new economic theories assignment

A Journal of Ideas

Symposium | beyond neoliberalism, a new economic paradigm, tagged economics neoliberalism.

Thomas Kuhn

In the fall of 2018, University of California, Berkeley economist Emmanuel Saez said, to an audience of economists, policymakers, and the press, “If the data don’t fit the theory, change the theory.” He was speaking about a new data set he developed to show who gains from economic growth, the rise in monopoly and monopsony power, and the resulting importance of policies such as wealth taxes and antitrust regulation. As we in the crowd listened to his remarks, I could tell this was an important moment in the history of economic thought. Saez had fast become one of the most respected economists in the profession—in 2009, he won the John Bates Clark Medal, an honor given by the economics profession to the top scholar under the age of 40, for his work on “critical theoretical and empirical issues within the field of public economics.” And here he was, telling us that economics needs to change.

Saez is not alone. The importance of his comments is reflected in the research of a nascent generation of scholars who are steeped in the new data and methods of modern economics, and who argue that the field should—indeed, must—change. The 2007 financial meltdown and the ensuing Great Recession brought to the forefront a crisis in macroeconomics because economists neither predicted nor were able to solve the problem. But a genuine revolution was already underway inside the field as new research methods and access to new kinds of data began to upend our understanding of the economy and what propels it forward. While the field is much more technical than ever, the increasing focus on what the discipline calls “heterogeneity”—what we can think of as inequality—is, at the same time, undermining long-held theories about the so-called natural laws of economics.

It’s not clear where the field will land. In 1962, the historian of science Thomas Kuhn laid out how scientific revolutions happen. He defined a paradigm as a consensus among a group of scientists about the way to look at problems within a field of inquiry, and he argued that the paradigm changes when that consensus shifts. As Kuhn said, “Men whose research is based on shared paradigms are committed to the same rules and standards for scientific practice. That commitment and the apparent consensus it produces are prerequisites for normal science, i.e., for the genesis and continuation of a particular research tradition.” In this essay, I’ll argue that there is a new consensus emerging in economics, one that seeks to explain how economic power translates into social and political power and, in turn, affects economic outcomes. Because of this, it is probably one of the most exciting times to follow the economics field—if you know where to look. As several of the sharpest new academics—Columbia University’s Suresh Naidu, Harvard University’s Dani Rodrik, and Gabriel Zucman, also at UC Berkeley—recently said, “Economics is in a state of creative ferment that is often invisible to outsiders.”

The Twentieth Century Paradigms

We can demarcate three epochs of economic thinking over the past century. Each began with new economic analysis and data that undermined the prevailing view, and each altered the way the profession examined the intersection between how the economy works and the role of society and policymakers in shaping economic outcomes. In each of these time periods, economists made an argument to policymakers about what actions would deliver what the profession considered the optimal outcomes for society. Thanks in no small part to the real-world successes of the first epoch, policymakers today tend to listen to economists’ advice.

The first epoch began in the early twentieth century, when Cambridge University economist John Maynard Keynes altered the course of economic thinking. He started from the assumption that markets do not always self-correct, which means that the economy can be trapped in a situation where people and capital are not being fully utilized. Unemployment—people who want to work but are unable to find a job—is due to firms not deploying sufficient investment because they do not see enough customers to eventually buy the goods and services they would produce. From this insight flowed a series of policy prescriptions, key among them the idea that when the economy is operating at less than full employment, only government has the power to get back to full employment, by filling in the gap and providing sufficient demand. Keynes’s contribution is often summarized to be that demand—people with money in their pockets ready to buy—keeps the economy moving. For economists, the methodological contribution was that policymakers could push on aggregate indicators, such as by boosting overall consumption, to change economic outcomes.

Keynes explicitly framed his analysis as a rejection of the prevailing paradigm. He begins his The General Theory by decrying the “classical” perspective, writing in Chapter 1 that “[T]he characteristics of the special case assumed by the classical theory happened not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.” He spends the next chapter identifying the erroneous assumptions and presumptions of the prevailing economic analysis and lays out his work as a new understanding of the economy. In short, he argues they were wrong because they assumed that the economy always reverts to full employment.

