Old economists offer the missing pieces of the puzzle for a new economy

Irene van Staveren 2019

The ideas of the renowned economists of the past, such as Keynes or Frank Knight, are very useful in solving major real-world problems of our time, says Professor of Development Economics Irene van Staveren. That is why she wrote the book: Alternative Ideas from 10 (Almost) Forgotten Economists, which was recently published in English. 

In the book, Van Staveren applies the ideas of ten renowned economists (Marx, Minsky, Keynes, Knight, Bergmann, Veblen, Sen, Myrdal, Smith, Robinson) to real-world economic problems. She explains why their – sometimes unknown – economic ideas and models are very relevant today. In addition to providing a bit of history, the book also offers applications and alternatives for today's economy. “Here we can find the tools for shaping a post-capitalist economy.”

Why exactly did you pull out the old economists?

“There is a lot of criticism of the economy at the moment. And rightly so. But I also see a lack of imagination: we keep falling back on tools that we have been using for a long period of time and language that we are familiar with . As if there is no alternative. While, in fact, there are alternatives. The old, sometimes forgotten economists offer ingredients that are needed for a post-capitalist economy.”

Can you cite an example of a theory that is relevant now?

“One example is Frank Knight. In 1917, he wrote his PhD on the difference between risk and uncertainty. That is a fundamental difference that is often ignored today. In today's economy, only risk is considered, because uncertainty cannot be measured. But Knight said: 'There are many uncertainties, if you miss them in your models, you miss a piece of reality'. Risk involves measuring a known number of options. A die has six sides. So you can calculate the probability of throwing six. Uncertainty is the die of which you do not know how many sides it has, nor what is written on it. The focus on uncertainty in the last hundred years has disappeared from economic thinking. This allowed a crisis to occur as it did in 2007 and almost nobody saw it coming.”

Irene Van Staveren introduces new book

Irene van Staveren introduces new book

For which problem in 2021 should we address uncertainty?

“A big uncertainty factor at the moment is climate change. We know it is happening. But we don't know exactly how, or when, it will cross the thresholds or tipping points. One solution is to admit that there is uncertainty. This can be done by working with scenarios. Some companies do that. One could develop a model for each scenario.”

In the case of climate change, the 'worst-case scenario' is pretty bad?

“Yes. If we get the worst-case scenario, things will go seriously wrong. Whole areas on earth will become unliveable because of drought. The Netherlands would be under the sea. Yet this must be taken into account. What are the costs if that happens? And what are the costs of preventing it? We do not know if this worst-case scenario will become reality. But we must take into account that there is a chance. Most economists today are not climate deniers, but they think (or hope) that technology will solve it. As a result, certain scenarios, that take  uncertainty into account, are not included in the models and we don’t know the costs.”

What are the costs of avoiding the worst-case scenario? You need to know

Which economist gives more guidance for a healthy post-capitalist economy?

“Adam Smith is mainly known for his invisible hand: leave the market to itself. But if you read his books carefully, he actually has a different message. He states: every well-functioning economy is an interplay between market, government and community.

Many economists forget the third domain: they say it is an interplay between market and government, in which the market must reign. Smith had a more nuanced vision. The market provides freedom and choice. The government provides justice and equality; think of publicly financed education. The community is important for benevolence. Feminist economists use the term ‘caring’. Every well-functioning economy needs these three domains and the values they provide They also support each other.”

Have we forgotten the third domain?

“Yes, in the dominant economic theory the whole third sector of community and benevolence has been forgotten. When there is a problem like climate change, the common diagnosis now is: it is a market failure. The real price of a healthy climate is not (adequately) reflected in products. Consequently, the common response is that the government then has to solve the market failure, preferably by creating a new market, for example, through the emissions trading system. I think Smith would turn in his grave if he heard this.

One solution from Smith's thinking could be to give much more space to government: for example, by taxing CO2 emissions. And to give space to the community. Think of community farming or urban vegetable gardens. There are examples of neighbourhoods that are financing their own windmills, so that they can generate their own renewable energy

If we don't start looking at alternative economic theories, I fear we will be overtaken by reality

But those initiatives are already there, aren't they?

“In the past, communities did a lot more themselves. Everyone had a vegetable garden. Now you only see that in certain groups of people. Moreover, activities or values such as caring labour in communities or the environmental value of recycling are not included in economic models. That's why I went back to the old economists. I think their ideas are important for economic change.

Frank Knight’s insights would suggest higher buffers for banks today. When the financial crisis broke out in 2007, those buffers were far too low. That is why support was needed from taxpayers.

Keynes is very relevant to a post-pandemic economy. He said: to get out of a crisis, the government has to spend more money and thus increase public debt. But Keynes was precisely the economist whose work has been excluded from economic teaching since the 1990s. Now, we are learning the hard way that the role of government is more than simply redistribution and fixing market failures. Perhaps it would be wise to have a European vaccine developer and public laboratories to develop vaccines quickly and offer them at cost price. It would be wise to consider.

Indeed, if we don't start looking at alternative economic theories, I fear we will be overtaken by reality.”


'Alternative Ideas from 10 (Almost) Forgotten Economists' is available for purchase at Springer Link and other major retailers. 

More information

Irene van Staveren is Professor of Pluralist Development Economics at the Erasmus University. Her key research interest is at the meso level of the economy with topics such as social cohesion, social exclusion, inequality and discrimination, as well as ethics and values in the economy and in economics. She is project leader of the online database, Indices of Social Development.

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