What can a new economic paradigm look like?
Economics should be the most interdisciplinary of all disciplines
A number of critical articles have been written on economics and its theories. At the beginning of the 20th century, economics was much more political and grounded in reality, but in its eagerness to be called scientific, an overemphasis on a mathematical and mechanical approach to an otherwise emotionally driven social system followed. The incompatibility should have been obvious. Today, economics seems to live its own academic life, without much political innovation. Old traditions continue through a self-producing education system and the research results are fragmentary.
Sweden will undergo a gigantic social transformation in the coming decades due to the sustainability goals and the fourth industrial revolution. This cannot be done with an economically outdated paradigm that has already reached the end of the road today.
When analyzing the purpose of economics, its critique, and published Nobel Prize, it is clear that economics' contribution to a deeper understanding of the world, proactivity, alternative forms of governance, and political reforms, is very weak compared to what the current world situation requires. The gigantic social change that is necessary is based on a completely different economic system that is characterized by other basic conditions. Characteristics and reasons are explained below. Therefore, today's economic system is counterproductive, when designing visions for the future. There is thus a need for a completely new economic paradigm that can support this new future.
Criticism of the current economic paradigm
In summary, the current paradigm suffers from a lack of:
- political ambition
- alternative social systems
- consideration of natural resources and nature
- power/impact analysis
- dynamic development based on, for example, educational and wisdom development perspectives
- analysis of indebtedness and money creation
- critical self-analysis
- fair governing parameters
A transformation to a globally sustainable, resilient and equal society requires, among others:
- greatly reduced energy and resource demand in rich countries
- wise citizens that guarantees a society with high trust, cooperation, self-organization, deepened democracy, simplicity and long-term perspectives.
The reasons for the above requirements are multiple and include parameters such as available natural resources, energy supply, climate, infrastructure, resilience, justice, democracy, employment, health, biodiversity, geopolitics, stability, future generations, happiness, synergies, environment, ecosystem services, meaningfulness, quality of life and security. The needed societal system looks very different from today. Some possible side effects are:
- With a large proportion of local self-sufficiency, exports and imports will decrease significantly, which reduces impact of boom and bust business cycles
- Balance of payments with foreign countries will be kept neutral or slightly positive/negative through small imports/exports/foreign debt, and wise consumption and investments patterns
- Speculative economy and high inflation can be avoided through a high general wisdom level
- Economic growth will not be a target
- The state will be able to self-finance full employment and make the necessary investments for a sustainable society, through "functional financing"
- Foreign loans will be phased out gradually, as will private indebtedness
Due to the above, there are many economic theories/models/concepts that will no longer be useful or add significant knowledge in a future society. Some of these are:
- The DSGE model
- Endogenous growth theory
- Expectation theories
- Quantitative theory
- The Phillips Curve
- Rehn-Meidner models
- Solow model (neoclassical)
- Game theory
- The displacement effect
What new economic theories are needed?
Below are some examples of economic theories and models that may be needed in a new economic system, which is sustainable, resilient, equal and resource efficient.
- Theories that show a connection between citizens' level of wisdom and society's sustainability, resilience, equality, level of happiness, etc.
- Theories that show a connection between resilience against external disturbances as a function of various factors (food stocks, cultivation systems, spare parts stocks, production systems, etc.)
- Theories showing the synergy effects of global cooperation (construction drawings, patents, common language, democracy, labor market, education, etc.)
- Theories that show a connection between sustainable consumption levels, and resource, energy and production systems
- Theories that analyze the effects of high quality products
- Theories that describe the framework, function and effects of "functional financing" in a nation with almost self-sufficient local systems
- Theories that show a connection between wisdom level and demographic health level
- Theories that describe the effects of everyone in society, regardless of age, being able to participate in economic/social activities
- Theories that show effects of lifelong learning/wisdom development
- Theories show the effects of a ban on trading in derivative instruments
- Theories that show the effects of a gradual liquidation of state, municipal and private loans
- Theories for frameworks for how a municipality should analyze/manage its finances
- Theories that describe frameworks for how different successions in the an economic/social system are achieved with progressed general wisdom
- Theories that describe multifunctions and its synergy effects in a future society
- Theories that show real costs for manual vs mechanical work
About functional financing
Functional Finance (FF) is an economic theory developed by the economist Abba P Lerner in the early 1900s. Through FF, the government can print any amount of its own currency to finance the government sector. Taxes/interest are used to control the economy, but not primarily as a source of income.
In reality, money reflects a certain amount of work at a certain hourly cost. What the state is doing is thus creating "paid working hours", so that everyone can be employed, in order to deliver services or goods that can be distributed and consumed by the population. This does not mean that everyone in society has to work 8 hours a day, which can make the supply too large in relation to the need. In this case, the number of working hours can be reduced per person. The purpose of the FF is that there should never be a bottleneck in terms of money to perform the working hours needed. Working hours involve production, research, culture, homework, politics, etc., ie all services and goods that are needed in society (many of which today are unpaid).
FF presupposes a floating exchange rate in such a way that the rest of the world values the goods and services that they can buy in the country in question. If other countries can produce the same goods and services cheaper, the exchange rate for the country in question will be depreciated - reduced in value. However, with almost self-sufficient nations, the global trade will be limited.
When the state creates more money to optimize "full employment", which in practice means the level of work that citizens consider satisfactory and with priority to the sectors that are valued, it may happen that demand increases and approaches or even exceeds the capacity of the work supply. In this case, there is a risk of inflation. If so, the state can raise taxes, increase fees, raise interest rates, decrease public spending, or issue bonds, to reduce the money supply. Then demand falls and the risk of inflation is reduced.