Many credit the ideas he laid out in The General Theory with pulling our economy out of the depths of the Great Depression. He advanced a set of tools policymakers could use to ensure that the economy was kept as close to full employment as possible—a measure of economic success pleasing to democratically elected politicians. Certainly, the reconceptualization of the economy brought forth by National Income and Product Accounts—an idea Keynes and others spearheaded in the years between World War I and II—shaped thinking about the economy. These data allowed the government, for the first time, to see the output of a nation—gross domestic product (GDP)—which quickly became policymakers’ go-to indicator to track economic progress.

By the late 1960s, Keynes’s ideas had become the prevailing view. In 1965, University of Chicago economist Milton Friedman wrote an essay in which he said, “[W]e are all Keynesians now,” and, in 1971, even Richard Nixon was quoted in The New York Times saying, “I am now a Keynesian in economics.”

Nonetheless, the field was shifting toward a consensus around what has become known as “neoliberalism”—and Friedman was a key player. Keynes focused on aggregates—overall demand, overall supply—and did not have a precise theory for how the actions of individuals at the microeconomic level led to those aggregate trends. Friedman’s work on the permanent income theory—the idea that people will consume today based on their assessment of what their lifetime income will be—directly contradicted Keynes’s assumption that the marginal propensity to consume would be higher among lower-income households. Whereas Keynes argued that government could increase aggregate consumption by getting money to those who would spend it, Friedman argued that people would understand this was a temporary blip and save any additional income. The microfoundations movement within economics sought to connect Keynes’s analysis, which focused on macroeconomic trends—the movement of aggregate indicators such as consumption or investment—to the behavior of individuals, families, and firms that make up those aggregates. It reached its apex in the work of Robert Lucas Jr., who argued that in order to understand how people in the economy respond to policy changes, we need to look at the micro evidence.

Together, these arguments shifted the field back toward focusing on how the economy pushed toward optimal outcomes. What we think of in the policy community as “supply-side” policy was the focus on encouraging actors to engage in the economy. In contrast, demand-side management sought to understand business cycles and was important for recessions, which the Federal Reserve could fix using interest rate policy. In other words, we were back to assuming that the economy would revert to full employment and to what economists call “optimal” outcomes, if only the government would get out of the way.

As the United States neared the end of the twentieth century, there were many indications that this was the right economic framework. The United States led the world in bringing new innovations to market and, up until the late 1970s, America’s middle class saw strong gains year to year. We had avoided another crisis like the Great Depression and our economy drew in immigrants from across the globe. If policymakers focused on improving productivity, the market would take care of the rest—or so economists thought.

The Unraveling

By the end of the twentieth century, a cadre of economists had grown up within this new paradigm. In her recent book, Leftism Reinvented , Stephanie Mudge points to the rise of what she terms the “transnational finance-oriented economists” who “specialized in how to keep markets happy and reasoned that market-driven growth was good for everyone.” But behind the scenes, there was a new set of ideas brewing. For the market fundamentalist argument to be true, the market needs to work as advertised. Yet new data and methods eventually led to profound questions about this conclusion.

My introduction to this work came in the first week of my first graduate Labor Economics course in 1993. The professor focused on a set of then newly released research papers by David Card and Alan Krueger in which they used “natural experiments” (here, comparing employment and earnings in fast food restaurants across state lines before and after one state raised their minimum wage) to examine what happened when policymakers raised the minimum wage. This was an innovation. Prior to the 1990s, most research in economics focused on the model, not the empirical methods. Indeed, Card recently told the Washington Center for Equitable Growth’s Ben Zipperer, “In the 1970s, if you were taking a class in labor economics, you would spend a huge amount of time going through the modeling section and the econometric method. And ordinarily, you wouldn’t even talk about the tables. No one would even really think of that as the important part of the paper. The important part of the paper was laying out exactly what the method was.”

This was not only an interesting and relevant policy question; it also was a deeply theoretical one. Standard economic theory predicts that when a price rises, demand falls. Therefore, when policymakers increase the minimum wage, employers should respond by hiring fewer workers. But Card and Krueger’s analysis came to a different conclusion. Using a variety of data and methods—some relatively novel—they found that when policymakers in New Jersey raised the minimum wage, employment in fast food restaurants did not decline relative to those in the neighboring state of Pennsylvania. Their research had real-world implications and broke new ground in research methods; it also brought to the fore profoundly unsettling theoretical questions.

