A Radical New Approach to the Field of Economics

‟Instead of starting with some idealized world, I started with actual observations.

After 15 years of work economist Anwar Shaikh finished writing Capitalism: Competition, Conflict and Crisis. It provides economics based on "actual observations" instead of the "idealized world" of mainstream economistsHe hopes it will create the "foundation for an alternate curriculum".

Originally published by Public Seminar (May 16, 2016). 
About the author (click)
Anwar Shaikh (1945) has been teaching economics at The New School  for 42 years. Born in Pakistan, previously working with economist Robert Heilbroner and influenced by economists Smith, Ricardo, Marx, Keynes, Pasinetti, Sraffa and "the American Left" (read his full bio here). Many of his publications are freely available on his personal website.

Anwar Shaikh has been teaching economics at The New School for 42 years. One of the world’s leading heterodox economists, he argues that the neoclassical models taught at most universities are bad tools for analyzing capitalism. He hopes that his recent book, Capitalism: Competition, Conflict and Crisis, can be the foundation for an alternative economic theory and pedagogy. He recently sat down with New School student Ebba Boye to talk about this work.

Why did you write this book?

W hen I first entered economics it was with a wish to understand how the world works. I am from Pakistan, I grew up in a part of the world where disparity in wealth was enormous and growth was slow. My father was a diplomat who was posted in many countries so growing up I observed a diversity of peoples, cultures and economies. In Kuwait I observed how they had more money than they could count, and still many were poor and working under very difficult conditions. So I thought that economics would help me explain this. But when I got to economics I realized that the orthodoxy was not dealing with the world that I was interested in, it was dealing with a world of fantasy.

So you had to build up your own economic theory?

Neoclassical economics [the dominant approach in the field today] deals with a world of perfection and rationality. The neoclassical tradition will start with some highly idealized assumptions, and then use these assumptions as building blocks for their theory. A lot of the economic research focuses on changing particular assumptions to make the model more applicable to the reality. But is this not to start [at] the complete wrong end?
‟When I got to economics I realized that the orthodoxy was not dealing with the world that I was interested in, it was dealing with a world of fantasy.
I wanted to go back to my original question, how does the capitalism work? But instead of starting with some idealized world, I started with actual observations, and tried to derive a coherent model. But it has taken time; I have been working [on] this for 35 years and spent 15 years writing this book.

Did you have to start from scratch?

No, I did not. There was a lot to build on from the classical economists Adam Smith David Ricardo, and Karl Marx. I have also continued some of the work of John Maynard Keynes, Joan Robinson, Luigi Pasinetti, Piero Sraffa and Geoffrey Harcourt. The classical tradition began by observing actual patterns and outcomes. The idea is to start from the bottom up, from the actual world that we observe around us, and then build abstractions from there.

In your book you show how it is unnecessary, and also wrong, to construct economic models on the basis of “perfect competition.” Why do you think that so many of the neoclassical models have this as central assumption?

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That is a quite interesting thing. The classical political economists like Smith, Ricardo and Marx all describe, with a lot of detail, what I call “real competition.” Relations between capital and labor, between big and small capital, and between nations, were all conflictual within the classical framework.

The neoclassical economists wanted to show that the system was harmonious, and beneficial for all. So they constructed a framework where these conflicts were all abolished. They presented capitalism as an ideal, harmonious system. Which it is not, of course. But it provides a powerful ideological foundation, or justification, of capitalism.

What are some of the policy implications of the theories presented in your book?

Let me start at the micro level. Competition works. It disciplines individual firms, industries and nations. But it also produces outcomes that are not desirable, especially for those who lose. The first lesson in the book is that we have to understand what these outcomes are, that they represent the natural consequences of capitalist mechanisms. And then if we don’t like these outcomes, the policy question is how do we deal with them?

Free trade in orthodox theory supposedly makes everybody better off, both individuals and nations. Because of the assumption of full employment, if a company or industry is outsourced, workers don’t suffer any disadvantage, because they just move to another job. Of course in practice orthodox economists will admit that there are some discrepancies to this theory, but basically they believe that everyone will end up happier.
‟Free trade in orthodox theory supposedly makes everybody better off. In the classical tradition free trade is a war, because competition is a war. And in every war there are winners and losers.
On the other hand, in the classical tradition free trade is a war, because competition is a war. And in every war there are winners and losers, and the losers can be permanently damaged.

My point is to show that both sides of this story, the advantages and the costs, are natural consequences because they are intrinsic [to] competition.

At the macro level we need to look at the recurring patterns in capitalism, and understand the booms and busts. The strong mechanisms of profit-seeking behavior [both] drive the economy forward, and also throw it into deep crisis.

