Heterodox economics refers to economic theories that diverge from mainstream or neoclassical principles. While most economists accept mainstream economic theories, they tend to rely on neoclassical theories of market equilibriums and rationality.
In contrast, heterodox economics includes more fringe ideologies that go against fundamental neoclassical beliefs. Due to the diverse nature of heterodox economics, many schools of economic thought are heterodox, including institutional, feminist, revolutionary, socialist, Marxian, or ecological theories.
However, most heterodox economic theories are considered irrelevant as they exert limited influence on mainstream economic discussions.
Heterodox economics refers to economic theories that diverge from mainstream or neoclassical principles.
Due to the diverse nature of heterodox economics, many economic ideologies are considered heterodox.
All heterodox economic theories involve a rejection of the neoclassical approach that has become the foundation for mainstream economics.
History of Heterodox Economics
To understand heterodox economics, it’s important to understand the history of neoclassical economics and how it became the dominant economic ideology. After the neoclassical revolution in the 1870s, the theory of supply and demand became the foundation of economic thought and was quickly adopted by most economists.
However, several heterodox schools dissented against neoclassical economics, including followers of mercantilism, socialism, and technocracy. The schools formed the early theories of heterodox economics.
In the 1930s, John Maynard Keynes developed his theory of Keynesian economics, which used demand-side economics to explain the events of the Great Depression.
With the arrival of the Keynesian revolution, economists began to understand that the market forces of supply and demand were insufficient on their own and that government intervention could be used to stabilize the economy.
After 1945, neoclassical ideologies and Keynesian economics came together in an academic movement known as neoclassical synthesis. The merging of these two ideas resulted in a clearly defined theory that encompassed microeconomics (neoclassical) and macroeconomics (Keynesian).
Economists who deviated from the neoclassical synthesis formed heterodox schools, which included Austrians, post-Keynesians, Marxists, and institutionalists.
After the neoclassical synthesis, micro and macroeconomics principles continue to dominate, serving as the generally accepted school of thought for most economists.
However, new research programs involving behavioral, evolutionary, and experimental economics have begun to gain influence, forming new branches of heterodox economics.
Heterodox Rejection of Mainstream Economics
All heterodox economic theories have a common thread, which is a rejection of the neoclassical approach that has become the foundation for mainstream economics. One common critique shared by heterodox theories is the rejection of rationality in economic thought.
In mainstream economics, it is assumed that individuals are rational and make economic decisions to maximize their utility. This assumption of rationality has served as the foundation of neoclassical economic models.
However, heterodox theories reject this idea of rationality and argue that individuals may not always act to maximize utility. Instead, individuals can be influenced by other factors such as coercion, social constraints, or incomplete information.
Another foundation of mainstream economics is the principle of market equilibrium. For economists, it is generally accepted that the forces of supply and demand move prices towards equilibrium, resulting in a market that is Pareto efficient.
However, heterodox economic theories reject this idea, arguing that models involving market equilibriums are inaccurate and do not reflect real-world conditions.
Theories of Heterodox Economics
With heterodox theories diverging and continuing to evolve, it’s impossible to categorize heterodox economics into a single theory. Some of the most notable heterodox economic theories include:
Post-Keynesian theories focus on the original work of John Maynard Keynes, with emphasis on effective demand as a driver of economic performance. Post-Keynesians argue that individual behavior is a result of institutional systems rather than a pursuit to maximize utility.
Instructional economic theories focus on the importance of institutional systems in affecting individual behavior. Under an institutional system, market activity is a result of interactions among various institutions, including corporations, states, individuals, and social norms.
Feminist economic theories focus on policies that account for gender awareness and inclusivity. In addition, feminist economics emphasizes neglected topics in mainstream economic research, such as care work, partner violence, and unpaid sectors of the economy.
Socialist economics focuses on economic theories that enable social ownership of the means of production, where goods are produced for use rather than profit. Under a socialist economic system, the market allocates capital and goods among the population according to their economic units, rather than maximizing productivity.
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