imc indymedia

Los Angeles Indymedia : Activist News

white themeblack themered themetheme help
About Us Contact Us Calendar Publish RSS
latest news
best of news




A-Infos Radio

Indymedia On Air

Dope-X-Resistance-LA List


IMC Network:

Original Cities africa: ambazonia canarias estrecho / madiaq kenya nigeria south africa canada: hamilton london, ontario maritimes montreal ontario ottawa quebec thunder bay vancouver victoria windsor winnipeg east asia: burma jakarta japan korea manila qc europe: abruzzo alacant andorra antwerpen armenia athens austria barcelona belarus belgium belgrade bristol brussels bulgaria calabria croatia cyprus emilia-romagna estrecho / madiaq euskal herria galiza germany grenoble hungary ireland istanbul italy la plana liege liguria lille linksunten lombardia london madrid malta marseille nantes napoli netherlands nice northern england norway oost-vlaanderen paris/Île-de-france patras piemonte poland portugal roma romania russia saint-petersburg scotland sverige switzerland thessaloniki torun toscana toulouse ukraine united kingdom valencia latin america: argentina bolivia chiapas chile chile sur cmi brasil colombia ecuador mexico peru puerto rico qollasuyu rosario santiago tijuana uruguay valparaiso venezuela venezuela oceania: adelaide aotearoa brisbane burma darwin jakarta manila melbourne perth qc sydney south asia: india mumbai united states: arizona arkansas asheville atlanta austin baltimore big muddy binghamton boston buffalo charlottesville chicago cleveland colorado columbus dc hawaii houston hudson mohawk kansas city la madison maine miami michigan milwaukee minneapolis/st. paul new hampshire new jersey new mexico new orleans north carolina north texas nyc oklahoma philadelphia pittsburgh portland richmond rochester rogue valley saint louis san diego san francisco san francisco bay area santa barbara santa cruz, ca sarasota seattle tampa bay tennessee urbana-champaign vermont western mass worcester west asia: armenia beirut israel palestine process: fbi/legal updates mailing lists process & imc docs tech volunteer projects: print radio satellite tv video regions: oceania united states topics: biotech

Surviving Cities africa: canada: quebec east asia: japan europe: athens barcelona belgium bristol brussels cyprus germany grenoble ireland istanbul lille linksunten nantes netherlands norway portugal united kingdom latin america: argentina cmi brasil rosario oceania: aotearoa united states: austin big muddy binghamton boston chicago columbus la michigan nyc portland rochester saint louis san diego san francisco bay area santa cruz, ca tennessee urbana-champaign worcester west asia: palestine process: fbi/legal updates process & imc docs projects: radio satellite tv
printable version - js reader version - view hidden posts - tags and related articles

New Economic Thinking - Turning Away from the Market Fetish

by Ronald Schettkat Tuesday, Jul. 17, 2012 at 10:13 AM

"New economic thinking" rejects the view of the person as "homo oeconomicus" reduced to maximization of individual benefits and offers a more comprehensive and realistic concept in which justice, norms, routines and emotions appear. "Homo recipocans" is an alternative.


By Ronald Schettkat [1]

[This article published in: WISO direct, June 2012, is translated from the German on the Internet, Ronald Schettkat is a professor of economics at the Schumpeter School of Economics, University of Wuppertal, Germany.]


With the financial- and economic crisis, the promises of a stable market-guided economic development of political neoliberalism and its theoretical-economic basis, neoclassical economics, have burst. Superficially it seems to be a failure of macro-economic models. However criticism of the extreme assumptions and the axiomatic inductive methods of neoclassical economics long fermented in economics. Trifling deviations from the referential model of the perfect market lead to completely different economic-political conclusions. “New economic thinking” rejects the view of the person of the “homo oeconomicus” reduced to maximization of individual benefits and offers a more comprehensive realistic concept in which justice, norms, routines and emotions flow into decision-making. New economic thinking is based on inductive empirical economics whose effect now shakes the foundations of doctrinaire economics.