You were one of the heterodox economists who predicted the economic crisis. What was it about your method that made you see what was coming, while the neoclassicals did not?

First of all, I wasn’t that precise. In my lectures I argued that the crisis would hit around 2008-2009, but as we know it crashed already in 2007-2008.

The problem for the neoclassicals was that they had already concluded that there are no such things as cycles. The market was already perfect. Crises and business cycles happen because of random shocks, not from something intrinsic in the model. Many heterodox economists on the other hand will have models where crises are a natural, and recurrent part of our current economic system.

What does your micro model look like?

By using stochastic models* you can accommodate multiple human behaviors, you don’t need to stick to one. And if we aggregate these behaviors at a sufficient level we end up getting remarkably stable patterns, even though the observation of individuals shows us that people have very different paths. People, being people, can choose to override habitual patterns. For example workers behave differently if they are organized as opposed to when they are competing against each other. That is also part of the social story. And economics should be able to include that from the start. That’s why I say that we have to start with looking at what anthropology tells us, and build our model from there. This might sound complicated, but it´s not. All we are doing is allowing for the complexity of human behavior.

*Editorial note: What is stochastic modeling? (click to expand)⇩
A summary provided by the website Investopedia: "Stochastic modeling is a form of financial modeling that includes one or more random variables. The purpose of such modeling is to estimate how probable outcomes are within a forecast to predict conditions for different situations." See also: a short video about one example of stochastic modeling: the Monte Carlo Simulation.

My argument is that it is possible to make abstract models that can be used to analyze the economy, using a framework that will fit much closer to the knowledge we have of how people actually behave. There is no need for the assumptions made by neoclassical economists.

What are you hoping to achieve by writing this book?

I wish to create a foundation for an alternate curriculum. I hope that other people with the same motivation, facing the same obvious contradiction between the orthodox economics foundation and the world they see, will not have to go through the whole process that I did.

What are your perceptions on how heterodox economic theories are received by the orthodox economic community?

I think mainstream economists since at least the 1980s have closed out all other points of view, by claiming that all other views can be derived [from] within their framework. All they need to do is add a sufficient number of imperfections. This started with Paul Samuelson and the attempt to incorporate Keynesian economics into the orthodoxy by saying that Keynesian outcomes were due to wage rigidities. Then came price rigidities, then interest rate rigidities.
‟I wish to create a foundation for an alternate curriculum.
I have always opposed the idea that real outcomes can be understood [as] imperfections. It seems to me that then you are trapped within the space of perfection, and you always end up going back to it for your reference. I wanted to construct a system that did not depend in any way on any of the standard tropes — no maximizing, no utility as the main motivator of consumer behavior, no price-taking as the definition of competition, no idea that only small firms are competitive. Because [these are] not necessary to make arguments about how the economy works.

Micro is very important. But we don’t need this fictional micro. We need real microeconomics.

Many who criticize the economics field focus on the use of abstract models, and their limitations for understanding the actual world. How do you use models and abstractions in your book?

Abstraction is necessary in any analysis. The issue is how the abstraction is derived. If abstraction is idealization, which I argue is the fundamental root of orthodox theory, that is very different from abstraction as typification.

Galileo [made] an abstraction about the movement of the planets. That abstraction [was] derived from observations. The Western Church had another abstraction. It was not derived from observation, but from an ideological need. And the church tried to close out other views.

I know that you mostly want to talk about the theories in your book. But I really want to hear a bit more about how it is to be in a heterodox economic environment, and how you are met by the neoclassicals.

Of course. Well, when I was in graduate school there was more communication between different viewpoints. People like Paul Samuelson, and many of the other big figures of the time, would all have read the original Keynes and Marx. At Cambridge you could talk to Maurice Dobb on one hand, and then Piero Sraffa and Nicholas Kaldor on the other. They all were educated in the European sense, they had this broad education, and a broad theoretical spectrum.

That spectrum narrowed. The Chicago School and MIT started taking over the profession. This happened especially with the advent of the theory of rational expectations. Suddenly everything that was legitimate had to be cast in their terms, otherwise it was not economics… If you did not build your theories on the same fundamentals as the neoclassical economists, you were simply not counted as a real economist.

And the only way the spectrum for heterodox economists ever grew was when capitalism, unimpressed by economic theory, would exert itself like an earthquake. Then these spaces would open up for a while. Maybe we have such a possibility right now?

Do you have any advice for young economists entering into the heterodox field?

Don’t spend your time complaining about neoclassical economics. That’s a trap. Pretty much everything has been [said]. It’s not enough to be in opposition. I think attention to method is important, but you really have to have vision, a plan. Suppose you were flown in from Mars and you have to analyze capitalism. How would you approach how the system works? You would read what others say, but may also need to start building your theory from a different foundation.


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