From this failure to expunge the microeconomic foundations of neoclassical economics from post-Great Depression theory arose the "microfoundations of macroeconomics" debate, which ultimately led to a model in which the economy is viewed as a single utility-maximizing individual blessed with perfect knowledge of the future. Fortunately, behavioral economics provides the beginnings of an alternative vision of how individuals operate in a market environment, while multi-agent modelling and network theory give us foundations for understanding group dynamics in a complex society. These approaches explicitly emphasize what neoclassical economics has evaded: that aggregation of heterogeneous individuals results in emergent properties of the group, which cannot be reduced to the behavior of any "representative individual." These approaches should replace neoclassical microeconomics completely.
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If you have a sane economy, and by sane economy I mean one which is not addicted to debt, not a Ponzi economy, then the change in debt each year should contribute a minor amount to demand. Therefore, if you tried to correlate debt to the level of unemployment you would not find much of a correlation. Unfortunately that is not the economy we live in.
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If you look at mainstream economics there are three things you will not find in a mainstream economic model - Banks, Debt, and Money. How anybody can think they can analyze capital while leaving out Banks, Debt, and Money is a bit to me like an ornithologist trying to work out how a bird flies whilst ignoring that the bird has wings...
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As Thorstein Veblen correctly surmised over a century ago, the failure of economics to become an evolutionary science is the product of the optimizing framework of the underlying paradigm, which is inherently antithetical to the process of evolutionary change. This is the primary reason why the neoclassical mantra that the economy must be perceived as the outcome of the decisions of utility-maximizing individuals must be squarely rejected.
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Have you heard the joke about the chemist, physicist and economist who get wrecked on a desert isle, with a huge supply of canned baked beans as their only food? The chemist says that he can start a fire using the neighbouring palm trees, and calculate the temperature at which a can will explode. The physicist says that she can work out the trajectory of each of the baked beans, so that they can be collected and eaten. The economist says "Hang on guys, you're doing it the hard way. Let's assume we have a can opener.
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Economics also has to become a fundamentally monetary discipline-from the consideration of how individuals make market decisions through to our understanding of macroeconomics. The myth of "the money illusion" (which can only be true in a world without debt) has to be immediately dispelled, while our macroeconomics have to reflect a monetary economy in which nominal magnitudes matter, precisely because they are the link between the value of current output and the financing of accumulated debt. The dangers of excessive debt and deflation simply cannot be comprehended from a neoclassical perspective. The discipline must also become fundamentally empirical, in contrast to the faux empiricism of econometrics. By this I mean basing itself on the economic and financial data first and foremost-the collection and interpretation of which has been the hallmark of contributions by econophysicists-and by respecting economic history, a topic which has been systematically expunged from economics departments around the world.
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The fallacy that dynamic processes must be modeled as if the system is in continuous equilibrium is probably the most important reason for the intellectual failure of neoclassical economics. Mathematics, science and engineering developed tools long ago to model outside of equilibrium processes. This dynamic approach to thinking about the economy should become second nature to economists.
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Neoclassical economics has effectively insulated itself from the great advances made in science and engineering over the last 40 years. This self-imposed isolation must come to an end. For while the concepts of neoclassical economics appear difficult, they are actually quaint in comparison to the sophistication evident in today's mathematics, engineering, computing, evolutionary biology and physics. In order to advance, economics must humbly submit to learning from disciplines that it has studiously ignored for so long. Some researchers in outside fields have called for the wholesale replacement of standard economics curricula, using at least the building blocks of modern thought inherent in other disciplines.
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An essential pedagogic step here is to relegate the teaching of mathematical methods in economics to mathematics departments. Any mathematical training in economics, if it occurs at all, should come after students have at the very least completed course work in basic calculus, algebra and differential equations (the last being one about which most economists are woefully ignorant). This simultaneously explains why neoclassical economists obsess too much about proofs and why non-neoclassical economists, like those in the Circuit School, experience such difficulties in translating excellent verbal ideas about credit creation into coherent dynamic models of a monetary production economy.
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