When Card and Krueger published their analysis, “natural experiments” were a new idea in economics research—and Card gives credit to Harvard economist Richard Freeman as “the first person” he heard use the phrase. These techniques, alongside other methods, allowed economists to estimate causality—that is, to show that one thing caused another, rather than simply being able to say that two things seem to go together or move in tandem. As Diane Whitmore Schanzenbach at Northwestern University told me, “In the last 15 or 20 years or so, economics—empirical economics—has really undergone what we call the credibility revolution. In the old days, you could get away with doing correlational research that doesn’t have a format that allows you to extract the cause and effect between a policy and an outcome.”

The profession was not immediately comfortable with Card and Krueger’s research, balking at being told the world didn’t work the way theory predicted. Their 1995 book, Myth and Measurement , contained a set of studies that laid bare a conundrum at the core of economic theory. The reception was cold at best. At an event at Equitable Growth to mark the twentieth anniversary edition, Krueger recalled a prominent economist in the audience at an event for the first edition saying, “Theory is evidence too.” Indeed, when Krueger passed away in March, his obituary in The Washington Post quoted University of Chicago economist James J. Heckman, who in 1999 told The New York Times, “They don’t root their findings in existing theory and research. That is where I really deviate from these people. Each day you can wake up with a brand new world, not plugged into the previous literature.”

History tells a different story. Card and Krueger would go on to become greats in their fields and lead a new generation of scholars to new conclusions using innovative empirical techniques. Krueger’s recent passing earlier this year illustrated the extent of this transformation in economics. The discipline is now grounded in empirical evidence that focuses on proving causality, even if that does not conform to long-standing theoretical assumptions about how the economy works. New methods, such as natural or quasi experiments that examine how people react to policies across time or place, are now the industry standard.

While in hindsight it might seem incredible that this discipline could have existed without these empirical techniques, their widespread adoption only came late in the twentieth century, alongside the dawn of the Information Age and advances in empirical methods, access to data, and computing power. As one journalist put it, “[N]umber crunching on PCs made noodling on chalkboards passé.” One piece of evidence for this is that the top economics journals now mostly publish empirical papers. Whereas in the 1960s about half of the papers in the top three economics journals were theoretical, about four in five now rely on empirical analysis—and of those, over a third used the researcher’s own data set, while nearly one-in-ten are based on an experiment. Card and Krueger connect their findings to another game-changing development—the emergence of a set of ideas known as behavioral economics. This body of thought—along with much of feminist economics—starts from the premise that there is no such thing as the “rational economic man,” the theoretical invention required for economic theory to work. Krueger put it this way:

The standard textbook model, by contrast, views workers as atomistic. They just look at their own situation, their own self-interest, so whether someone else gets paid more or less than them doesn’t matter. The real world actually has to take into account these social comparisons and social considerations. And the field of behavioral economics recognizes this feature of human behavior and tries to model it. That thrust was going on, kind of parallel to our work, I’d say.

This is the definition of a paradigm shift. As a result of these changes, empirical research is now the route to join those in the top echelons of economics. While this may seem like a field looking within, it also appears to be a field on the cusp of change. Kuhn talks about how as a field matures, it becomes more specialized; as researchers dig into specific aspects of theory, they often then uncover a new paradigm buried in fresh examinations of the evidence. This kind of research commonly elevates anomalies—findings that don’t fit the prevailing theory.

How we make sense of this new empirical analysis will define the new paradigm. The policy world has been quick to take note of key pieces of this new body of empirical research. Indeed, evidence-backed policymaking has become the standard in many areas. But the nature of a paradigm shift means that policymakers are in need of a new framework to make sense of all the pieces of evidence and to guide their agenda. We can see this in current policy debates; while conservatives continue to tout tax cuts as the solution to all that ails us, the public no longer believes this to be the true remedy. Whether that means the agenda being discussed in many quarters to address inequality, by taxing capital and addressing rising economic concentration, will become core to the new framework remains to be seen.

A New Vision

A new focus on empirical analysis doesn’t necessarily mean a new paradigm. The evidence must be integrated into a new story of what economics is and seeks to understand. We can see something like this happening as scholars seek to understand inequality—what economists often refer to in empirical work as “heterogeneity.” Putting inequality at the core of the analysis pushes forward questions about whether the market performs the same for everyone—rich and poor, with economic power or without—and what that means for how the economy functions. It brings to the fore questions that cannot be ignored about how economic power translates into social power. Most famously, in Capital in the Twenty-First Century , Thomas Piketty brings together hundreds of years of income data from across a number of countries, and concludes from this that powerful forces push toward an extremely high level of inequality, so much so that capital will calcify as “the past tends to devour the future.”

