Heterodox Economics

Frederic S. Lee

From The New Palgrave Dictionary of Economics, Second Edition, 2008

Edited by Steven N. Durlauf and Lawrence E. Blume

‘Heterodox economics’ refers to economic theories and communities of economists that are in various ways an alternative to mainstream economics. It is a multi-level term that refers to a body of economic theories developed by economists who hold an irreverent position vis-à-vis mainstream economics and are typically rejected out of hand by the latter; to a community of heterodox economists who identify themselves as such and embrace a pluralistic attitude towards heterodox theories without rejecting contestability and incommensurability among heterodox theories; and to the development of a coherent economic theory that draws upon various theoretical contributions by heterodox approaches which stand in contrast to mainstream theory. Thus, the article is organized as follows. The first section outlines the emergence of ‘heterodox economics’ in the sense of a body of heterodox theories; the second section deals with heterodox economics as a pluralist community of heterodox economists; the third section situates heterodox economics relative to mainstream economics; and the fourth section delineates heterodox economics in terms of theory and policy.

Heterodox economics as a group of heterodox theories

Heterodox as an identifier of an economic theory and/or economist that stands in some form of dissent relative to mainstream economics was used within the Institutionalist literature from the 1930s to the 1980s.  Then, in 1987, Allan Gruchy used ‘heterodox economics’ to identify Institutional as well as Marxian and Post Keynesian theories as ones that stood in contrast to mainstream theory. By the 1990s, it became obvious that there were a number of theoretical approaches that stood, to some degree, in opposition to mainstream theory. These heterodox approaches included Austrian economics, feminist economics, Institutional-evolutionary economics, Marxian-radical economics, Post Keynesian and Sraffian economics, and social economics; however, none of the names of the various heterodox approaches were suitable as a general term that could represent them collectively. While terms such as ‘non-traditional’, ‘non-orthodox’, ‘non-neoclassical’ and ‘non-mainstream’ were used to collectively represent them, they did not have the right intellectual feel or a positive ring. Moreover, some thought that ‘political economy’ (or ‘heterodox political economy’) could be used as the collective term, but its history of being another name for Marxian-radical economics (and its current reference to public choice theory) made this untenable. Therefore, to capture the commonality of the various theoretical approaches in a positive light without prejudicially favouring any one approach, a descriptive term that had a pluralist ‘big-tent feel’ combined with being unattached to a particular approach was needed. Hence, ‘heterodox’ became increasingly used throughout the 1990s in contexts where it implicitly and/or explicitly referred to a collective of alternative theories vis-à-vis mainstream theory and to the economists who engaged with those theories.

The final stage in the general acceptance of heterodox economics as the ‘official’ collective term for the various heterodox theories began c. 1999. First there was the publication of Philip O’Hara’s comprehensive Encyclopedia of Political Economy (1999), which explicitly brought together the various heterodox approaches. At the same time, in October 1998, Fred Lee established the Association for Heterodox Economics (AHE); and to publicize the conference and other activities of the AHE as well as heterodox activities around the world, he also developed from 1999 an informal ‘newsletter’ that eventually became (in September 2004) the Heterodox Economics Newsletter, now received by over 1,600 economists worldwide

(see http://www.heterodoxnews.com). These twin developments served to establish ‘heterodox economics’ as the preferred terminology by which these groups of economists referred to themselves.