A problem that has increased in recent decades is that large amounts of capital have been accumulated into the hands of a small number of people and companies. In reality, this means that they have unused working hours, which they save for later use. As the current system is designed, the only possibility for the other citizens to compensate for this saving is that they themselves borrow "working hours" from the bank, which creates these out of "nothing". The result is that the majority of citizens each year have to pay high interest rates (in reality "unusable working hours") to the bank. Demand is shrinking and so is the entire labor market in a negative spiral.
FF does not solve the problem of sustainability and resilience. On the other hand, it solves other problems such as labor mobility, ie people's tendency to take other jobs because they do not risk becoming unemployed. People also become less stressed, which increase their health status. FF also removes the banks' ability to create money themselves, which significantly reduces risks for financial bubbles as well as larger economic fluctuations.
With FF, it is still up to the state to work for reduced inequality and optimal use of labor, based on the wishes of citizens, through fiscal and monetary policy.
What are the risks with FF? A key part is about balancing supply against demand in order to reduce the risk of inflation. This is not that difficult. Through FF, the state must also stimulate the sectors that give citizens the greatest benefit for the money, and maintain competitiveness vis-à-vis other countries. In the long run, the value of imports and exports should be neutral.
When analyzing the purpose of economics, its critique, and published Nobel Prize, it is clear that economics' contribution to a deeper understanding of the world, proactivity, alternative forms of government, and political reforms, is very weak compared to what the current world situation requires. The gigantic social change that is necessary is based on a completely different economic system that is characterized by other basic conditions. Characteristics and reasons are explained below. Therefore, today's economy is counterproductive, when designing visions for the future. There is thus a need for a completely new economic paradigm that can support this new future.
- Gross Domestic Product (GDP): Is a measure of the total economic activity of a country over a period of time, usually one year. It can be expressed as the value of total consumption of goods and services, gross investment and exports minus imports.1
- The DSGE model: The Dynamic Stochastic General Equilibrium model is a method in macroeconomics that attempts to explain economic phenomena, such as economic growth and business cycles, and the effects of economic policy, through econometric models based on applied general equilibrium theory and microeconomic principles.2
- Economics: Is the doctrine of housekeeping with limited resources in a state of scarcity.3
- Endogenous growth theory: Paul Romer was the pioneer in endogenous growth theory who opened up that knowledge was the key to capital accumulation and economic growth. Endogenous growth theory tries to explain technological development rather than treating technology as exogenously given and the importance of investing in new knowledge to be able to reach technological development is emphasized as technology increases through a population that has the opportunity to research and educate itself. Education is seen as an investment in human capital, which means that a higher technological level can be achieved, which in turn leads to a higher level of GDP.4
- Keynesianism: Is a macroeconomic theory that includes ideas on how a government can curb cyclical fluctuations, by controlling aggregate demand with fiscal policy tools.5
- The quantity theory: Is a monetary theory which in its simplest form is written MV = PT. M denotes the money supply, V the turnover rate of money, P the price level and T the real turnover of goods (transaction volume) .6
- Monetarism: The theory is that inflation is due to an increase in the supply of money in the economy. Therefore, Friedman considered that one of the tasks of the state was to ensure that the supply of means of payment in the economy is stable.
- Economics: According to Paul Samuelson, economics is a study of how people and society choose, with or without money, to use scarce resources that can have alternative uses, to produce different goods over time and distribute them for consumption now and in the future among different people and groups. in society.7
- Neoclassical model (Solow): Is a static equilibrium model that is primarily applied to so-called comparative statics. This means that we assume that the individual finds situations they do not want to deviate from given the income and the taste they have (equilibrium) and that we are not interested in decisions over time or sequential decisions (the static). We then compare characteristics of different equilibria where something outside the individual himself, via price changes, leads the individual to choose again. We have a starting position and an end position and compare these with each other without really being interested in the adaptation process itself.8
- Neoliberalism: Is a political ideology that advocates lower taxes and fewer state regulations.9
- Phillips curve: Is a graph in macroeconomics that shows the relationship between inflation and unemployment.10
- Rehn-Meidner model: The model is based on a collaboration between Keynesian economic theory, real wage development, active labor market policy and government intervention. It aims to create a positive upward spiral, in line with Keynesian economic theory, by creating an expansive welfare state and public investment, which aimed to maintain domestic demand over the business cycle, created security, safety and stability for employees, business, capital interests and consumers.11
- Game theory: Are theories aimed at describing beneficial behaviors in the interaction between different parties. Two basic concepts are maximization of profit and minimization of loss. It is also fundamental that the players have conflicting interests.12
- Stabilization policy: Basically pursues an expansionary monetary and fiscal policy in a recession and a contractionary monetary and fiscal policy in a boom.13
- The crowding-out effect: Is an economic concept that refers to the phenomenon that arises when increased public spending instead of contributing to economic growth reduces or displaces the amount of private investment, because the interest rate increase that results from the increased demand for money reduces the incentives for companies to invest.14
Selected sources consist predominantly of books, articles and reports from well-known Swedish and international institutes, universities and newspapers. NOTE! Paragraphs in the "Background" chapter have in all cases been copied directly from sources without quoting, only footnotes. Text has been copied and merged into a relevant whole based on the purpose of this document.
