What is heterodox economics? Does it have future?

Some clarifications

Long ago I wrote on the meaning of heterodox economics. I suggested that it should be defined in its own terms, not as a reaction to the mainstream or orthodox approach, and as a unified set of propositions [1]. In other words, heterodox economics would be a set of principles that would be backed by a certain community. Of course, the sociology of that community would lead to some degree of debate and dissent within heterodoxy, as it is in fact the case within the mainstream. There is, one might add, significant confusion about the meaning of marginalist and neoclassical economics, and also there is no monolithic and consensual approach within the orthodoxy. The mainstream is somewhat fragmented, and there are more than a few neoclassical or marginalist schools. Some, like the Austrians, tend to think of themselves as heterodox, and evident confusion.

My preoccupation when I first wrote about this topic had been related to the argument by Colander, Holt and Rosser that heterodox economics should be abandoned, or that the labels orthodox/heterodox themselves meant little or nothing. For them, the mainstream itself was moving on, and that the best within the mainstream, the cutting edge as they called them, were breaking away with traditional neoclassical views. In my reply to them, I suggested that the mainstream was doing fine, and that it was not being abandoned by the best and the brightest. I argued that the mainstream had for a while a dual strategy. It maintained certain principles that purported to show that markets produce efficient outcomes, even if a significant part of the profession does not believe it is true in practice, and then proceeded to discuss a series of imperfections that are better suited for the complexities of the real world.

I should have noted more explicitly that both notions, that markets produce efficient allocation of resources, that the factors of production are fully utilized, and the alternative that suggest that imperfections abound and that inefficiencies are the norm, are firmly based on the marginalist theory of value [2]. One group may think that market imperfections are crucial and favor government intervention, while the other might put more emphasis on government failures, and prefer laissez faire. But for both markets are mechanisms for allocating resources, and they do that more or less efficiently depending on what type of imperfection matters the most. At times one group might have the upper hand, while the other might become more relevant in other circumstances, often associated with real economic crises that force changes in the institutional arrangements that sustain capitalist societies. The 1970s was one such period, the one that gave rise to the heterodox group as a distinctive one, in fact.

The crisis of the real economy, with the collapse of Bretton Woods, the fears about the decline of American Hegemony, and the subsequent stagflation period, brought down the dominant Keynesian Consensus, that was firmly based on a neoclassical interpretation of Keynes, one that implied that imperfections allowed for government intervention. The new Neoliberal Consensus had less space for the more radical elements of the Keynesian Consensus, that agreed that government intervention was necessary, but went further and doubted the very notion that markets were efficient allocators of resources.

The question raised by Geoffrey Hodgson – in a book, and more recently in a debate with his critics on the Journal of Economic Issues – is whether there is any future for this group that emerged in the 1970s, in particular, in the face of the 2008 crisis, that led many to think that the mainstream would vanish [3]. A discussion about the future of heterodoxy must start, however, from the question of how to define heterodox economics, the limitations of Hodgson's critics and his own definition.

Vision or Analysis?

The first issue, if one takes Joseph Schumpeter’s distinction between vision and analysis seriously, is whether the definition should be about the ideological stance or the analytical tools used by heterodox economists. It seems that it is, in fact, the analytical differences between the marginalist mainstream and heterodox economics that matter.

Hodgson starts from a critique of two influential definitions of heterodoxy by Tony Lawson and Fred Lee, both emphasizing methodological and analytical stances. Lawson’s definition relies on the notion of open systems, and a relative preference for qualitative analysis, according to Hodgson. In that sense, Hodgson is not incorrect to point out that some Austrians, like Friedrich Hayek, that use the marginalist theory of value and distribution – meaning they do believe that relative prices, including factors of production, are determined by supply and demand – would be heterodox in that account. Hayek, in his post-1940s intellectual development, emphasized increasingly the role of complexity, unknowability, and showed a dislike for formalization, not dissimilar to certain Post Keynesian (PK) groups. But Austrians and PKs are very dissimilar.

Hodgson then proceeds to discuss Lee’s views, which I think he somewhat mischaracterizes as defining heterodoxy “as incipiently an anti-capitalist movement.” Lee (2012: 340) argued that:

“heterodox economics is a historical science of the social provisioning process… The heterodox explanation involves human agency embedded in cultural context and social processes in historical time affecting resources, consumption patterns, production and reproduction, and the meaning (or ideology) of the market, state and non-market/state activities engaged in social provisioning.”

