosystem – say, manufacturing, in the case of an economy – does not comprise the majority of the production of the ecosystem, that does not mean that the part is not the most important, or the source of the most important changes. Even a very small niche – say, machine tools in an economy – can have a very oversized effect on the system as a whole.
In the 20th century biological systems, such as ecosystems, increasingly became the focus of scientific research. Even in the field of mechanics, scientists such as Ilya Prigone helped to invent the field of “chaos theory”, or nonlinear dynamics, that is, the study of systems that are not stable. Evolutionary theory, first developed by Charles Darwin, showed that you could have a science that did not predict exact outcomes –- how can you predict the creation of a new species, or ecosystem? The interaction of discrete niches and species, all different, does not lead to complete “chaos”, it is possible to make some broad predictions about how an ecosystem will develop, thrive, and die.
In the same way, we can make statements about how an economy will develop, thrive, and die, when we view an economy as a set of identifiable “chunks”, like manufacturing, or transportation systems, or natural ecosystems like rivers and the climate, and seek to understand how these parts fit together. When the way that a set of parts fits together effects how the set of parts act together, then we know that we are looking at a system — that is, as the saying goes, the whole is greater than (or different than) the sum of the parts (in the language of systems, we say that structure allows for new properties to emerge).
If each part of the economy –- including the natural ecosystems –- is important for the functioning of the entire economy, and if some ways of putting those pieces together are better than others, than it is the government’s responsibility to make sure that those pieces are thriving and fitting together in a productive way. The market cannot design the system as a whole. If, on the other hand, the pieces of an economy are interchangeable – if manufacturing is just as valuable for the economy as, say, tourism – then the government has very little to do, as the neoclassical viewpoint would have it.
In the next couple of posts I’ll develop the idea that thinking of the economy as an ecosystem — and as a manufacturing-centered ecosystem — is a better way to understand the economy and to create economic policy than the mainstream, neoclassical route. A manufacturing-centered economics will allow progressives to move forward toward a sustainable, middle-class economy.