Heterodox economics

Economic theories that contrast with orthodox schools of economic thought

Heterodox economics is any economic thought or theory that contrasts with orthodox schools of economic thought, or that may be beyond neoclassical economics. These include institutional, evolutionary, feminist, social, post Keynesian (not to be confused with New Keynesian),

Economics may be called orthodox or conventional economics by its critics. Alternatively, mainstream economics deals with the "rationality–individualism–equilibrium nexus" and heterodox economics is more "radical" in dealing with the "institutions–history–social structure nexus". A 2008 review documented several prominent groups of heterodox economists since at least the 1990s as working together with a resulting increase in coherence across different constituents. One study suggests four key factors as important to the study of economics by self identified heterodox economists: history, natural systems, uncertainty, and power.

One of the most broadly accepted principles of neoclassical economics is the assumption of the "rationality of economic agents". Indeed, for a number of economists, the notion of rational maximizing behavior is taken to be synonymous with economic behavior (Hirshleifer 1984). When some economists' studies do not embrace the rationality assumption, they are seen as placing the analyses outside the boundaries of the Neoclassical economics discipline (Landsberg 1989, 596). Neoclassical economics begins with the a priori assumptions that agents are rational and that they seek to maximize their individual utility (or profits) subject to environmental constraints. These assumptions provide the backbone for rational choice theory. Many heterodox schools are critical of the homo economicus model of human behavior used in the standard neoclassical model. A typical version of the critique is that of Satya Gabriel:
Neoclassical economic theory is grounded in a particular conception of human psychology, agency or decision making. It is assumed that all human beings make economic decisions so as to maximize pleasure or utility. Some heterodox theories reject this basic assumption of neoclassical theory, arguing for alternative understandings of how economic decisions are made and/or how human psychology works. It is possible to accept the notion that humans are pleasure seeking machines, yet reject the idea that economic decisions are governed by such pleasure seeking. Human beings may, for example, be unable to make choices consistent with pleasure maximization due to social constraints and/or coercion. Humans may also be unable to correctly assess the choice points that are most likely to lead to maximum pleasure, even if they are unconstrained (except in budgetary terms) in making such choices. And it is also possible that the notion of pleasure seeking is itself a meaningless assumption because it is either impossible to test or too general to refute. Economic theories that reject the basic assumption of economic decisions as the outcome of pleasure maximization are heterodox. Shiozawa emphasizes that economic agents act in a complex world and therefore impossible for them to attain maximal utility point. They instead behave as if there are a repertories of many ready made rules, one of which they chose according to relevant situation.

In microeconomic theory, cost minimization by consumers and by firms implies the existence of supply and demand correspondences for which market clearing equilibrium prices exist, if there are large numbers of consumers and producers. Under convexity assumptions or under some marginal cost pricing rules, each equilibrium will be Pareto efficient: In large economies, non convexity also leads to quasi equilibria that are nearly efficient. However, the concept of market equilibrium has been criticized by Austrians, post Keynesians and others, who object to applications of microeconomic theory to real world markets, when such markets are not usefully approximated by microeconomic models. Heterodox economists assert that micro economic models rarely capture reality. Mainstream microeconomics may be defined in terms of optimization and equilibrium, following the approaches of Paul Samuelson and Hal Varian. On the other hand, heterodox economics may be labeled as falling into the nexus of institutions, history, and social structure.

Over the past two decades, the intellectual agendas of heterodox economists have taken a decidedly pluralist turn. Leading heterodox thinkers have moved beyond the established paradigms of Austrian, Feminist, Institutional Evolutionary, Marxian, Post Keynesian, Radical, Social, and Sraffian economics—opening up new lines of analysis, criticism, and dialogue among dissenting schools of thought. This cross fertilization of ideas is creating a new generation of scholarship in which novel combinations of heterodox ideas are being brought to bear on important contemporary and historical problems, such as socially grounded reconstructions of the individual in economic theory; the goals and tools of economic measurement and professional ethics; the complexities of policymaking in today's global political economy; and innovative connections among formerly separate theoretical traditions (Marxian, Austrian, feminist, ecological, Sraffian, institutionalist, and post Keynesian) (for a review of post Keynesian economics, see Lavoie (1992); Rochon (1999)). David Colander, an advocate of complexity economics, argues that the ideas of heterodox economists are now being discussed in the mainstream without mention of the heterodox economists, because the tools to analyze institutions, uncertainty, and other factors have now been developed by the mainstream. He suggests that heterodox economists should embrace rigorous mathematics and attempt to work from within the mainstream, rather than treating it as an enemy. Some schools of heterodox economic thought have also taken a transdisciplinary approach. Thermoeconomics is based on the claim that human economic processes are governed by the second law of thermodynamics. The posited relationship between economic theory, energy and entropy, has been extended further by systems scientists to explain the role of energy in biological evolution in terms of such economic criteria as productivity, efficiency, and especially the costs and benefits of the various mechanisms for capturing and utilizing available energy to build biomass and do work. Various student movements have emerged in response to the exclusion of heterodox economics in the curricula of most economics degrees. The International Student Initiative for Pluralist Economics was set up as an umbrella network for various smaller university groups such as Rethinking Economics to promote pluralism in economics, including more heterodox approaches.