While I would agree that this is too encompassing and somewhat vague, I would disagree that it hinges fundamentally on vision or ideology, and that for Lee the heterodoxy is fundamentally an anti-capitalist movement, even if clearly it is part of his view [4].

I particularly tend to agree with part of Lee’s notion of heterodoxy, the one that harks back to old classical political economy, and that argues that economics deals with the reproductive needs of society. But I would also agree with Hodgson’s critique of sociological definitions of heterodoxy – the ones that describes the heterodox community, whether along the lines of their left of center political stance or their non-market friendly ideology – seem self-defeating, and incorrect.

This leads to Hodgson’s own definition of heterodoxy, which is built in contrast to the neoclassical or marginalist position. He says, “I characterize orthodox economics in terms of the prevailing assumptions of utility maximization (Max U) and equilibrium. Hence, I suggest that heterodox economics could be defined primarily in terms of opposition to Max U” (Hodgson, 2021: 606). He then discusses fundamentally the notion of utility maximization, leaving issues related to equilibrium aside [5]. This definition has the advantage of clarity, but it is a misleading definition of the marginalist approach to economics, and ultimately provides a flawed view of the heterodoxy.

It is true that one can think of the marginalist approach as a development along the lines of the Benthamite calculus of pleasure and pain, and that the methodological individualistic, to use again a Schumpeterian expression, approach is at the basis of the marginalist approach. In that sense, one can think of the development of marginalism along the Bentham/Stuart-Mill/Marshall line as an alternative to the classical paradigm, and the Ricardo/Marx/Kalecki non-utilitarian tradition [6]. But it is not clear to me that this is Hodgson’s point.

Besides, utility maximization is secondary to the marginalist theory, which is fundamentally about the determination of relative prices by scarcity, by supply and demand, including the prices for capital and labor [7]. Marginalist economics expanded the Ricardian notion of diminishing returns from the extensive use of a naturally scarce resource, land, to the intensive use of other ‘factors of production’, capital and labor. The more intensive use of a factor of production leads to a lower remuneration for that factor of production that is abundant. If the quantity of capital is large, the price of capital, the interest rate, will fall and the demand for capital, investment, adjusts to the level in which it corresponds to full utilization capital. It is true that most marginalist models try to formalize the intertemporal decisions of consumption, i.e. the savings behavior, that might be behind the quantity of capital. But it is not central to the theory. If one assumes a given quantity of capital, the marginalist principle of substitution still works [8]. However, the notion of quantity of capital, central for marginalism, is problematic, to say the least.

Both classical and marginalist models tried to solve the question of relative prices for the same reason. Marginalist authors needed the quantity of capital to explain the interest rate, but the quantity of capital required the discount rate (interest) in advance. The capital debates showed the limits of their solution [9]. Classical authors needed to explain accumulation that depended on the rate of profit (in equilibrium equal to the rate of interest). But to determine the rate of profit one would need the prices of the means of production, the equilibrium prices, determined for a uniform rate of profit. The circularity is the same. The difference is that classical prices do have a solution, as Sraffa demonstrated, that avoids the circularity issues. The classical solution also implies that one distributive variable, real wages for them, must be determined exogenously, by historical and institutional circumstances.

An important consequence of discarding the marginalist theory of value and distribution, is that it implies abandoning the mechanism by which investment adjusts to full employment savings, making possible to adopt the Keynesian Principle of Effective Demand, not just in the short-run as a result of an imperfection. That is why I think my own definition of heterodoxy, which is independent, in fact, of the orthodox story, still makes more sense. Like the one by Hodgson is analytical and revolves around two elements. Heterodoxy requires both the notion that distribution is exogenous – and that is based on the surplus approach theory of value and distribution – and the notion of effective demand in the long run.

Is There a Future for Heterodox Economics?

My definition, like any definition leads to some authors being included and some excluded from heterodoxy. And narrow definitions, like Hodgson or mine, might imply that many authors often considered heterodox might be left out. As a group, the heterodoxy is somewhat eclectic, but I do not see that as a problem or a weakness. Hodgson seems to think that this contrasts with the orthodoxy that would be strong and powerful because of its ability to reach a clear consensus. This is, in my view, the weakest part of his argument [10].