Definition of economics
According to Paul Samuelson, economics includes the study of how people and society choose, with or without money, to use scarce resources that can have alternative uses, to produce different goods over time and distribute them for consumption now and in the future, among different individuals and groups in society.15
Economics today studies all the arrangements within which people presumably try to maximize benefits. This involves a range of issues, including community organization, production, consumption and distribution. Economic research frequently contains so-called cetris paribus assumptions, in which attempts are made to observe individual variables regardless of the material context that prevails. This entails an extensive difficulty, as economics cannot conduct experiments in the same way as can be done in, for example, chemistry. The various branches of economics can largely be divided into two main departments: In microeconomics, individual decision-makers are treated on both the production and consumption side. In macroeconomics, the economy as a whole is treated with a focus on aggregate variables such as output, unemployment and inflation. Another area that is sometimes considered a third major department is international economics, which studies trade and capital flows between countries. Some Swedish economists have expressed the opinion that another term for the subject, such as "social economics" or "economics", would be desirable to avoid misunderstandings. The term political economy also occurs today, which economic historians usually emphasize as a more correct term for what the discipline actually deals with, since all political-economic issues are inevitably precisely political. This is something liberal economists tend to want to tone down as liberal political economy today is dominant in economics.16
Criticism of the prevailing economic paradigm
The financial crisis of 2008 shook the economy. At the outbreak of the financial crisis, there was reason to criticize the dominant macro models. They ignored the complexity and lack of rationality of the actual financial markets as well as the possibility of a financial crisis. Many central banks even used macro models that lacked a financial sector. The financial crisis gave new impetus to the critical student movement that had emerged in economics in early 2000. Students and some teachers and researchers at universities and colleges demanded a more realistic (and environmentally conscious) economy. The international network Rethinking Economics is connected to the so-called heterodox tradition in economics. The tradition includes post-Keynesianism, evolutionary economics, algorithmic economics (computational economics), ecological (thermodynamic) economics, gender economics, Marxism, Schumpeterianism, institutional economics, behavioral economics (which studies so-called limited rationality) and also the so-called the Austrian school. The critique of the methodology and theories of the dominant neoclassical tradition is the common denominator of the heterodox economy. Many heterodox economists emphasize that the individual and market orientation of economics has legitimized and even laid the foundations for a neoliberal world order, and for austerity policies in EU countries in the 2010s.17
The standard economic model is based on a series of stylized assumptions about individuals, markets, the availability of information and technologies (with great opportunities to switch between machines and labor in production). Households are assumed to maximize their benefits and companies their profits (usually over an infinite period of time) given the family members 'budgets and preferences as well as the companies' production opportunities. Assumptions about perfect markets and complete information as well as the idea of market equilibrium are other cornerstones of the neoclassical basic model. The economics methodology facilitates the use of elementary mathematics. The assumptions in the basic model, which are often of an axiomatic nature, create a general frame of reference and thus a consensus on what is real theory and what is "loose opinion". Using the standard model, the neoclassical economy determines what is optimal behavior. But neoclassics also try to explain actual behaviors and events (and indicate the conditions under which they will appear) within the framework of the basic model or by deviating from the assumptions of the model in certain respects.18
Despite its high demands for precision, economics can be criticized on the basis of scientific theory. The neoclassical basic model makes it difficult to exchange knowledge with other behavioral and social sciences. Applications of the model often lack transparency. It is e.g. difficult to detect what specifications and modifications are required to make the model compatible with empirical data. Such requirements also raise legitimate doubts about the value of starting from the standard model at all. The conclusions in economic theory often vary between being bound by the assumptions of the basic model and being trivial. The use of the neoclassical model rarely results in new insights. It has only given the insights a national language costume. Today's economics is developed to deal with issues concerning the management of scarce resources at a certain point in time (efficiency) but not to conduct causal analyzes of historical cumulative processes. A fundamental "ontological" problem in economics is that the neoclassical model lives its own life in relation to an objective reality. The model is the main object of the research process, which excludes a comprehensive illumination and plausible explanation of actual states and processes.19
In recent decades, critics have focused on the weaknesses in the economic analysis of economic fluctuations, crises and economic policy. The dominant DSGE model (Dynamic Stochastic General Equilibrium model) drives the micro-theoretical anchoring to its peak. All decisions are made by a representative individual with rational ('forward-looking') expectations who assumes the role of both consumer, saver, business leader and owner. Cyclical fluctuations arise mainly in the DSGE model through technological shocks when assuming perfect commodity, financial, insurance and labor markets (which, among other things, exclude unemployment). In the DSGE model's New Keynesian variant, which has little to do with Keynes, demand shocks and monetary policy can affect GDP, employment and unemployment in an assumption of sluggish prices and wages. The DSGE model was used by central bank economists worldwide and also to dominate higher education in economics at the academies.20
The DSGE model has also been sharply criticized by leading "mainstream economists". According to growth economist Paul Romer, the model's breakthrough has meant a macroeconomic regression in the last three decades. Joseph Stiglitz, the recipient of the Economics Prize in memory of Alfred Nobel in 2001, believes that the model could neither explain the financial crisis nor guide us out of it. Stiglitz also emphasizes, as post-Keynesians have done for a long time, that the "rational" decisions of the DSGE model at the micro level can give rise to coordination problems and flocking behaviors, mainly in the financial and foreign exchange markets and thus to macroeconomic instability, economic crises and mass unemployment. The logic of DSGE models can also be questioned. In some New Keynesian theories, the representative company is affected by demand shocks through the reaction of other companies. The representative company is apparently not so representative after all. In most DSGE models, companies and their investments (as well as banks) shine with their absence, a fact that, among others, limits the ability to explain productivity and demand shocks in the economy.21
