Modern economic thinking
Chapter 2 - Society
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Welcome to the Modern economic thinking page
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The world is not moving towards equilibrium spontaneously. Entropy is the universal law.
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Core ideas
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The Real Economy
Jonathan Levy
He is a historian of economic life in the United States (University of Chicago)
Drawing inspiration particularly from Thorstein Veblen and John Maynard Keynes, he proposes a theory of the economy that is open to rich empirical and historical scrutiny, covering topics that includeː
- the emergence of capitalism,
- the notion of radical uncertainty,
- the meaning of demand,
- the primal desire for money,
- the history of corporations,
- and contemporary globalization.
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He states that we often equate the economy with financial wealth - GDP, stock markets, and capital flows. But wealth is more than money, and money is based on more than labour and capital would be my answer. The real economy is built on multiple forms of wealth, including:
- Natural CapitalːThe Earth’s resources and ecosystems that sustain life
- Human Capital: The skills, knowledge, and well-being of individuals
- Social Capital: The networks and relationships that foster trust and cooperation
- Intellectual Capital: The ideas, innovations, and collective knowledge that drive progress
The key is the interaction between these forms of wealth. The economy is not just about transactions. It’s about how we build, store, and distribute different kinds of capital over time.
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New Economic Thinking
A large economy is one of the best examples we have of complex dynamics. There are multiple components arranged in complicated overlapping hierarchies, out-of-equilibrium dynamics, nonlinear coupling and feedback between different levels, and ubiquitous unpredictable and chaotic behaviour.
| Institute for New Economic Thinking |
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| The Institute for New Economic Thinking at the Oxford Martin School (INET Oxford) is a multidisciplinary research centre dedicated to applying leading-edge thinking from the social and physical sciences to global economic challenges. |
| https://www.inet.ox.ac.uk/ |
| Doyne Farmer on Chaos, Crashes, and Economic Complexity |
| https://www.youtube.com/watch?v=muhbe_153Aw |
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NET developped the SAGE framework
SAGE framework
- S - Solidarity
- The set of psycho-social mechanisms that creates and maintains pro-social group-level functional organisation
- A - Agency
- The exercise of one’s ability to individually or collectively make and enact decisions through one’s effort that are beneficial for life
- G - Gain
- GDP per capita
- E - Environmental connectedness
- The responsible use, protection, and regeneration of the natural environment, aimed at promoting and preserving the health and stability of ecosystems
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These measures adhere to the following principles:
- the measures of economic prosperity should be consistent across countries, enabling cross-country comparisons in the economic, social and environmental dimensions
- the measures of business prosperity should be consistent across companies in these dimensions, enabling comparisons of business and investor performance across these dimensions; and
- the measures of economic and business prosperity should be consistent with one another, enabling a meaningful collaboration between government policy, business strategy and institutional investors within a systemic framework serving the needs and purposes of people, now and in the future
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| Content source |
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| https://www.inet.ox.ac.uk/projects/measuring-prosperity-beyond-gdp |
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Entropy in economics
James K. Galbraith
He is a professor at the Lyndon B. Johnson School of Public Affairs and at the Department of Government, University of Texas at Austin. Recent bookː Entropy Economics: The Living Basis of Value and Production.
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The big problem with mainstream economics is its obsession with a 19th-century illusion: equilibrium. Here’s the gist: general equilibrium theory - the foundation of modern economics - rests on the idea that markets naturally balance themselves over time. It assumes all economies are just a collection of independent markets, each perfectly matching supply and demand.
The general equilibrium theory is rooted in a view of the world that predates late 19th-century physics and biology. It predates Darwin. It predates the second law of thermodynamics. It’s a view of the world that there is some stable state to which we are tending and that we can figure out what it is. This theory leads to some wild assumptions: poor countries are poor because they’re “out of equilibrium,” and prosperity in developed countries proves that free markets work, ignoring that these markets sometimes crash, only to be brushed off as “unpredictable shocks.”
Traditional economists have avoided one essential truth: entropy. In physics, entropy is the force that drives the universe, and it’s fundamental to all living systems, including economies. However, neoclassical economists have stubbornly stuck with equilibrium, even though entropy and equilibrium are incompatible. Entropy is a universal law of nature. Equilibrium is a convenient abstraction.
Entropy
Entropy has to do with resources. Resources are front and centre in our thinking, which is downplayed in mainstream economics. Neoliberalism tends to treat resources as being readily substitutable, one for another, and they’re not. To do anything, you have to be able to extract resources and to do so with a certain degree of surplus.
Entropy explains why it’s so difficult to move to the so-called energy transition. Imagine, you’re looking at trying to replace a very efficient resource, with a big entropic surplus, with something that’s far less efficient, but the entropic surplus is much smaller. The capacity to pull that off is an enormous challenge.
Equilibrium
The second point, equilibrium, concerns the nature of the relationship between markets and government. All living and mechanical systems are effectively regulated. That’s true for your body temperature and your blood pressure. It’s true for the pressure and the temperature in your engine. It’s true of the cooling systems on your reactors. It’s true of the habits, regulations, laws, and constitutions that govern economic societies. These are all of the same general form; without them, you get a meltdown, explosion, or crash. These are metaphors for what happens when you don’t have proper regulation in a remotely complex market system. Markets obviously exist, but they exist under the cover of governments, and as a result, if you try to operate a market without a government, it tends to run out of control and doesn’t last for very long. People will not operate in any complicated market environment unless they feel there is adequate regulation.
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Do you wan to know more?
| Real-world economics review |
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| https://www.paecon.net/ |
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| Economic from the top down |
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| https://economicsfromthetopdown.com/ |
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| Institute for new economic thinking |
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| https://www.ineteconomics.org/ |
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