Queen Elizabeth was amazed that economists did not warn of the banking crisis and was astonished about the justification for the economics Nobel Prize winner Robert Lucas. Economic theory assumes that such events are not foreseeable but are exogenous shocks of otherwise stable markets. Lucas holds to the hypothesis of efficient markets (HEM) that markets always tend to balance and represents the collapse of Lehmann Brothers (September 15, 2008) as an exogenous shock rather than a result of excessive financial markets. The big investor, speculator and philanthropist George Soros was dismayed by Lucas’ answer. He gained his considerable assets [2] with an interpretation of market events contrary to HEM. Instead of relying on the constant tendency to balance (HEM), Soros emphasized reflexivity and interdependent acts since the market can drift away from balance. Soros now uses part of his assets to support “new economic thinking” and promotes the “Institute for New Economic Thinking.” He also organized the much-discussed conference “Paradigm Lost: Rethinking Economics and Politics” in Berlin (April 12-15, 2012). [3]


Superficially only the macro-economic models seem to have failed. However the crisis of economic thinking concerns above all the extremely unrealistic assumptions. The “homo oeconomicus” orders a myriad of action alternatives according to a use-function (which must satisfy mathematical demands), considers the consequences of its actions and chooses the maximum benefit combination by including price- and income conditions. The “homo oeconomicus” has “rational” expectations, operates on perfect capital markets with the markets tending to general balance in a “natural” unemployment rate. Ideas of justice, fairness and relative income are unimportant. The aggregation problem from individual- to market-conduct is defined away and macro-economic results are projected from the assumed macro-economic conduct.

Agreement with axioms is more important than realistic empirically validated conduct. Discrepancies between assumptions and actual behavior are irrelevant. The logical consistency of the models is crucial, not the reality-content of the assumptions. Adjusting reality to the model (deregulation) is recommended. Markets are stable without regulations and state incursions. They always tend to balance; they are efficient and lead to maximum welfare. The state and politics only disturb this balance and cause inefficiencies. That is why state activity should be limited and its functions replaced by private arrangements (privatization) as much as possible. “Rigidities” can delay price adjustments. However the dominance of market forces in the long-term is assumed that leads back again to balance as if nothing happened (comparative statistics). Economics is even reduced to the analysis of balances.


A fundamental methodical criticism criticizes the formal deductive procedures of a neoclassical model world. This method does not contribute to more knowledge but blocks the way to a profound empirically-oriented development of theory. The “new thinkers” – including many Nobel Prize winners – argue that theory must adjust to reality, not vice versa. Prognoses based on false assumptions could accidentally be right. Understanding the conduct of individuals depends on the context and interactions on markets. Motivations, structures and processes must be considered to identify the causal connections.

“Super-rationality,” systematically alternating individual conduct may not be dismissed as a special case (anomaly) or irrationality because ideas of justice, routines, norms and emotions influence conduct. Studies on the behavioral axioms of neoclassical economics also show a systematically different conduct than assumed. If individuals feel they are treated unfairly, they refuse advantageous gratifications – against their “rational” monetary interests.


Markets are stable and always tend to optimum welfare and general balance. That is why macro-economic stabilization policy can only have a disturbing effect. This theoretical conclusion of “neoclassical theory” rests on a whole bundle of dubious assumptions: (1) balance in the initial situation; (2) a-historical analysis; (3) rational expectations; (4) consumption determined by long-range instead of current incomes; (5) “Ricardian equivalence” that explains the debts of today as the taxes of tomorrow; (6) there are no credit restrictions on the assumed perfect capital market (!); (7) risk instead of uncertainty guides the assessment of future events and (8) the “natural” unemployment rate.

“New economic thinking” regards these assumptions as theoretically and empirically refuted and criticizes the political recommendations based on the neoclassical immunization strategy. Right at the front, effective analyses of expansive economic policy consider the initial situation. The mere assumption of balance and full employment (1) is inadequate and misleading. In reality, expansive macro-economic fiscal- or monetary policy is used to gain balance and full employment, not to produce inflation-driving over-employment.

National economies carry out adjustment processes that substantially influence the path of development. “Neoclassical theory” only allows short-term quantitative reactions (“straw-fires”) that are quickly compensated by price reactions. Interim inflation occurs. The economy levels out at a higher price level with the original quantities. Expansive macro-policy leads to wrongly understood signals. “Rational” expectations (3) fade out such errors from the start. They anticipate the model-immanent effects. For that reason, systematic influences on politics are impossible. Unexpected and surprising policies could induce economic agents to act. This a-historical analysis of “old economic thinking” should be replaced by a sequential analysis (2) which is especially relevant when the restriction to negative feedbacks is abandoned and positive feedbacks are allowed. Economic decisions are made outside balance situations. When businesses invest in reaction to expansive political-economic impulses, then the production possibilities of the economy (the potential) are changed. New balances result that are crucial for long-term price reactions. The long-term balance cannot be equated with the short-term balance of a fictional frictionless economy. Through their actions, investors and other market actors influence the development. Therefore development is characterized by insecurity and risk (7).