The macroeconomic revolution that David Romer expected has failed. Defenders of neoclassical theory emphasize that laboratory experiments and so-called Natural experiments (which have become increasingly common in economics since the 1990s) have shed light on psychological phenomena that are incompatible with rational action. Defendants have also referred to the fact that Richard Thaler and psychologist Daniel Kahneman have been awarded the economics prize in memory of Alfred Nobel for their research on deviations from the standard model axiom. Natural experiments and so-called time series analyzes are based on data for increasingly longer time periods. Quantitative analyzes that do not favor any particular theory are widely used in economics today - data must speak for itself. The defenders of neoclassical economics claim that modern game theory deals with the possibility of coordination problems and the associated risk of inoptimal states of society. Institutional analysis has gained an increasingly strong position, especially in growth theory. Today's economic studies of the problems of underdevelopment focus on the lack of trust and growth-generating political-legal institutions. Under the influence of Joseph Schumpeter, neoclassics have also studied the driving forces and effects of innovations for several decades. Furthermore, the DSGE model has been the subject of extensions which, among other things, takes into account corporate investment, habitual thinking, incomplete information and imperfect insurance and financial markets. Leading macroeconomist Olivier Blanchard today believes that a reformed DSGE model is the answer to macro theory's problems. And central banks have increasingly come to use other macro models, such as the so-called The Mortensen-Pissaridis model (possibly with New Keynesian elements) that focuses on the search and matching process in the labor market. Unemployment is the normal state of the economy according to this model.22
But the development of knowledge in economics has been hampered by the dominant paradigm. The references to psychological research have not resulted in a micro-theoretical reorientation. Economists in the mainstream of the subject regard every psychological anomaly as an exception and retain the rest of the standard model. Neoclassical analyzes of limited rationality due to the conflict of interest between company management and shareholders, almost always lead to a conclusion that the actors nevertheless maximize their benefits (although not always the company's profits). Attempts by neoclassical institutional economists to link to the core economic model have not provided any new knowledge and in some cases have been directly misleading. Extensions of the DSGE model have had an ad-hoc character, a derogatory assessment that supporters often make about other macroeconomists' analysis. Attempts to make the model more realistic have also made it less and less transparent. The model is also not adapted to treat companies with different technologies, strategies, organizational forms, competencies, expectations and driving forces. The relevance of the DSGE model to studies of the effects of economic policy on GDP, employment, unemployment and inflation has also been questioned by its proponents.23
The Mortensen-Pissarides model only abandoned the neoclassical standard model in some respects. Like the DSGE models, it is fixed on individuals' voluntary choices between work and leisure; through its focus on frictional unemployment, not on involuntary unemployment (through low aggregate demand), the model can even be considered pre-Keynesian. And companies differ only by their external conditions, not by their unique characteristics; The origins of productivity shocks (as well as demand shocks) are still shrouded in obscurity. The question is how many design defects a house can show without it having to be demolished.24
However, there is no reason to build high walls between heterodox and neoclassical economies. Evolutionary game theorists and older macroeconomists (who, among other things, developed the goal-means analysis of economic policy) have moved the research front. In addition, the reluctance of some leading economists to start from the micro-theoretical basic model makes it difficult to draw clear boundaries between different schools. Neoclassicists' lack of interest in and even suspicion of the heterodox tradition should not be answered with the same coin. The post-Keynesian network argues for a pluralistic rather than an alternative economy. There is every reason to criticize the conventional notion that discipline has developed through a cumulative knowledge process that has sorted out ideas and theories that did not prove to be viable. In fact, the dominance of the neoclassical model has prevented the emergence of a rich economic branch and thus the development of many fruitful ideas and theories on the subject. The economic models were unable to describe the mechanisms of the financial crisis. And the attempts to explain the crisis by pushing the boundaries of the application of the standard model have rightly raised questions about its relevance.25
Criticism from Professor Erik Dahmén (1916 - 2005)
Professor Erik Dahmén (1916 - 2005) was a major figure in Swedish economics. He was of great importance for Swedish research, business development and public debate for more than half a century. For a long time he was a professor at the Stockholm School of Economics and he was also closely associated with Enskilda banken and the Wallenberg sphere. At the same time, he was a very unusual economist. Namely, he himself stood for his own tradition, which in essential respects differs from the one currently dominant among economists. According to Dahmén, these had "locked themselves in the tool shed" by unilaterally using mathematical methods and narrowly focusing on equilibrium states and statistical aggregates. The consequence was that they therefore lost contact with the economic reality. In order to be able to understand economic development and growth, it is instead necessary, Dahmén said, that the interest is directed towards entrepreneurship and the market process. What is interesting is the content of industrial development, ie the emergence of new goods, new technologies, new organizations and new markets and the struggle of these news with and victory over older goods, methods, etc. Development and growth presuppose, according to Erik Dahmén, transformation.26
33 theses for a reform of the national economy
In 2017, 33 theses were written for a reform of economics, by Rethinking Economics and the New Weather Institute. The world is facing poverty, inequality, ecological crisis and financial instability. We are concerned that the economy is doing much less than it can do to provide insights that would help solve these problems. 27
The basic problem of economics
- First, the economy has developed an unhealthy intellectual monopoly. The neoclassical perspective dominates teaching, research, advice to politicians and public debate. Many other perspectives that can provide valuable insights are marginalized and excluded.