Heterodox economics as a community of heterodox economists

‘Heterodox economics’ also denotes a community of heterodox economists, which implies that the members are not segregated along professional and theoretical lines. The segregation of professional engagement has not existed among heterodox associations, with the exception of two instances in the mid-1970s. For example, from their formation in 1965–70, the three principal heterodox associations in the United States, AFEE, ASE, and URPE (see Table 1 for full names), opened their conferences to Institutionalist, social economics, radical-Marxian, and Post Keynesian papers and sessions; appointed and/or elected heterodox economists to the editorial boards of their journals and to their governing bodies who also were members of other heterodox associations or engaged with Post Keynesian economics; and had members who held memberships in other heterodox associations, engaged with Post Keynesian economics, and subscribed to more than one heterodox economics journal. Moreover, a number of heterodox associations formed since 1988, such as AHE, EAEPE, ICAPE, SDAE and SHE, have adopted an explicitly pluralistic approach towards their name, membership and conference participation: for a list of heterodox associations, dates formed and primary country or region of activity, see Table 1. Finally, the informal and explicit editorial policies of heterodox journals have, from their formation, accepted papers for publication that engage with the full range of heterodox approaches; and this tendency strengthened since the mid-1990s as heterodox economics became more accepted. To illustrate this point, from 1993 to 2003 the eight principal English language generalist heterodox journals – Cambridge Journal of Economics, Capital and Class, Feminist Economics, Journal of Economic Issues, Journal of Post Keynesian Economics, Review of Political Economy, Review of Radical Political Economics, and Review of Social Economy – cited each other so extensively that no single journal or subset of journals was isolated; hence they form an interdependent body of literature where all heterodox approaches have direct and indirect connections with each other. Thus, in terms of professional engagement since the mid-1990s, the heterodox community is a pluralistic integrative whole.

Heterodox economics associations (currently active)

NameDate Country or region of Established primary activity

Theoretical segregation involves the isolation of a particular theoretical approach and its adherents from all other approaches and their adherents; that is to say, theoretical segregation occurs when there is no engagement across different theoretical approaches. However, it does not exist within heterodox economics currently, nor has it existed in the past among the various heterodox approaches. From the 1960s to the 1980s heterodox economists engaged, integrated or synthesized Institutional, Post Keynesian and Marxist-radical approaches, Institutional and Post Keynesian approaches, Post Keynesian and Marxian-radical approaches, Post Keynesian and Austrian, Austrian and Institutional, feminist and Marxist-radical approaches, Institutional and Marxist-radical approaches, Institutional and social economics, ecological and Marxian-radical approaches, and social and Marxian economics. Thus by 1990 many heterodox economists could no longer see distinct boundaries between the various approaches. Moreover, from the 1990s to the present day heterodox economics has continued the past integration efforts of engaging across the various heterodox approaches. Hence, it is clear that the heterodox community is not segregated along theoretical lines, but rather there is cross-approach engagement to such an extent that the boundaries of the various approaches do not simply overlap – they are, in some cases, not there at all. The ensuing theoretical messiness of cross-approach engagement is evidence, to detractors, of the theoretical incoherence of heterodox economics, whereas to supporters of progress it is evidence of a more theoretically coherent heterodox economics – a glass half-empty of coherence as opposed to a glass half-full of coherence.

Heterodox critique of mainstream economics

Mainstream economics is a clearly defined theoretical story about how the economy works; but this story is theoretically incoherent. That is, mainstream theory is comprised of a core set of propositions – such as scarcity, equilibrium, rationality, preferences, and methodological individualism and derivative beliefs, vocabulary, symbols and parables – while there is a range of heterogeneous theoretical developments beyond the core that do not call into question the core itself in totality. As a result, critiques of the theory vary in that they can deal with the internal coherence and/or empirical grounding of the theory; they can be directed at the theory at a particular point in time or at specific components of theory (such as methodology, concepts qua vocabulary, parables qua stories and symbols); and they can be initiated from a particular heterodox approach. What emerges is a varied but concatenation of particular and extensive critiques that generate an emergent encompassing rejection of mainstream theory, although any one particular critique may not go that far.