That rethinking is happening right now. At January’s Allied Social Science Association conference—the gathering place for economists across all the sub-fields—UC Berkeley’s Gabriel Zucman put up a very provocative slide, which said only “Good-bye representative agent.” This slide was as revolutionary as Card and Krueger’s work decades before because it implied that we should let go of the workhorse macroeconomic models. For the most part, policymakers rely on so-called “representative agent models” to inform economic policy. These models assume that the responses of economic actors, be they firms or individuals, can be represented by one (or maybe two) sets of rules. That is, if conditions change—for example, a price rises—the model assumes that everyone in the economy responds in the same way, regardless of whether they are low income or high income. Moody’s Analytics houses a commonly cited economic model, led by economist Mark Zandi, who confirms this: “Most macroeconomists, at least those focused on the economy’s prospects, have all but ignored inequality in their thinking. Their implicit, if not explicit, assumption is that inequality doesn’t matter much when gauging the macroeconomic outlook.”

But these workhorse models of macroeconomics underperformed—to put it mildly—in the run up to the most recent financial crisis. They neither predicted the crisis nor provided reasonable estimates of economic growth moving forward as the Great Recession hit and then the slow recovery began. When Zandi integrated inequality into the Moodys macroeconomic forecasting model for the United States, he found that adding inequality to the traditional models—ones that do not take into account economic inequality at all—did not change the short-term forecasts very much. But when he looked at the long-term picture or considered the potential for the system to spin out of control, he found that higher inequality increases the likelihood of instability in the financial system.

This research is confirmed in a growing body of empirical work. This spring, International Monetary Fund economists Jonathan D. Ostry, Prakash Loungani, and Andrew Berg released a book pulling together a series of research studies showing the link between higher inequality levels and more frequent economic downturns. They find that when growth takes place in societies with high inequality, the economic gains are more likely to be destroyed by the more severe recessions and depressions that follow—and the economic pain is all too often compounded for those at the lower end of the income spectrum. Even so, as of now, most of the macroeconomic models used by central banks and financial firms for forecasting and decision-making don’t take inequality into account.

Key to any paradigm change is that there’s a new way of seeing the field of inquiry. That’s where Saez, along with many co-authors, including Thomas Piketty and Gabriel Zucman, are making their mark. They have created what they call “Distributional National Accounts,” which combine the aggregate data on National Income so important to the early twentieth century paradigm, with detailed data on how that income is allocated across individuals—incorporating the later-twentieth-century learning—into a measure that shows growth and its distribution. As Zucman told me, “We talk about growth, we talk about inequality; but never about the two together. And so distribution of national accounts, that’s an attempt at bridging the gap between macroeconomics on the one hand and inequality studies on the other hand.”

Congress seems to have gotten the message. The 2019 Consolidated Appropriations Act, which opened the government after a record 35-day shutdown, included language “encourag[ing]” the Bureau of Economic Analysis to “begin reporting on income growth indicators” by decile at least annually and to incorporate that work into its GDP releases if possible. In this way, step by step, new economic paradigms become new policymaking tools.

From the Symposium

Beyond neoliberalism, the moral vision after neoliberalism, 16 min read, read more about economics neoliberalism.

Heather Boushey is President and CEO of the Washington Center for Equitable Growth and author of Unbound: How Inequality Constricts Our Economy and What We Can Do About It .

Also by this author

Which side are we on, view comments.

21st century crises demand new economic understanding, say top economists

Leading economists, including Nobel laureate Joseph Stiglitz, Argentina's Minister of Economy Martin Guzman, as well as academics from Oxford, Yale, Columbia, and UCLA, are calling today for a deep shift in how economists understand the overall economy. According to the new thinking, a series of massive economic shocks have left traditional economic theory in pieces and the old macroeconomic paradigm is on its way out.  

Oxford Professor David Vines says, ‘The old model of ‘macroeconomics’ was built for a stable world free from large economic shocks. If we ever lived in such a world, we no longer do.’

The old model of ‘macroeconomics’ was built for a stable world free from large economic shocks. If we ever lived in such a world, we no longer do Professor David Vines

Summarising the Rethinking Macroeconomics project in the  Oxford Review of Economic Policy , Oxford economists Professor David Vines and Dr Samuel Wills call for a shift away from the assumptions which have underpinned economic theory for decades – and which do not meet today’s challenges.  They argue a more open, more diverse, paradigm is emerging, which is far better equipped to deal with contemporary challenges such as the global financial crisis, climate change and COVID. 