- Second, while neoclassical economics has contributed historically and is still useful, there are plenty of opportunities for improvement, debate, and learning from other disciplines and perspectives.
- Third, economics seems incapable of self-correction, and is more of a belief than a science. Too often, when theories and reality have come into conflict, it is the theories that have been defended.28
The purpose of economics
- Society must determine the purpose of the economy. No economic goal can be separated from politics. Indicators of success are represented by different policy choices.
- The distribution of wealth and income is fundamental to economic reality and should be so in economic theory.
- Finance is not value-free and economists should be open about the valuation assessments they make. This is especially true of the valuation assessments that may not be visible to the untrained eye.
- Politics does not "level" the playing field but leans it in one direction. We need a clearer discussion about what kind of finances we want and how we get there.29
We are part of nature
- The character of the economy is that it is a subset of nature and of the societies in which it arises. It does not exist as an independent entity. Social institutions and ecological systems are therefore central, not external, to its function.
- The economy cannot survive or thrive without input from the natural world or without the many life support systems that the natural world provides. It is due to a continuous flow of energy and matter and operates within a sensitive balanced biosphere. An economic theory that treats the natural world as external in its model, cannot understand how the destruction of the natural world can harm its own future prospects.
- Economies must realize that the supply of non-renewable energy and resources is not infinite, and the use of these energy reserves changes the planet's aggregated energy balances, creating consequences such as climate change.
- Feedback between economics and ecology cannot be ignored. The economy must be based on the objective constraints of the planet's ecology.30
Institutions and market
- All markets are created and shaped by laws, customs and culture and are affected by what governments do and what they do not do.
- Markets are the result of interactions between different types of public and private organizations (as well as in the voluntary sector and civil society). More studies should be done on how these organizations are actually organized and how collaboration between them works and can work.
- Markets are also more complex and less predictable than can be indicated by simple relationships between supply and demand. Economics needs a deeper understanding of how markets behave and can learn from the science of complex systems, which are used in physics, biology and computer use.
- Institutions shape markets and influence the behavior of all economic actors. The economy must therefore consider institutions as a central part of its model.
- Because different economies have different institutions, a policy that works well in one economy may work poorly in another. For this reason, among many others, it is unlikely that it will be useful to propose a generally applicable set of economic policies based solely on abstract economic theory.31
Labor and capital
- Wages, profits, and return on assets may appear to depend on a wide range of factors, including the relative power of workers, corporations, and owners - not just their relative contribution to production. Economics needs a broader understanding of these factors in order to better inform about what affects the proportion of income that different groups in society receive.32
- Errors, bias, pattern recognition, learning, social interaction and context are all important influencing factors on behavior that are not recognized in economic theory. General economics therefore needs a broader understanding of human behavior and can learn from sociology, psychology, philosophy and other disciplines.
- People are not perfect and "perfectly rational" economic decisions are not possible. All financial decisions that have something to do with the future involve a certain degree of quantifiable uncertainty and therefore require assessment. General economic theory and practice must recognize the role of uncertainty.33
- In a market economy, people with the same abilities, preferences and talents do not tend to end up at the same level of wealth, but with a certain random variation. The effects of small differences in luck or circumstances can lead to very different results for similar people.
- Markets often show a tendency towards increased inequality. In turn, an unequal society works worse with regard to a number of indicators for social welfare. General economic theory could be done much better in understanding how and why this happens and how it can be avoided.
- The statement that in order to become richer, a country must first have an increasing inequality before it falls, has proved to be false. Any combination of GDP growth and inequality is possible.34
GDP growth, innovation and indebtedness
- Growth is a political, as much as, an economic choice. If we choose to strive for "growth", the questions must be - "growth of what, why, for whom, for how long and how much is enough?" - all are answered either explicitly or implicitly.
- Innovation is not external to the economy, but an inherent part of economic activity. Our understanding of GDP growth can be improved if we see innovation as part of a constantly evolving, an ecosystem in imbalance, shaped by markets and by interactions between all actors within them.
- Innovation has both a pace and a direction. A discussion of the "direction" of innovation requires an understanding of the "purpose" of decision-making.
- Private debt strongly influences how the economy grows, and yet this is excluded from economic theory. Debt creation increases credit-financed demand and affects both commodities and asset markets. Finance and economics cannot be separated.35
Money, banks and crises
- The majority of new money circulating in the economy is created by commercial banks every time they make a new loan.
- How money is created affects the distribution of wealth in society. Consequently, the method of creating money should, of course, be a political issue, not just a technical one.
- Because banks create money and debt, they are important players in the economy and should be included in macroeconomic models. Economic models that do not include banks will not be able to predict banking crises.
- The national economy needs a better understanding of how instability and crises can be created internally in markets, rather than treating them as "shocks" that affect markets from the outside.
- Financing has two dimensions: short-term and speculative financing and a financed real economy. The two problems must be studied together.36
Education in economics
- A good education in economics must offer a number of theoretical methods to its students. This should include not only history and philosophy as economic thought, but also a wide range of current perspectives - such as institutional, Austrian, Marxist, post-Keynesian, feminist, ecological and complex.
- The economy should not be a monopoly. Interdisciplinary courses are the key to understanding the economic realities of financial crises, poverty and climate change. Politics, sociology, psychology and environmental science must thus be integrated into the curriculum without being treated as inferior additions to existing economic theory.
- Economics should not be taught as a value-neutral study of models and individuals. Economists must have a good knowledge of ethics and politics and be able to meaningfully engage with the public.