Although the internal critiques and critiques of models that tell theoretical stories show that the theory is incoherent, they do not by themselves differentiate mainstream from heterodox theory. This, however, can be dealt with in terms of specific critiques of the core propositions. That is, each of the heterodox approaches has produced critiques of particular core propositions of the theory, while each core proposition has been subject to more than one critique; in addition, the multiple heterodox critiques of a single proposition overlap in argumentation. To illustrate this point, consider the critiques of the concept of scarcity. The Post Keynesians argue that produced means of production within a circular production process cannot be characterized as scarce and that production is a social process, while Institutionalists reject the view that natural resources are not ‘produced’ or socially created to enter into the production process, and the Marxists argue that the concept is a mystification and misspecification of the economic problem – that it is not the relation of the isolated individual to given resources, but the social relationships that underpin the social provisioning process. The three critiques are complementary and integrative and generate the common conclusion that the concept of scarcity must be rejected as well as the mainstream definition of economics as the science of the non-social provisioning process analysed through the allocation of scarce resources among competing ends given unlimited asocial wants of asocial individuals. Other critiques of the core propositions exist and arrive at similar conclusions. Together, the three critiques – internal, story qua model and core propositions – form a concatenated structured heterodox critique that rejects and denies the truth and value of mainstream theory.

Heterodox economics: theory and policy

Since the intellectual roots of heterodox economics are located in traditions that emphasize the wealth of nations, accumulation, justice, social relationships in terms of class, gender, and race, full employment, and economic and social reproduction, the discipline of economics, from its perspective, is concerned, not with prediction per se, but with explaining the actual process that provides the flow of goods and services required by society to meet the needs of those who participate in its activities. That is, economics is the science of the social provisioning process, and this is the general research agenda of heterodox economists. The explanation involves human agency in a cultural context and social processes in historical time The explanation involves human agency in a cultural context and social processes in historical time affecting resources, consumption patterns, production and reproduction, and the meaning (or ideology) of market, state, and non-market/state activities engaged in social provisioning. Thus heterodox economics has two interdependent parts: theory and policy. Heterodox economic theory is an empirically grounded theoretical explanation of the historical process of social provisioning within the context of a capitalist economy. Therefore it is concerned with explaining those factors that are part of the process of social provisioning, including the structure and use of resources, the structure and change of social wants, structure of production and the reproduction of the business enterprise, family, state, and other relevant institutions and organizations, and distribution. In addition, heterodox economists extend their theory to examining issues associated with the process of social provisioning, such as racism, gender and ideologies and myths. Because their economics involves issues of ethical values and social philosophy and the historical aspects of human existence, heterodox economists make ethically based economic policy recommendations to improve human dignity, that is, recommending ameliorative and/or radical, social and economic policies to improve the social provisioning and hence well-being for all members of society and especially the disadvantaged members. To do this properly, their economic policy ecommendations must be connected to heterodox theory which provides an accurate historical and theoretical picture of how the economy actually works – a picture that includes class and hierarchical domination, inequalities, and social-economic discontent. Given the definition of economics as the science of the social provisioning process and the structure of the explanation of the process combined with the pluralistic and integrative proclivities of heterodox economists, there has emerged a number of elements that have come to constitute the provisional theoretical and methodological core of heterodox theory. Some elements are clearly associated with particular heterodox approaches, as noted by O’Hara (2002, p. 611):

The main thing that social economists bring to the study [of heterodox economics] is an emphasis on ethics, morals and justice situated in an institutional setting. Institutionalists bring a pragmatic approach with a series of concepts of change and normative theory of progress, along with a commitment to policy. Marxists bring a set of theories of class and the economic surplus. Feminists bring a holistic account of the ongoing relationships between gender, class and ethnicity in a context of difference … And post-Keynesians contribute through an analysis of institutions set in real time, with the emphasis on effective demand, uncertainty and a monetary theory of production linked closely with policy recommendations.

