This post is part of a blogging series by economics students at the Presidio Graduate School’s MBA program. You can follow along here.
By Elze van Hamelen Classical economics as a discipline can be traced back to the publication of Adam Smith’s The Wealth of Nations in 1776 (Mark, 2007). It is no coincidence that economics as a science emerged in the Era of Enlightenment, or ‘Age of Reason’.
Coming from an era where religion and concern about the afterlife dominated the lives of people, during the Enlightenment people started to explain and understand their world from a rational standpoint. This resulted in a flourishing of scientific discoveries. As a result the worldview changed: instead of God as the primary goal and end, reason was now seen as the source of ultimate knowledge. This new worldview was causal, mechanistic and deterministic.
Classical economics resonates with these ideas: humans are seen as rational actors, and the movements within the economy can be understood, explained and predicted by causal theories and mathematical formulae. In the last twenty years these assumptions have been challenged: economic theories have not been able to predict, explain or prevent any of the economics downturns we have been through. The theories seem to be less applicable to an understanding of an increasingly complex reality.
In the last decades various perspectives have emerged that have affinity with this increased complexity: complexity theory and systems thinking. It seems as if we can not understand reality by understanding separate elements. Meaning emerges from the interactions between different elements within a system and between systems. The relatively new branch ‘ecological economics’ is congruent with the new complexity and systems paradigm, and takes a break from the mechanical worldview: it does not accept the pre-analytic version of the world assumed by mainstream economics. Within classical economics parts of reality, like the social or ecologic reality are excluded for the sake of theory. The basic tenets of classical economics, rational thinking and the market mechanism, do not stand firm when tested in reality. The comprehensive systems worldview of ecological economics is much better equipped to do so.
For instance, the market mechanism is supposed to produce efficient prices. However, in reality we seldom find perfect markets, resulting in various kinds of market failures, such as externalities, public goods, dilemma of the commons, and monopolies (Daly & Farley, 2007, p. 157). A near sacred belief in the organizing power of markets has brought the global ecology to the edge of collapse (Hawken, 1993). Ecological economics places the economy within the natural environment, thereby searching for solutions for the abovementioned market failures.
Another example: The assumed rationality behind peoples’ choices found many antagonists, such as Herbert Simon. As a sociologist and economist, he instead proposed a theory of ‘bounded rationality’. Goodwin et al (2009) contest that people make individual choices: as social beings, much of our behavior and choices are governed by our social environment. Ecological economics relates economic theory to social perspectives – coming to a theory of economics that is much more credible and in line with reality than the ‘rational choice’ perspective.
Ecological economics will, just as classical economics, not be able to predict the future. However, because it has a more realistic perspective, it will be better able to understand the current developments in the economy. Placing the economy in relation to social and ecological realities puts boundaries to the shapes the economy can take, especially its size. Ecological and social laws are taken into account within this economic paradigm. More importantly, it is better equipped for addressing the problems that the rational and market view have caused.
Blaug, Mark (2007). “The Social Sciences: Economics”. The New Encyclopædia Britannica, v. 27, p. 343
Daly, H., & Farley, J. (2007). Ecological Economics. Principles and Applications. Dehli: Island Press.
Enlightenment. (2008). Encyclopædia Britannica. Deluxe Edition. Chicago: Encyclopædia Britannica.
Goodwin, N., Nelson, J., Ackerman, F., & Weisskopf, T. (2009). Microeconomics in context. New York: M.E. Sharpe.
Hawken, Paul. (1993) The ecology of commerce : a declaration of sustainability.
Simon, Herbert A. (2008). Encyclopædia Britannica. Deluxe Edition. Chicago: Encyclopædia Britannica.