The thesis of “long-term income” (4) includes the effect of fiscal impulses (tax allowances and premiums) on consumer conduct (consumers make their buying decisions based on long-term available income, not on current income) and the “Ricardian equivalence” (5) according to which the state debts of today are the taxes of tomorrow. State spending neutralizes – doesn’t influence – growth or crowds out private investments. If the economy is really used to capacity, then the neoclassical reflections are right. If there is under-employment, the impulse to balance will lead us out. The focus of public spending is decisive: consumption or investment. The public sector brings important benefits for the private economy and is not inefficient per se. Public payments have great importance for income distribution in reducing the inequality in all OECD countries. In other words, lower income groups are disproportionally burdened by cancellation of public benefits.


Credit restrictions are eliminated in the neoclassical model by the assumption of perfect capital markets (6). Businesses can finance their investments and households their education spending (human capital investments) at any time with foreign capital. Credit restrictions, uncertainty and asymmetrical information do not exist. Future profits are foreseeable (risk). The assumption of perfect capital markets seduces to the thesis that high and increasing wage inequality is conducive for education investments since education profit increases with them. Here is one fallacy or non sequitor: the share of successful bachelor degrees increases with the socio-economic status of the parents. Inequality reproduces inequality across generations the more intense is the inequality of a society. In the US with the greatest income inequalities, there is the strongest inter-generational bond while the bond is nearly outgrown in Norway – the country with the least income inequality and high public engagement in education. A broad access to education, equal opportunities, is essential for knowledge-societies. There is a “great goal conflict” when taxes reduce performance –readiness and flow into an inefficient public sector. On the other hand, technical progress and the growth potential are promoted if taxes flow into efficient areas like education.


Wages should correspond to individual production contributions. That is another firmly anchored assumption of “old economic thinking.” Every person receives what he or she earns. There is a quasi “natural” income distribution whose correction (through taxes or minimum wages) leads to efficiency- losses. The increasing wage spread in nearly all OECD countries is interpreted as a “natural” market reaction to technical progress or as a consequence of globalization. But market forces are no longer plausible as an explanation when income growth increasingly concentrates with the top one percent of income recipients and great wage-differences appear in narrowly limited groups. Institutional explanations like the decline of union organizations, trifling or missing minimum wages, taxes (the top tax rate in OECD countries fell 20 percent on average; capital incomes are taxed less than work incomes) gain more and more plausibility. However such regulations were condemned in “old economic thinking” as efficiency-reducing and disturbing the “natural” distribution. Still the same efficiency seems attainable with very different income distributions.

In the neoclassical model, minimum wages inevitably lead to redundancies of employees previously paid below the minimum wage. But individual production contributions are not observable and comparable. Therefore one easily falls to a circular reasoning in which one deduces from wage to individual production contribution. “New economic thinking” recognizes that wages are negotiated and the balance of power plays an essential role on the labor market. The pay of different activities is always subject to value judgments.


Institutional incentives (above all wage compensations) determine the general balance, the “natural” unemployment rate to which the economy should always return. This unemployment rate can only be reduced through structural reforms, not through macro-economic policy. If the “homo oeconomicus” is jobless, this is a benefit-maximizing weighing of freedom, work suffering and income in a given institutional environment. What a contrast to the findings of modern research in which unemployment is established as the crucial event drastically reducing well-being – comparable with divorce. In “new economic thinking,” adjustment processes on the labor market are very relevant because long recessions lead to fortified long-term unemployment. If this occurs, the costs of unemployment will be very high. That is why timely counter-measures are efficient.

“New economic thinking” is based on empirical inductive analysis and considers actual human conduct. Turning away from the extreme assumptions of the “homo oeconomicus” overcomes the immunization of neoclassical economics and gives an active role to economic policy. The division of labor according to which only the central bank is competent for price stability and structural reforms and the demand-side of the economy is ignored cannot be maintained.


1 The author is a professor of economics at the Schumpeter School of Economics, University of Wuppertal, Germany.

2 With billion in net assets, Soros is nr. 22 on the Forbes list of billionaires.





Schettkat, Ronald, “Will Only an Earthquake Shake Up Economics?