However, other provisional elements, such as critical realism, non-equilibrium or historical modelling, the gendering and emotionalizing agency, the socially embedded economy, and circular and cumulative change, emerged from a synthesis of arguments that are associated only in part with particular heterodox approaches. The core methodological elements establish the basis for constructing heterodox theory. In particular, the methodology emphasizes realism, structure, feminist and uncertain agency qua individual, history, and empirical grounding in the construction of heterodox theory, which is a historical narrative of how capitalism works. The theory qua historical narrative does not simply recount or superficially describe actual economic events, such as the exploitation of workers; it does more in that it analytically explains the internal workings of the historical economic process that, say, generates the exploitation of workers. Moreover, because of its historical nature, the narrative is not necessarily organized around the concepts of equilibrium/long period positions and tendencies towards them. Because the narrative provides an accurate picture of how capitalism actually works and changes in a circular and cumulative fashion, economists use their theory to suggest alternative paths that future economic events might take and propose relevant economic policies to deal with them. In constructing the narrative, they have at the same time created a particular social-economic-political picture of capitalism.

The core theoretical elements generate a three-component structure–organization–agency economic theory. The first component of the theory consists of three overlapping interdependencies that delineate the structure of a real capitalist economy. The first interdependency is that the production of goods and services requires goods and services to be used as inputs. Hence, with regard to production, the overall economy (which includes both market and non-market production) is represented as an input–output matrix of material goods combined with different types of labour skills to produce an array of goods and services as outputs. Many of the outputs replace the goods and services used up in production and the rest constitute a physical surplus to be used for social provisioning, that is for consumption, private investment, government usage and exports. A second interdependency is the relation between the wages of workers, profits of enterprises, and taxes of government and expenditures on consumption, investment, and government goods as well as non-market social provisioning activities. The last interdependency consists of the overlay of the flow of funds or money accompanying the production and exchange of the goods and services. Together, these three interdependencies produce a monetary input–output structure of the economy where transactions in each market are a monetary transaction; where a change in price of a good or the method by which a good is produced in any one market will have an indirect or direct impact on the entire economy; and where the amount of private investment, government expenditure on real goods and services, and the excess of exports over imports determines the amount of market and non-market economic activity, the level of market employment and non-market labouring activities, and consumer expenditures on market and non-market employment and non-market labouring activities, and consumer expenditures on market and non-market goods and services. These elements of course have parallels in non-heterodox economics, but the ideas are developed differently.

The second component of heterodox theory consists of three broad categories of economic organization that are embedded in the monetary input–output structure of the economy. The first category is micro market-oriented, hence particular to a set of markets and products. It consists of the business enterprise, private and public market organizations that regulate competition in product and service markets and the organizations and institutions that regulate the wages of workers. The second is macro market-oriented and hence is spread across markets and products, or is not particular to any market or product. It includes the state and various subsidiary organizations as well as particular financial organizations, that is, those organizations that make decisions about government expenditures and taxation, and the interest rate. Finally, the third category consists of non-market organizations that promote social reproduction and include the family and state and private organizations that contribute to and support the family. The significance of organizations is that they are the social embeddedness of agency qua the individual, the third component of heterodox theory. That is, agency, which are decisions made by individuals concerning the social provisioning process and social wellbeing, takes place through these organizations. And because the organizations are embedded in both instrumental and ceremonial institutions, such as gender, class, ethnicity, justice, marriage, ideology, and hierarchy qua authority, agency qua the individual acting through organizations affect both positively and negatively but never optimally the social provisioning process.

Conclusion

If mainstream economics suddenly disappeared, heterodox economics would be largely unaffected. It would still include the various heterodox traditions; there would still be an integrated professional and theoretical community of heterodox economists; and its heterodox research agenda would still be directed at explaining the social provisioning process in capitalist economies and argue for economic policies that would enhance social well-being. In this regard, heterodox economics is not out to reform mainstream economics. Rather, it is an alternative to mainstream economics: an alternative in terms of explaining the social provisioning process and suggesting economic policies to promote social well-being. Since the mid-1990s the community of heterodox economics has grown, diversified and integrated. The previously isolated are now part of a community, heterodox associations exist in countries where previously no heterodox associations had existed, and developments in heterodox theory and policy are occurring at breakneck speed. In short, heterodox economics is now an established feature on the disciplinary landscape and the progressive future of economics.

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