Professor Vines and Dr Wills argue that the old macroeconomic paradigm is being replaced by an approach which is less tied to idealised theoretical assumptions, takes real-world data more seriously,  and is, therefore, far better suited to dealing with 21 st century challenges.  

Dr Wills says, ‘This shift [in thinking] breaks with more than a century of macroeconomic thinking and has wide-ranging implications for economic thought and practice.’

This shift [in thinking] breaks with more than a century of macroeconomic thinking and has wide-ranging implications for economic thought and practice Dr Samuel Wills

Professor Vines adds, ‘An economic model that cannot handle serious shocks is like a medical science that does not study major disease outbreaks; it is likely to let us down at the most critical of moments. The old economic model has already failed us badly in the 21 st century’.

Since the 2008 global financial crisis, which was not seen coming by most macroeconomists, the field has undergone a difficult decade. Its reputation was not helped by the slow and weak recovery from the 2008 crisis, which most observers now agree was made worse by world-wide austerity policies. 

Macroeconomics has been dominated by one core approach for the last two decades: the ‘New Keynesian Dynamic Stochastic General Equilibrium’ (NK-DSGE) model. While this remains the profession’s generally accepted framework, the contributors to this issue of the  Oxford Review of Economic Policy  argue it is no longer fit for purpose.

According to today’s journal issue, the NK-DSGE model is unsuited to understanding large economic shocks. At the heart of the old model is the assumption that all disturbances are temporary and the economy eventually returns to one stable ‘equilibrium’, in which it continues to grow. This assumption makes it badly unsuited to studying large crises and transitions which see unemployment multiply and financial systems in crisis.

Professor Vines insists, ‘The old core assumption that the economy returns to one equilibrium point is a major diversion from reality. If we want an economics up to the challenges of the twenty first century, it is crucial the discipline understands the possibility of multiple economic equilibria.’

The old core assumption that the economy returns to one equilibrium point is a major diversion from reality...it is crucial the discipline understands the possibility of multiple economic equilibria Professor Vines

The NK-DSGE model is also built on over-idealised foundations. The old model is built on a set of assumptions about how people act in the economy and why: it assumes people are always well informed, rational, and dedicate all their attention and effort towards one particular goal.  

Dr Wills maintains, ‘This analytical straight-jacket means the old paradigm refuses to recognise that we all act under uncertainty about the future when we make economic decisions, and that our decisions are therefore always shaped by our best guesses, habits, and rules of thumb.’   

Professor Vines and Dr Wills have named the newly-emerging macroeconomic paradigm ‘MEADE’: Multiple Equilibrium and DiversE (in recognition of the Nobel prize-winning economist James Meade). The new approach studies how multiple economic equilibria can arise and uses wide range of different kinds of models to understand what policymakers can do.  

Professor Vines says, ‘This new paradigm has far deeper roots in the real world: it stresses the need for models based on detailed empirical understandings of how the economy actually is, rather than how it theoretically should be.  

‘Just as doctors only build up a full understanding of how a body is functioning using a whole host of empirically-grounded diagnostic tools, so economists must build up a full understanding of how economies function using a wide range of empirically-grounded tools and models.

‘Placing too much weight on the old, overly idealised model has blinkered macroeconomics; the blinkers are now coming off, and we want to speed this change along.’ 

DISCOVER MORE

• Support Oxford's research
• Partner with Oxford on research
• Study at Oxford
• Research jobs at Oxford

You can view all news or browse by category

1.3 How Economists Use Theories and Models to Understand Economic Issues

Learning objectives.

By the end of this section, you will be able to:

• Interpret a circular flow diagram
• Explain the importance of economic theories and models
• Describe goods and services markets and labor markets

John Maynard Keynes (1883–1946), one of the greatest economists of the twentieth century, pointed out that economics is not just a subject area but also a way of thinking. Keynes ( Figure 1.6 ) famously wrote in the introduction to a fellow economist’s book: “[Economics] is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.” In other words, economics teaches you how to think, not what to think.

Watch this video about John Maynard Keynes and his influence on economics.

