New Economic Thinking Research Articles

The economics of wishful thinking and the adventures of rationality

Replying to Queen Elizabeth II who in November 2008 asked why so few economists had warned about the emerging financial crisis, a group of eminent economists of the British Academy, claimed that while this failure had many causes, the most important was principally a failure of the collective imagination of many bright people, to understand the risks to the system as a whole. The paper suggests that this failure is due also to the still heavy influence of the paradigm of rational expectations, that did not provide the intellectual tools to grasp the signs of the impending financial crisis. The paper explores the development of Muth’s rational expectations hypothesis and the parallel development of Simon’s idea of bounded rationality—two opposite views about economic behavior that originated in the same context, during the early 1960s at Carnegie Mellon. It is shown that the latter, while marginalized for decades from the core economic ideas, generated a wide development in cognitive psychology, problem solving and experimental economics that grew up in the last decades and now permit a more profound analysis of human behavior in economic and organizational contexts, that can be the seed of a new thinking in economics. The challenge for economists is to use this new toolbox to incorporate in their models real human behaviors, getting out from the economy of wishful thinking.

How ‘Little’ Outsourcing Creates A Large Skill Premium: A Model of North-to-South Manufacturing Outsourcing

This paper develops a general equilibrium model that shows that a small volume of North–South 11 We use the terminology North–South trade to describe trade between the developed countries (North) and developing countries (South), as is generally understood. trade (i.e. 2% of Northern GDP) could have caused the observed rise in the skill premium, thus resolving the ‘small trade volume paradox’ in the skill premium debate. We apply the concept of ‘trade in tasks’ of Grossman and Rossi-Hansberg to analyze the nature of North-to-South manufacturing outsourcing. As a conceptual innovation, we carefully distinguish two different implicit assumptions of the Heckscher–Ohlin model: ‘factor immobility’ versus ‘task inseparability’. We show that outsourcing, as a form of trade in tasks, essentially attains ‘task separability’ while apparently retaining factor immobility, thus rendering the traditional Heckscher–Ohlin framework obsolete for analyzing current North–South trade. We argue that this change in the nature of trade calls for new thinking in economics and public policy-making.

The ‘new economics’ and policies for financial stability

The purpose of this paper is to consider the policy implications of the ‘new economics’. The focus will be on financial stability as an objective of policy within a more general framework of policies. The theoretical framework upon which we base our policy conclusions is summarised to provide understandings of the operation of the economy and the need for policy interventions, before the main policy implications, the focus of this paper, are discussed. In doing so we argue that an important policy dimension, which has been ignored in the past, is financial stability, a new focus of monetary policy amongst other implications. The theoretical framework upon which we base our policy conclusions tries to avoid the problems encountered by the previously dominant paradigm ‘New Consensus in Macroeconomics’. It represents in this sense ‘new thinking in economics’.

Introduction to the special issue: Economic policies of the new thinking in economics

"Introduction to the special issue: Economic policies of the new thinking in economics." International Review of Applied Economics, 26(2), pp. 145–146

The reduction of the UK budget deficit: a human rights perspective

This paper contributes to new thinking in economics by employing a human rights perspective to examine the budget deficit reduction strategy of the UK coalition government, as set out in 2010 in the June budget and October Spending Review. Focusing on economic and social rights, the paper explains the human rights obligations of governments and key human rights principles. As examples of how they should be applied to examine the deficit reduction strategy, it examines the implications of the policy changes for child poverty and gender equality, and finds that in both cases there is evidence to suggest non-compliance with the human rights obligations of the UK government.

How 'Little' Outsourcing Create Large Skill Premium: A Model of North-to-South Manufacturing Outsourcing

This paper develops a general equilibrium model that shows a small volume of North-South trade (i.e. 2% of Northern GDP) can cause the observed rise in skill premium, thus resolving the “small trade volume paradox” in the skill premium debate. We do this by applying the concept of “trade in tasks” of Grossman and Rossi-Hansberg (2008) to analyze the nature of North-to-South manufacturing outsourcing. As a conceptual innovation, we carefully distinguish two different implicit assumptions of the HO model: factor immobility vs. “task inseparability”. We show that outsourcing, as a form of trade in tasks, essentially attains “task separability” while apparently retaining factor immobility, thus making the traditional HO framework obsolete for analyzing current North-South trade. We argue that this change in the nature of trade calls for new thinking in economics and public policy making.

Market Instability and Economic Complexity: Theoretical Lessons from Transition Experiments

The Washington consensus and shock therapy approach to transition economies ignored the Keynesian lessons from the Great Depression: that market instability is a possibility and there may be an active role of government in managing stability and growth. The severe output decline in East Europe and the former Soviet Union (EEFSU) was triggered by a simplistic policy of liberalisation and privatisation, which ignored many economic complexities and the existence of multiple equilibria under alternative divisions of labour. Issues of fundamental importance, such as the chain reaction between macroeconomic instability and microeconomic behavior, the role of the government in creating learning space in development, interactions between economic openness, sustainable growth, and social stability, can all be revealed from comparative experiments between China and EEFSU. These include the role and impact of exchange rate regimes, price dynamics, trade policies, and reform strategies. The tremendous cost of the Transition Depression sheds new light on theoretical limitations of atomic demand and supply analysis, theory of hard-budget constraints, microfoundations in macroeconomics, and the property rights school in institutional economics. New development policy based on learning, innovation, and decentralised experiments will pave the way for new thinking in complex economics.

Perestroika and the economy: new thinking in Soviet economics

Perestroika and the economy: new thinking in Soviet economics

Conventional and new thinking in defence economics

The necessity of new thinking exists in military matters, but also in what must replace military activity: institutions and policies. Their base must be confidence inspiring, their aim a world without war, with a clean environment, an equitable distribution of welfare over today's world population and over today's and all future generations. Within the framework of these restrictions welfare must be maximised. The means to attain the aim are the institutions which together may be called the Earth's management. This may be the outcome of a completed integration or it may be deliberately organised, preferably by reforms and a strengthening of the United Nations. A World Treasury and a World Police Force should be added to the present set of institutions. Authorities vested with the power to implement supranational decisions are necessary if many countries’ welfare is affected. More development assistance should be financed from savings on arms.

Perestroika and the economy: new thinking in Soviet economics

Perestroika and the economy: new thinking in Soviet economics