- An overwhelming focus on statistics and quantitative models can leave economists blind to other ways of thinking. Students should be supported to explore other methodological methods, including qualitative research, interviews, fieldwork and theoretical argumentation.
- Above all, economics must encourage critical thinking and not just reward the memorization of theories and the implementation of models. Students must be encouraged to compare, contrast and combine theories and critically apply them to in-depth case studies of the real world.37
Nobel Prize in Economics
The most common way to describe a laureate's contribution in the Nobel Prize motivations is to
- describe an actual situation
- point out that this situation has not been handled well in previous theories, and
- clarify that the winner has formulated a theory that can explain the current observations.
In summary, the Nobel Prize motivations emphasize that the mathematical models in economic theory are primarily an aid to understanding how the real economy works.38
Differences in Nobel Prize motivations:
- If a subject studies a deterministic object, a theory may contain hypotheses about specific laws, but for a chaos theoretical object, the theory will to a greater extent provide a framework that must then be adapted to the specific situation. The word "framework" should therefore be more common in economic justifications.
- For a deterministic object, it may be obvious to say that the theory describes how the world works in a certain respect. If there are no unambiguous connections, this is not as natural. The words "description / describe" (description / describe) should therefore be more common in the physics motivations.
- When studying a chaos theoretical object, it is not as obvious what the researcher is actually doing. No laws are formulated and no unambiguous results exist. It is then more convenient to use a broader and somewhat fuzzy concept to describe what the researcher has done. The words "analysis" should therefore be more common in economic motivations.
- When trying to find connections in data about a chaos theoretical object, statistical methods need to be used. If there are deterministic connections, it is not needed in the same way and therefore the words "statistical / statistics" (statistical / statistics) should be more common in economic motivations.
- If there are no unambiguous connections, the researcher may hesitate to use a relatively strong word such as that something has been "confirmed". Formulations with "confirm / confirmed" should therefore be common in physics motivations.39
Nobel Prize and motivation
2019 - Michael Kremer, Abhijit Banerjee and Esther Duflo for their experimental efforts to alleviate global poverty. In short, it is about dividing the big issue into smaller, more manageable, issues - for example, which specific measures are most effective in improving students' school results or children's health. They have shown that one can usually answer such smaller, more well-defined, questions with the help of carefully designed experiments among directly affected people.
2018 - William D. Nordhaus and Paul M. Romer "for integrating climate change into long-term macroeconomic analysis" and "for integrating technological development into long-term macroeconomic analysis". Paul Romer shows how knowledge can function as an engine for long-term economic growth. Nordhaus models make it possible to investigate the consequences of climate policy instruments, such as carbon dioxide taxes, under different scientific conditions.
2017 - Richard H. Thaler. By examining the consequences of limited rationality, social preferences and lack of self-control, he has shown how these human characteristics govern both individual decisions and outcomes in markets in a predictable way.
2016 - Oliver Hart, Bengt Holmström. The winners have developed the contract theory, a general framework for analyzing many different issues concerning the design of contracts, such as bonus programs for company management, deductibles in insurance, and privatization of public enterprises.
2015 - Angus Deaton. How do consumers distribute their expenditure on different goods? How much of society's total income is consumed, and how much is saved? How can we best measure and analyze welfare and poverty?
2014 - Jean Tirole. His analysis of companies with market power has created a coherent theory with application to key policy issues: How should the authorities handle mergers and cartels? How should they regulate monopolists?
2013 - Eugene F. Fama, Lars Peter Hansen, Robert J. Shiller. It is impossible to say whether the prices of shares and bonds will go up or down the next day or week. But it is quite possible to roughly predict the course development over a longer period of, for example, three to five years according to the researchers. Today, prices are seen as determined partly by variations in risk and risk attitude, partly by psychological factors and market frictions.
2012 - Alvin E. Roth, Lloyd S. Shapley. The Gale-Shapley algorithm - which always leads to a stable match. These methods also limit the actors' motives for manipulating the matching process.
2011 - Thomas J. Sargent, Christopher A. Sims. How are GDP and inflation affected by a temporary increase in interest rates or a reduction in taxes? What happens if the central bank permanently changes its inflation target or the government changes its budget balance target?
2010 - Peter A. Diamond, Dale T. Mortensen, Christopher A. Pissarides. The winners' models help us understand how unemployment, job vacancies and wages are affected by regulations and economic policy. This may apply to the level of compensation in the unemployment insurance or the rules regarding new recruitment and termination of employment. One conclusion is that a more generous benefit in the event of unemployment leads to higher unemployment and longer application times.
2009 - Elinor Ostrom, Oliver E. Williamson. Elinor Ostrom has shown how common assets can be managed successfully by associations of users. Oliver Williamson has developed a theory where companies are seen as structures for conflict resolution. The disadvantage of markets is that they lead to more bargaining and conflict. The disadvantage of companies is that management can exercise its decision-making power for its own purposes. Markets with fierce competition work well because both buyers and sellers can find other suppliers and customers if they do not agree. If the competition is less, however, this becomes more difficult.