Economists see the world through a different lens than anthropologists, biologists, classicists, or practitioners of any other discipline. They analyze issues and problems using economic theories that are based on particular assumptions about human behavior. These assumptions tend to be different than the assumptions an anthropologist or psychologist might use. A theory is a simplified representation of how two or more variables interact with each other. The purpose of a theory is to take a complex, real-world issue and simplify it down to its essentials. If done well, this enables the analyst to understand the issue and any problems around it. A good theory is simple enough to understand, while complex enough to capture the key features of the object or situation you are studying.

Sometimes economists use the term model instead of theory. Strictly speaking, a theory is a more abstract representation, while a model is a more applied or empirical representation. We use models to test theories, but for this course we will use the terms interchangeably.

For example, an architect who is planning a major office building will often build a physical model that sits on a tabletop to show how the entire city block will look after the new building is constructed. Companies often build models of their new products, which are more rough and unfinished than the final product, but can still demonstrate how the new product will work.

A good model to start with in economics is the circular flow diagram ( Figure 1.7 ). It pictures the economy as consisting of two groups—households and firms—that interact in two markets: the goods and services market in which firms sell and households buy and the labor market in which households sell labor to business firms or other employees.

Firms produce and sell goods and services to households in the market for goods and services (or product market). Arrow “A” indicates this. Households pay for goods and services, which becomes the revenues to firms. Arrow “B” indicates this. Arrows A and B represent the two sides of the product market. Where do households obtain the income to buy goods and services? They provide the labor and other resources (e.g., land, capital, raw materials) firms need to produce goods and services in the market for inputs (or factors of production). Arrow “C” indicates this. In return, firms pay for the inputs (or resources) they use in the form of wages and other factor payments. Arrow “D” indicates this. Arrows “C” and “D” represent the two sides of the factor market.

Of course, in the real world, there are many different markets for goods and services and markets for many different types of labor. The circular flow diagram simplifies this to make the picture easier to grasp. In the diagram, firms produce goods and services, which they sell to households in return for revenues. The outer circle shows this, and represents the two sides of the product market (for example, the market for goods and services) in which households demand and firms supply. Households sell their labor as workers to firms in return for wages, salaries, and benefits. The inner circle shows this and represents the two sides of the labor market in which households supply and firms demand.

This version of the circular flow model is stripped down to the essentials, but it has enough features to explain how the product and labor markets work in the economy. We could easily add details to this basic model if we wanted to introduce more real-world elements, like financial markets, governments, and interactions with the rest of the globe (imports and exports).

Economists carry a set of theories in their heads like a carpenter carries around a toolkit. When they see an economic issue or problem, they go through the theories they know to see if they can find one that fits. Then they use the theory to derive insights about the issue or problem. Economists express theories as diagrams, graphs, or even as mathematical equations. (Do not worry. In this course, we will mostly use graphs.) Economists do not figure out the answer to the problem first and then draw the graph to illustrate. Rather, they use the graph of the theory to help them figure out the answer. Although at the introductory level, you can sometimes figure out the right answer without applying a model, if you keep studying economics, before too long you will run into issues and problems that you will need to graph to solve. We explain both micro and macroeconomics in terms of theories and models. The most well-known theories are probably those of supply and demand, but you will learn a number of others.

As an Amazon Associate we earn from qualifying purchases.

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Access for free at https://openstax.org/books/principles-economics-3e/pages/1-introduction

• Authors: Steven A. Greenlaw, David Shapiro, Daniel MacDonald
• Publisher/website: OpenStax
• Book title: Principles of Economics 3e
• Publication date: Dec 14, 2022
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-economics-3e/pages/1-introduction
• Section URL: https://openstax.org/books/principles-economics-3e/pages/1-3-how-economists-use-theories-and-models-to-understand-economic-issues

© Jan 23, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.

"A multidisciplinary forum focused on the social consequences and policy implications of all forms of knowledge on a global basis"

We are pleased to introduce Eruditio, the electronic journal of the World Academy of Art & Science. The vision of the Journal complements and enhances the World Academy's focus on global perspectives in the generation of knowledge from all fields of legitimate inquiry. The Journal also mirrors the World Academy's specific focus and mandate which is to consider the social consequences and policy implications of knowledge in the broadest sense.

Eruditio Issues

Volume 2 issue 1.

