The linear and symmetric approach of neoclassical economics is elegant, intuitive and very attractive, especially to those in power. However, the global financial crisis showed clearly that we are facing a huge paradigm blindness and therefore a paradigm crisis — said Andrew Sheng, Distinguished Fellow of Asia Global Institute, a Hong Kong-based global think tank in its interview given to Economania.
According to him, we need to change the system of education completely, as competition of ideas and models comes from old school kereskedési stratégia. He says that if the theory is wrong, we must change the theory and admit that this is not the reality which is considered defective if it does not fit the theory.
Kolozsi Pál KP : One of your central theses is that the old neo-classical paradigm does not work anymore. How did you arrive to that conclusion? What are the visible signs of that paradigm-crisis?
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Andrew Sheng AS : The neo-classical paradigm has certain blind spots that is very dangerous if ignored. The two obvious ones are social inequality and climate change, both assumed to be taken care of by politics. So, the reductionist model used in neo-classical has both theoretical weaknesses, as well as uses. This is because financial assets and liabilities are netted out in models of the real economy, but the financial tail can easily wag the real dog.
We also know that because the neoclassical model is laissez faire in approach, it assumed that the system is self-regulated and would revert to equilibrium if disturbed by exogenous shocks. It completely ignored endogenous shocks.
This is a huge logical error. If the economic system is complete, there can be no exogenous shocks. If it is partial, then of course there are exogenous to the partial systembut then your model is incomplete — but it assumes that it is complete.
The global financial crisis showed that the financial system has endogenous conditions that can create very large shocks. These reductionist market models also forget about the institutional structures, including the fact that not only does the market have self-order as Hayek observedbut in practice, large bureaucracies in either government, firms or non-government organisations also have self-order.
This means that institutions have their own interests, different from their owners or managers.
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If you do not factor these into consideration, your models and policy conclusions are going to be very wrong in their outcomes. Of course, the state used the market forces very well, because they learned a bábuknak nem megfelelő opciókról mimic the market prices where the state is uncertain where to move. The institution also learned how to engender competition between firms including state-owned enterprisescities and provinces, in order to push innovation and efficiency gains.
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KP: Why do you think that actually the biggest risk is paradigm risk? AS: I have observed from pilots that those who believe in black-boxes die by such black-boxes. This means that those who rely on instruments, rather than looking for themselves old school kereskedési stratégia the skies look like, will suffer the consequences. A person who has rosy-tinted glasses will always see the world in rosy pink. Hence, if our paradigms are wrong, we will get to wrong conclusions and policy prescriptions.
Kereskedési Stratégia Kiértékelése
The sad part is that even a dead clock is right twice a day! We get back to normal by some slight fine-tuning. That is huge paradigm blindness.
What if the bumps are structural, fractal and fundamental — the whole road has been washed away by climate change natural disaster, the country is in revolution or there will be huge inward or outward migration because of climate change or technology or old school kereskedési stratégia The most dangerous fool is the one who is certain, complacent and wrong. What are the key ingredients and the fundamental differences of these philisophical schools?
AS: Polanyi went to the heart of the logic of the neoclassical model, which is whether you can separate the economics from the social. His fundamental point is that the market is embedded in society, even as society is embedded in nature. You cannot separate them artificially. Therefore, to assume that economics and the market can trade land, labour and capital as if they are rational and would self-regulate is a logical flaw — fiction!
But of course, doctors believed for old school kereskedési stratégia that bleeding would cure patients, so it is not surprising that neoclassical economists believed that free markets would self-correct.
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I must admit that I was a believer, and if the majority believed in the same thing, there is a self-fulfilling prophecy. When things go wrong, it is not the theory that is wrong, it is the bad execution of policy, or the policymakers did not understand the market well enough! The shaman cannot be wholly wrong — that would challenge their credibility.
Sounds familiar? It is easy to criticise, but not easy to give credible and concrete alternatives.
Polanyi was instinctively and logically right, but to find the right balance between state and market is very difficult, so he did not point the right way.
My conclusion is that there is no one-size-fit-all model or solution — each society will have to seek its own balance. From diversity comes competition of ideas and models, so the system as a whole adapts. Taken to its extreme, the neoclassical school became pseudo-science, where the assumptions become self-evident truths.
As you know, old school kereskedési stratégia old school kereskedési stratégia be refuted when new evidence show that these theories are defective. The neo-classical is a big school that covers many different views, and the most theoretical have become cardinals that preach to the converted, ignoring the fact that reality has moved away from their paradigm.
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It took the rise of the periphery economies in Europe to convince the Catholic Church that the Reformation was real, and the church adapted accordingly. The neoclassical school adapted to the Keynesian challenge by absorbing it into quantitative terms. The philosophy of Keynes was interventionist — the market will not clear when there is inadequate aggregate demand.
When Keynesian economics was over-applied, the neoclassical came back with a vengeance, arguing that you should not only cut back fiscally, but also in terms of regulation in almost every field.