A Manifesto for Economic Sense July 2012

More than four years after the financial crisis began, the world’s major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s. And the reason is simple: we are relying on the same ideas that governed policy in the 1930s. These ideas, long since disproved, involve profound errors both about the causes of the crisis, its nature, and the appropriate response.

These errors have taken deep root in public consciousness and provide the public support for the excessive austerity of current fiscal policies in many countries. So the time is ripe for a Manifesto in which mainstream economists offer the public a more evidence-based analysis of our problems.

• The causes. Many policy makers insist that the crisis was caused by irresponsible public borrowing. With very few exceptions - other than Greece - this is false. Instead, the conditions for crisis were created by excessive private sector borrowing and lending, including by over-leveraged banks. The collapse of this bubble led to massive falls in output and thus in tax revenue. So the large government deficits we see today are a consequence of the crisis, not its cause.

• The nature of the crisis. When real estate bubbles on both sides of the Atlantic burst, many parts of the private sector slashed spending in an attempt to pay down past debts. This was a rational response on the part of individuals, but - just like the similar response of debtors in the 1930s - it has proved collectively self-defeating, because one person’s spending is another person’s income. The result of the spending collapse has been an economic depression that has worsened the public debt.

• The appropriate response. At a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilizing force, attempting to sustain spending. At the very least we should not be making things worse by big cuts in government spending or big increases in tax rates on ordinary people. Unfortunately, that’s exactly what many governments are now doing.

• The big mistake. After responding well in the first, acute phase of the economic crisis, conventional policy wisdom took a wrong turn - focusing on government deficits, which are mainly the result of a crisis-induced plunge in revenue, and arguing that the public sector should attempt to reduce its debts in tandem with the private sector. As a result, instead of playing a stabilizing role, fiscal policy has ended up reinforcing and exacerbating the dampening effects of private-sector spending cuts.

In the face of a less severe shock, monetary policy could take up the slack. But with interest rates close to zero, monetary policy - while it should do all it can - cannot do the whole job. There must of course be a medium-term plan for reducing the government deficit. But if this is too front-loaded it can easily be self-defeating by aborting the recovery. A key priority now is to reduce unemployment, before it becomes endemic, making recovery and future deficit reduction even more difficult.

How do those who support present policies answer the argument we have just made? They use two quite different arguments in support of their case.

The confidence argument. Their first argument is that government deficits will raise interest rates and thus prevent recovery. By contrast, they argue, austerity will increase confidence and thus encourage recovery.

But there is no evidence at all in favour of this argument. First, despite exceptionally high deficits, interest rates today are unprecedentedly low in all major countries where there is a normally functioning central bank. This is true even in Japan where the government debt now exceeds 200% of annual GDP; and past downgrades by the rating agencies here have had no effect on Japanese interest rates. Interest rates are only high in some Euro countries, because the ECB is not allowed to act as lender of last resort to the government. Elsewhere the central bank can always, if needed, fund the deficit, leaving the bond market unaffected.

Moreover past experience includes no relevant case where budget cuts have actually generated increased economic activity. The IMF has studied 173 cases of budget cuts in individual countries and found that the consistent result is economic contraction. In the handful of cases in which fiscal consolidation was followed by growth, the main channels were a currency depreciation against a strong world market, not a current possibility. The lesson of the IMF’s study is clear - budget cuts retard recovery. And that is what is happening now - the countries with the biggest budget cuts have experienced the biggest falls in output.

For the truth is, as we can now see, that budget cuts do not inspire business confidence. Companies will only invest when they can foresee enough customers with enough income to spend. Austerity discourages investment.

So there is massive evidence against the confidence argument; all the alleged evidence in favor of the doctrine has evaporated on closer examination.

The structural argument. A second argument against expanding demand is that output is in fact constrained on the supply side - by structural imbalances. If this theory were right, however, at least some parts of our economies ought to be at full stretch, and so should some occupations. But in most countries that is just not the case. Every major sector of our economies is struggling, and every occupation has higher unemployment than usual. So the problem must be a general lack of spending and demand.

In the 1930s the same structural argument was used against proactive spending policies in the U.S. But as spending rose between 1940 and 1942, output rose by 20%. So the problem in the 1930s, as now, was a shortage of demand not of supply.

As a result of their mistaken ideas, many Western policy-makers are inflicting massive suffering on their peoples. But the ideas they espouse about how to handle recessions were rejected by nearly all economists after the disasters of the 1930s, and for the following forty years or so the West enjoyed an unparalleled period of economic stability and low unemployment. It is tragic that in recent years the old ideas have again taken root. But we can no longer accept a situation where mistaken fears of higher interest rates weigh more highly with policy-makers than the horrors of mass unemployment.