2008 - Paul Krugman. The new theory explains why world trade is in fact dominated by countries with similar conditions that trade in similar products - for example, that a country like Sweden both exports and imports cars. Such trade enables specialization and increased large-scale operations with lower prices and a richer product range as a result. Reduced transport costs can trigger a self-reinforcing process where a growing urban population leads to more economies of scale, higher real wages and a more varied range of goods. This stimulates further migration to the cities. Krugman's theories have shown that the result of these processes may be that regions are divided into a highly developed urbanized center and a less developed
2007 - Leonid Hurwicz, Eric S. Maskin, Roger B. Myerson. Competition is not completely free, consumers are incompletely informed and production and consumption can have positive or negative effects on other people or on the environment. In addition, many transactions do not take place in open markets but within companies, in negotiations between individuals or interest groups and under a variety of other institutional conditions. How well do different such institutions, or allocation mechanisms, work? What is the optimal mechanism for achieving a particular goal, such as societal welfare or private economic gain? Are government regulations justified and, if so, how are they best designed? The winners have deepened our understanding of how optimal mechanisms should be designed with regard to individuals' incentives and private information.
2006 - Edmund Phelp's work has increased the understanding of the connections between the short- and long-term effects of economic policy. Phelps formulated the hypothesis of the extended Phillips curve, according to which inflation depends on both unemployment and inflation expectations.
2005 - Robert Aumann and Thomas Schelling. Why do some groups of individuals, organizations and nations succeed in finding forms of peaceful co-operation while others are plagued by conflicts? Thanks to the work of Robert Aumann and Thomas Schelling, game theory - or interactive decision theory - has become the dominant method of analyzing this ancient question. Schelling showed how a party to a conflict can strengthen its position by curtailing its ability to act, how the ability to counterattack can be more important than the ability to withstand an attack, and how insecure retaliation can be more effective than a safe counterattack. Robert Aumann was the first to conduct a complete formal analysis of infinitely repeated games. In this way, he was able to identify which collaboration patterns are sustainable in the long term.
2004 - Finn Kydland and Edward Prescott. Households save less the higher capital taxation they expect in the future; companies set higher prices and contract negotiators higher wages the more investment-driven monetary policy they expect, and so on. The winners showed how such effects of expectations about future economic policy can give rise to time-consistency problems in politics. They guided the discussion of practical economic policy from individual measures to the institutional framework of policy. This new approach has e.g. marked the reforms of central banks and the structure of monetary policy in many countries from the 1990s onwards. The prize winners laid the foundation for more robust models by seeing economic conditions as the overall result of a myriad of forward-looking decisions in individual households and companies on consumption, investments, labor supply, etc.
2003 - Robert Engle, Clive Granger. During the 1980s, this year's winners developed new statistical methods that deal with two key characteristics of many time series: time-varying volatility and non-stationarity, respectively.
2002 - Daniel Kahneman, Vernon L. Smith. Kahneman's most important contributions concern decision-making under uncertainty, where he has shown how human behavior can systematically deviate from the predictions of traditional economic theory. Vernon Smith has laid the foundation for the research field of experimental economics. In his own experiments, he has empirically demonstrated the importance of alternative market institutions; for example what price a seller can expect depending on the choice of auction form. Smith has also taken the lead in using the laboratory as a "wind tunnel", where the rules of the game for new markets - e.g. deregulated electricity markets - tested in a laboratory environment before being applied in practice.
2001 - George A. Akerlof, Michael Spence, Joseph E. Stiglitz. Akerlof's pioneering contribution thus showed how asymmetric information among borrowers and lenders can explain soaring lending rates in local markets in developing countries. Michael Spence demonstrated an important form of adaptation in individual market participants, where better informed players take costly measures to credibly transfer their information to less informed ones and thereby improve their market outcome. Joseph Stiglitz clarified the reverse type of market adaptation, where instead less informed players extract information from better informed ones, such as when insurance companies distinguish risk classes among their customers by offering them different contracts where lower premiums can be exchanged for higher deductibles. In a series of school-based contributions on various markets, Stiglitz has shown how asymmetric information can explain many observed phenomena, including unemployment and credit rationing.
2000 - James J. Heckman, Daniel L. McFadden. James Heckman and Daniel McFadden have solved fundamental problems that arise in the statistical analysis of microdata. Heckman has developed methods for handling selective selections in a statistically satisfactory manner. He has also shown how to solve similar problems with, for the researcher, unobserved differences between individuals; such occur, for example, in evaluations of public labor market programs and in estimates of the impact of the unemployment period on the chance of getting a job. McFadden himself has applied his theories in many practical applications, including the design of the San Francisco commuter train system and investments in telephone service and nursing homes.40
Paradigm and the development of economics
Several famous theorists of science (Kuhn 1962; Lakatos 1970) believe that researchers work within a paradigm with certain core assumptions and core methods. These assumptions and methods are they are not prepared to change. Over time, however, the paradigm has problems explaining various phenomena, and when the problems accumulate, it becomes a scientific revolution. A new paradigm with new basic assumptions and methods takes over. If we interpret Kuhn and Lakato strictly, it should not be possible for an individual assumption at the core of a paradigm to be replaced, while everything else is preserved unchanged. In the case of scientific revolutions, major simultaneous changes take place in fundamental assumptions about how the world works and which methods are considered adequate. The established scientists fight for all the elements at the core of the paradigm until it collapses in a revolution. If it turns out that researchers who stand for the new ideas can respond to objections and that their theories can explain things that the established cannot explain, then there comes a point where the researchers in the established paradigm incorporate the new elements and then continue as usual in others respects. If the established scientists do this, there will never be a great radical scientific revolution, because the established paradigm is flexible enough to take the laws of those who claim that the whole paradigm needs to be replaced. It can be noted that every time there is a major crisis in the capitalist market economies, various heterodox groups in economics claim that it is time for a new economic paradigm. A review of the Nobel Prize, however, implies that they will fail.41
Insight into the contributions of some economists
The brief statements below do not claim to be representative of today's national economy but constitute some randomly selected economists.