Alessandro Roncaglia has referred to the current state of the discipline, essentially within the mainstream, as an era of fragmentation. I suggested in the debate with Colander and co-authors, that, since the capital debates, there has been a return to vulgar economics. In other words, that economics has returned to something similar to what dominated between the collapse of Ricardian economics in the 1830s and the rise of marginalism in the 1870s. For Marx that was essentially a discourse that abandoned the notion that distribution was conflictive, defending, without analysis, a harmonious view of class relations. Vulgar economics was apologetic of the capitalist system and unscientific. My point was that since the capital debates, and the change in the notion of equilibrium that resulted from it, the mainstream has not only been fragmented, but also has used a dual strategy to maintain its dominance, and is apologetic, dominated by neoliberal views, and unscientific. [11].

On the one hand, the mainstream appeals to the logical consistency of the Arrow-Debreu intertemporal model for analytical rigor, but then, given its sterility, it continues to provide policy advice on the basis of the aggregative model, that has well-known logical problems. There is a disconnect between the core of the marginalist theory, and most subfields, creating fragmentation and confusion. Hence, the notion by Colander and co-authors that the distinction between heterodox and orthodox was not relevant. Everybody is breaking with the mainstream, or at least the best in the profession, the cutting edge, in their view. One can think of the empirical turn, as much as the fragmentation of the mainstream, as a direct result of that dual strategy. The core is irrelevant, other than as a totemic symbol of the proof of market efficiency [12].

Not only the mainstream is fragmented, but most of the practitioners do not even know that they use marginalist or neoclassical economics. Like Monsieur Jourdain, they speak prose without knowing it. The marginalist or neoclassical mainstream has maintained power in spite of the significant lack of consensus, and the fragmentation of their views. Arguably, the fragmentation has been instrumental in the inertia that allows the mainstream to be dominant. It is their ability and flexibility to defend the status quo, like the old vulgar economics, that is, to some extent, the basis for their dominance [13].

In that sense, the lack of complete consensus among the heterodoxy on what is the meaning of heterodox economics is normal, and not very different than the mainstream. It is also healthy, to some extent, and part of the process of doing science, but it does reflect, less helpfully some degree of analytical confusion. In part, this is the result of the fragmentation and confusion of the mainstream, and the fact that many define the heterodoxy as a negation of the mainstream, as Hodgson himself does. Some neoclassical authors are seen as heterodox if they criticize globalization or neoliberal policies, or because it is not evident that they use neoclassical principles. Accepting that there is no consensus within the heterodoxy, like the mainstream, does not undermine its existence.

The idea of a big tent, as discussed by Lavoie, in this context, is very useful, in particular to understand the future of the group, if not necessarily to define it. In many ways, the big tent is important not because it provides a common understanding about who we are as a group or even to provide a sense of purpose. The big tent is important because it is part of a strategy of survival that keeps us reproducing heterodox economists, providing the conferences to present our work, the journals to publish, and the graduate programs that are inclusive and pluralistic to form new generations of heterodox economists.

Heterodox economists, meaning my narrow definition, that know that distribution is conflictive and that demand drives the process of accumulation, are in a reasonably good position by historical standards, and there is little risk that we will go extinct any time soon, which was almost the case in other periods of the history of our discipline. There is no need for a consensus by all participants, and certainly not to gain more power within the profession, which is, ultimately, a chimera. Heterodox economics will remain on the fringes, and there are good ideological reasons for that, but it will not vanish.

Concluding remarks

Marx argued in a preface to his magnus opus, that political economy could be scientific only as long as the class struggle was latent. Essentially, while the notion that distribution was conflictive was tolerated by those in power. That of course was only possible while the bourgeoisie was not in power, or at least it confronted the aristocracy, and not the working class, as its main foe. Vulgar economics, unscientific analysis, was the result of the victory of the bourgeoisie. Ricardo gave way to Bastiat. One can add to Marx’s limits to scientific political economy the problem that after Keynes and Kalecki economics could only remain scientific while those in power accepted that government demand had the potential to generate full employment and maintain it in the long run. Kalecki was more explicit about the political element in favor of austerity policies.

The crisis of capitalism in the interwar period, and the rise of the Soviet system with its alternative to capitalism, provided another period of relatively open and disinterested analysis in political economy. The Keynesian Consensus, in which many radical Keynesians that believed in the importance of conflictive distribution and effective demand in the long run, was the result. The capital debates, with the demonstration that the marginalist notion that markets produce an efficient allocation of resources is not tenable, at least in the sense of full utilization of factors of production, broke the tenuous alliance between more radical disciples of Keynes at Cambridge University, perhaps personified by Joan Robinson, and the mainstream Keynesians in the United States, led by Paul Samuelson and Robert Solow at the Massachusetts Institute of Technology (MIT). It was only when this alliance broke down that heterodox economists were forced out of the traditional departments, and started to publish in alternative journals. The rise of the Neoliberal Consensus explains the segregation of heterodox economics from the rest of the profession.