Better policies will differ between countries and need detailed debate. But they must be based on a correct analysis of the problem. We therefore urge all economists and others who agree with the broad thrust of this Manifesto to register their agreement at, and to publically argue the case for a sounder approach. The whole world suffers when men and women are silent about what they know is wrong. 2-hr video “What a Way to Go: Life at the End of Empire”

Report this post as:

Local News

OUR HOUSE Grief Support Center Presents Night for Hope O30 5:38PM

Marshall Tuck’s racist dog whistle O27 5:01AM

Marshall Tuck’s ethnocentrism contradicts Californian values O27 4:32AM

Contra Costa-Hawkins O25 3:48AM

Debunking Some Anti-Prop 10 Propaganda O12 6:56AM

Why Should California Choose De Leon Over Feinstein? O10 9:55PM

Change Links September 2018 posted S02 10:22PM

More Scandals Rock Southern California Nuke Plant San Onofre A30 11:09PM

Site Outage Friday A30 3:49PM

Change Links August 2018 A14 1:56AM

Setback for Developer of SC Farm Land A12 11:09PM

More problems at Shutdown San Onofre Nuke J29 10:40PM

Change Links 2018 July posted J09 8:27PM

More Pix: "Families Belong Together," Pasadena J02 7:16PM

"Families Belong Together" March, Pasadena J02 7:08PM

Short Report on the Families Belong Together Protest in Los Angeles J30 11:26PM

Summer 2018 National Immigrant Solidarity Network News Alert! J11 6:58AM

Watch the Debate: Excluded Candidates for Governor of California M31 5:20AM

Change Links June 2018 posted M28 7:41AM

The Montrose Peace Vigil at 12 Years M22 8:01PM

Unity Archive Project M21 9:42AM

More Local News...

Other/Breaking News

Allo, quelqu'un ? Allo, quelqu'une ? D09 9:16AM

deral Government Officials are not allowed to take leaflets nor pick up items in privste D09 4:15AM

Communist Mouthwash Hides Nature of Nations Suffering in Comm Pyramids Ploys D09 12:01AM

Atlanta: metro Pillage, Poison Gas, Pricks D08 9:13PM

Atlanta Metro Suffers Under Pillage, Shame lso Political Poison Gases D08 8:41PM

Fed Says College Students Have More Debt than Previous Generations D07 3:08PM

Paraphysique de l'insurrection et de l'émeute D07 9:55AM

Corruption of USA government D06 4:14AM

"We live in a time of radical counter-enlightenment" D04 1:45AM

Did Woolsey Fire Cause Radioactive Fallout? D03 10:26PM

G20 Discusses Preventing Financial Crisis and Small Island Economies N30 3:10PM

Driver near Campbell San Jose researches Bus Traffic from Northern Mexico N29 4:04AM

The Death of Small Businesses in Big Cities, Explained N28 3:43PM

Felons Shw Ninjasred Heavy Truck Tyres N28 2:28PM

Paraphysique de la consommation/pollution N28 8:08AM

Paraphysique de l'effet spectateur N26 11:13AM

Condominium, terrorisme du capital N24 8:52AM

Debt and Tax Policies Needed to Prevent Crisis Says Finance Watchdog Group N23 2:40PM

Independent Media Crackdown and Global Social Movements N22 9:45PM

Abécédaire du fascisme restreint et général N22 8:41AM

“Animaniacs in Concert!” Starring Voice Legend Rob Paulsen Heads to Portland, Oregon N20 8:39PM

Socialism in American English N20 12:04PM

Noske, noskisme réactualisé N20 11:29AM

Oprah Please Stop Selling Dead Animal Pieces N20 3:32AM

Down In Smoke SF N20 12:03AM

Lucifers Banker N18 7:38PM

Paraphysique du scientisme N18 9:19AM

USDA Withholds Names Of Turkey Companies Spreading Salmonella N17 7:51PM

More Breaking News...
© 2000-2018 Los Angeles Independent Media Center. Unless otherwise stated by the author, all content is free for non-commercial reuse, reprint, and rebroadcast, on the net and elsewhere. Opinions are those of the contributors and are not necessarily endorsed by the Los Angeles Independent Media Center. Running sf-active v0.9.4 Disclaimer | Privacy