Professor Petter Lundborg
Lundborg is a very productive empirically oriented researcher who has used high-quality Swedish register data to answer questions where causality plays a central role. He has made important contributions in health economics and labor market economics, and in recent years also in family economics and financial economics. He has shown how small differences early in life - in terms of both education and health - have long-term significance for success in working life, effects that also spill over to future generations. In recent years, Lundborg has become interested in family finances. In a recently published highly acclaimed essay, he develops an innovative method for studying the relationship between childbirth and labor supply and shows that differences in fertility are more important than previously thought to explain wage differences between men and women. In other current work, Lundborg has studied how differences in savings and wealth and propensity to take financial risks are transferred between generations, and has shown that the differences are mainly explained by the environment in which they grew up, while genetic factors play a lesser role.42
Professor Mariassunta Giannetti
Giannetti primarily researches the importance of institutions and policies for governance and financing of companies. In a high-profile article from 2003, Giannetti shows how the lack of legal protection for external investors in many countries has counteracted the financing of innovative business activities. Weak protection for ordinary investors seems to explain in a similar way why the return on equity investments in some countries is significantly lower than in countries with better protection, as Giannetti showed in an article from 2009. Giannetti has studied how cultural differences slow down international investment, perhaps because that the perceived uncertainty is greater when trading with foreign companies. Culture also seems to play an important role when it comes to entrepreneurship. On the basis of detailed Swedish data, Giannetti shows that the willingness to start a company seems to be greatly influenced by non-monetary factors, such as the reputation of entrepreneurs in the local environment.43
Johan Lönnroth (Economic Debate no. 5 2019) about Niclas Berggren
In Ekonomisk Debatt nr 3 2019, the editor Niclas Berggren publishes an interesting philosophical leader in science under the heading "Prisoners of the tool shed". He begins by stating that the technical possibilities have made it possible to work with large amounts of data and advanced econometric tests, which has led to a sharp appreciation of empirical research. Berggren continues to divide economists into four varieties: 1. Those who have a good method for studying an important subject. 2. Those who have a good method for studying an unimportant subject. 3. Those who have a bad method of studying an important subject. 4. Those who have a bad method of studying an unimportant subject. He then criticizes those who are more interested in the method than in the subject and refers to Erik Dahmén who called his mathematical colleagues "prisoners of the tool shed". Finally, Berggren argues for the need for both studies of the "big world" that are treated with "imperfect method" and studies of "a small part of the world" with good methods. The author begins with Friedrich Hayek, who in his economics preface in 1974 said: It seems to me that there is a close connection between economists' misleading policy recommendations and their tendency to try to imitate the extraordinarily successful natural sciences - something that in our field can lead completely wrong. (Hayek 1974, own translation). My second quote is from a post by Bo Rothstein that dealt with the social scientists more generally: ... younger researchers choose to research increasingly esoteric and trivial problems that are of minimal societal relevance in order to meet the ever-increasing demands for statistical and methodological refinement. (Rothstein 2019) .44 45
Villy Bergström 1938-2018
In his memoirs, he described Göran Persson as "intelligent but uneducated", a man who "could humiliate government minister after minister and in front of the whole people". Persson, "with his misjudgments personifies the embarrassing collapse of the Social Democrats as a popular movement". It could not have happened when the leading Social Democrats were named Sandler, Wigforss, Undén, Möller or Erlander, but since people with that rise had been missing in the top tier, those like Göran Persson could have "ravaged". In an interview in 2012, Villy thought that the Social Democrats had lost the initiative in areas so central to the party as the labor market and social insurance. One of Villy's idols was Ernst Wigforss, with whom he corresponded. Since Villy Bergström was both an economist and politically involved in the Social Democrats, it was natural that he wrote about the economists' attitude to the labor movement. Villy's conclusion was drastic. "... The review of leading economists' stance on the labor movement's policy during a 44-year era has given a compact impression of contradiction. Only the young generation of economists in the so-called Stockholm School is an exception insofar as these economists fought for the new unemployment policy" . This could hardly be explained by their social background, but it was their education that put them in the barrel: the study of economics of the individual, the profit-maximizing, the human and the profit-maximizing company. An economist was a person with a doctorate in "liberalism" and the labor movement had emerged in opposition against the consequences of liberalism. When he himself summed up his Riksbank years, he could state "that none of my previous workplaces can compete with the Riksbank. The time there was the best during my working life" .46
17 Vad är felet med nationalekonomin? https://www.post-keynesianer.org/?p=456
26 Erik Dahmén och det industriella företagandet (2007) https://ratio.se/publikationer/erik-dahmen-och-det-industriella-foretagandet/
27 33 Theses for an Economics Reformation (2017) https://neweconomics.opendemocracy.net/33-theses-economics-reformation/
38 Lind, Hans (2019) " Vetenskapen nationalekonomi - som den framträder i Nobelprismotiveringar" https://www.nationalekonomi.se/sites/default/files/NEFfiler/47-3-hl.pdf
44 Släpp ut nationalekonomerna ur redskapsboden (2019) https://www.nationalekonomi.se/sites/default/files/NEFfiler/47-5-jl.pdf
45 Verktygsbodens fångar https://www.nationalekonomi.se/sites/default/files/NEFfiler/47-3-led.pdf
46 Vännen Villy - Villy Bergström 1938-2018 (2019) https://www.nationalekonomi.se/sites/default/files/NEFfiler/47-2-ml.pdf