The alliance behind the Keynesian Consensus era was possible, in part, because the analytical consequences of the Keynesian Revolution and the limits of marginalism were not fully understood. But the consensus was a political one, relevant to support the broadly progressive policies that created the Golden Age of Capitalism [14]. On an analytical level, Paul Samuelson was closer to Milton Friedman than to Joan Robinson or Piero Sraffa. Heterodox economics does best when it maintains its analytical core, which is logically consistent and comprehensive, and engages the more reasonable within the mainstream to discuss policy issues [15]. In a world dominated by vulgar economics, the heterodoxy is what keeps the scientific element of political economy alive.

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[1] This notion that heterodox ideas must be developed independently from the definition of the mainstream has been picked up since then by Ingrid Kvangraven and Carolina Alves.

[2] Incidentally, this was also central in my debate with Philip Mirowski on the definition of Neoliberalism. He purports that Neoliberalism is a movement and, hence, broader than neoclassical economics. My point is that all neoliberals, whether they understand it or not, believe in some sort of notion that markets are either efficient, or at least better than the government in allocating resources. In that sense, all neoliberals hold a view that must be based on some notion that comes from the supply and demand theory of relative prices, and their ability to allocate resources. In other words, all neoliberals defend some version of marginalism, even if they are unaware. In fact, as noted above, many Austrians are so confused that think they are not marginalists, and some authors classify them, incorrectly, but accordingly as heterodox.

[3] I argued a decade ago that the mainstream would not fall as a result of the crisis, and more recently have discussed with skepticism about the notion that Neoliberalism is also in decline.

[4] For Lee’s view go to his paper here.

[5] For Hodgson’s paper go here.

[6] That’s to some extent the point of Milgate and Stimson’s book on the developments in political economy after Adam Smith.

[7] Note that classical authors were concerned with social utility rather than individual, subjective utility. Nobody would produce something that was not useful and for which there would be no demand. Demand was relevant, but the notion was that the changes in demand were slow, and should be analyzed in historical and institutional fashion. In that sense, utility, like rationality plays an important role in both classical (or the surplus approach) and marginalist analysis. But is very different in both. Adam Smith and Marx certainly assume that competition is at work, and that there is some rationality. But it is not the rational maximizing behavior of the individual that matters.

[8] For example, would anyone argue that the Solow growth model, that assumes a given savings rate, is less neoclassical than the Ramsey model because it does not explain endogenously the savings rate as a utility maximization result of consumer behavior? Hodgson’s definition would make Ramsey’s model orthodox, but Solow’s model would be heterodox, since no explicit utility maximization takes place. In fact, many neoclassical synthesis models, with no explicit microfoundations, would be heterodox by that definition.

[9] I discussed the limits of the marginalist notion in my post on the capital debates on my blog here. For Garegnani entry in the New Palgrave go here.

[10] In his own words, he identifies the “weaknesses that prevent [heterodoxy from] organizing more effectively and gaining more power, including the lack of consensus on what heterodox economics means, and the lack of a shared raison d’être” (Hodgson, 2021: 611).

[11] Garegnani was the first to note the importance of the change and the abandonment by the mainstream, at least for theoretical purposes, of the long period method of traditional economics.

[12] The same can be said about the mythical role of the ‘invisible hand’ and why the modern literature connects it, incorrectly, with Arrow-Debreu results, and takes it out of the context in which it was used by Adam Smith.

[13] Lucas and Stiglitz can share significant influence and power within the profession, even if they are completely at odds in almost everything. Many would actually suggest that Stiglitz is heterodox, but he would not be by Hodgson’s or my own definition of heterodoxy, even if he is progressive and left-of-center politically.

[14] The Review of Keynesian Economics (ROKE), of which I am a founding editor, chose that name exactly to suggest that non-hyphenated Keynesianism, a broad sociological consensus, was necessary for policy reasons. The Godley-Tobin lecture that pairs a Cambridge heterodox Keynesian, and a US neoclassical synthesis one, and that was given by heterodox economists like Galbraith, Rowthorn and Lavoie, and mainstream ones like Shiller and Krugman, tries to promote that alliance that existed during the Keynesian era.

[15] For example, not long ago Summers suggested that Post Keynesians (and he cited Tom Palley) were correct on thinking about lack of effective demand rather than imperfections.