from http://www.sciam.com:80/article.cfm?id=the-economist-has-no-clothes
The Economist Has No Clothes
Unscientific assumptions in economic theory are undermining efforts to
solve
environmental problems
By Robert Nadeau
The 19th-century creators of neoclassical economics—the theory that now
serves as the basis for coordinating activities in the global market
system—are credited with transforming their field into a scientific
discipline. But what is not widely known is that these now legendary
economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and
Vilfredo
Pareto—developed their theories by adapting equations from 19th-century
physics that eventually became obsolete.
Unfortunately, it is clear that neoclassical economics has also become
outdated. The theory is based on unscientific assumptions that are
hindering
the implementation of viable economic solutions for global warming and
other
menacing environmental problems.
The physical theory that the creators of neoclassical economics used as a
template was conceived in response to the inability of Newtonian physics
to
account for the phenomena of heat, light and electricity. In 1847 German
physicist Hermann von Helmholtz formulated the conservation of energy
principle and postulated the existence of a field of conserved energy that
fills all space and unifies these phenomena.
Later in the century James Maxwell, Ludwig Boltzmann and other physicists
devised better explanations for electromagnetism and thermodynamics, but
in
the meantime, the economists had borrowed and altered Helmholtz’s
equations.
The strategy the economists used was as simple as it was absurd—they
substituted economic variables for physical ones. Utility (a measure of
economic well-being) took the place of energy; the sum of utility and
expenditure replaced potential and kinetic energy.
A number of well-known mathematicians and physicists told the economists
that there was absolutely no basis for making these substitutions. But the
economists ignored such criticisms and proceeded to claim that they had
transformed their field of study into a rigorously mathematical scientific
discipline.
Strangely enough, the origins of neoclassical economics in mid-19th
century
physics were forgotten. Subsequent generations of mainstream economists
accepted the claim that this theory is scientific. These curious
developments explain why the mathematical theories used by mainstream
economists are predicated on the following unscientific assumptions:
The market system is a closed circular flow between production and
consumption, with no inlets or outlets.
Natural resources exist in a domain that is separate and distinct from a
closed market system, and the economic value of these resources can be
determined only by the dynamics that operate within this system.
The costs of damage to the external natural environment by economic
activities must be treated as costs that lie outside the closed market
system or as costs that cannot be included in the pricing mechanisms that
operate within the system.
The external resources of nature are largely inexhaustible, and those that
are not can be replaced by other resources or by technologies that
minimize
the use of the exhaustible resources or that rely on other resources.
There are no biophysical limits to the growth of market systems.
If the environmental crisis did not exist, the fact that neoclassical
economic theory provides a coherent basis for managing economic activities
in market systems could be viewed as sufficient justification for its
widespread applications.
But because the crisis does exist, this theory can no longer be regarded
as
useful even in pragmatic or utilitarian terms because it fails to meet
what
must now be viewed as a fundamental requirement of any economic theory—the
extent to which this theory allows economic activities to be coordinated
in
environmentally responsible ways on a worldwide scale.
Because neoclassical economics does not even acknowledge the costs of
environmental problems and the limits to economic growth, it constitutes
one
of the greatest barriers to combating climate change and other threats to
the planet. It is imperative that economists devise new theories that will
take all the realities of our global system into account.
[end]
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COMMENTS :
I suggest that the author look up the work of Robert Lucas, who won the
Nobel prize for his work debunking macroeconomics. He makes exactly this
claim -- that classical economics is based on untestable ideas -- and
establishes the criterion that macroeconomic concepts must stem from a
testable microeconomic model based on the actual psychology and observable
actions of consumers, firms, industries and policymakers. See
http://en.wikipedia.org/wiki/Robert_Lucas,_Jr
, for example.
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As a rural development economist with 6yrs of formal and 10 yrs of
informal
training on the subject of economics (as well as many other related and
non-related fields of study) I can safely say that:
YES, modern economic theory is STILL based on the neoclassical model both
in
PRACTISE and in ACADEMIA.
The author of this article is NOT incorrect in his assertion that modern
economic PRACTISE is damaging our environment.
A new economic model DOES indeed need to be adopted. One that I find
particularly useful in my daily life and consumer choices is the
energy-economy model. This model (reference not found) would measure
everything in the (rough or average) joules of energy it takes to produce.
We can calculate how many joules the sun puts into the crops, how much
energy we put into the manufacturing of a product, how much effort we
exert
in a craft; and with this knowledge we can calculate it's true value both
economically (to humans) and environmentally (making the environment no
longer an externality of production).
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If this topic is of interest to you, I suggest that you read
Market Economies and Natural Laws
by C-Rene Dominique
Book Description
The forefathers of neoclassical or conventional economics, beginning with
Walras, wanted to build a psycho-mathematical science similar to celestial
mechanics. However, during the first half of the last century, they
suc***bed to the charm of axiomatization: Hence, economics remains a
stillborn science. Its theory is plagued with incongruities, generating
misleading notions and policies that are detrimental to human welfare and
environmental equilibrium. Its "truths" have significantly low half-lives,
and its confused pronouncements have become an open ground in which "false
consciousness" rumble unchallenged. This state of affairs calls for a
fundamental revision. After reviewing the evolution of economics from
Antiquity to the present and pointing to its inadequacies, Dominique
proposes an alternative formulation which not only sheds light on the
enduring features of market economics but also makes economics consistent
with physics, the mother of all sciences. This is a challenging revision
for
scholars, students, and others involved with economic theory.
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