• Volume 2 Issue 2
• Volume 2 Issue 3
• Volume 2 Issue 4
• Volume 2 Issue 5
• Volume 2 Issue 6
• Volume 3 Issue 1

Editorial Information

• Editorial Board
• Author Guidelines
• Editorial Policy
• Reference Style Guide

World Academy of Art & Science

• Publications
• Events & News

Introduction to the New Paradigm of Political Economic Theory

ARTICLE | November 27, 2015 | BY Winston P. Nagan

This short article is an attempt to provide a reasonably simplified introduction to a complex initiative. Influential Fellows in the World Academy of Art and Science, moved in part by the global crisis of unemployment and a conspicuous lack of theoretical engagement that might constructively respond to the problem, came to the conclusion that the reason for the silence of intellectual concern was because there was a dire need for new thinking about the importance of political economy and its salience for a defensible world order. Leading figures in the Academy, such as Orio Giarini, Ivo Šlaus, Garry Jacobs, Ian Johnson, and many others, have diligently worked on a new economic framework with the focus of the centrality of human capital as a critical foundation for economic prosperity.

This article seeks to contribute to a clear and more simplified description of the fundamental paradigms of traditional and emerging economic order. It seeks to set out the paradigmatic contours of classical theory, it moves from classical theory (the old normal) to the new normal in neoliberalism and then recommends a framework for the future that borrows from the new paradigm thinking of jurisprudence. It applies and summarizes these ideas as guidelines for the development of a theory about political economy as an inquiring system with a comprehensive focus and a fixed concentration on human-centered approach for the future. This approach summarizes articles the author wrote for Cadmus. *

1. The Background to Basic Theory and its Roots in laissez-faire

Economic Theory is a disputed field of intellectual endeavor. The stakes implicated in economic theory development are high and as a consequence theory is a contested domain. The contestation is intensified because the dominance of a particular theory will influence the social impact of that theory on human relations and this in turn will invite policy interventions and policy consequences. Within the arena of theoretical contestation, there has emerged a new normal for economic theory. We may regard this new normal as the conventional paradigm of economic theory. The new normal has come with various terms of identification, but the one that seems to be ascendant is encapsulated in the phrase “economic neoliberalism.” In a sense, economic neoliberalism draws powerful inspiration from the earliest iterations of the nature of economic activity. In the 18 th century, French officials adopted and popularized a phrase that would serve as both an empirical description of ideal economic exchanges, as well as a preferred model for the structure and function of the arena within which economic activity happened. The phrase was laissez-faire . In practice, this meant that the state should reduce its regulatory control over economic interactions within the body politic. The less regulation, the less interference there would be in the arena of economic activity. Less interference meant increased dynamism in the arena of economic productivity, distribution, and exchange.

In the latter part of the 18 th century, the moral philosopher Adam Smith published his famous book, The Wealth of Nations . Smith was aware of the principle of laissez-faire that had emerged in French practice. Indeed, he found this idea compatible with the theory of economic enterprise that was developed in his book. Smith provided both a description of how economics worked, and by implication, provided a justification for the importance of his model in improving the level of economic prosperity in society. Adam Smith was preeminently a moral philosopher with profound economic insight. In his book, The Theory of Moral Sentiments , he noted that the specialized capacities of human beings were not a matter coordinated by centralized authority and control. On the contrary, it was influenced by something more impersonal—the market. By the pursuit of economic self-interest and the system of pricing, human beings and their capacities are led to meet the needs of others, who they do not know and by mechanism, they do not comprehend.

The genius of Smith’s work lay in its simplicity using common sense ideas to sustain a level of understanding of the workings of economic order. Economic relations encompassed the supplier of goods and services and the demander of goods and services. The goods and services constituted property that was exchanged between supplier (S) and demander (D). The arena of this exchange between S & D was the market, which established a natural equilibrium when it functioned optimally and satisfied the self-interests of both S & D. We may look at Smith’s model as the old normal of economic theorizing. The importance of this model is its reinvention for the new normal model of economic neoliberalism.

2. The Influence of Value-Free Positivism

We must carefully remind ourselves that Adam Smith was at heart a moral philosopher. This particular understanding of the role of the market became a central feature of his work, largely because subsequent economists committed to the positivist approach to the study of economics received no inspiration to moderate the dynamics of autonomous market, with the untidy implications of collective and individual social responsibility. Vitally important to this approach was its strenuous justification of insulating economics from social reality and social responsibility. Indeed, positivism as a science went much further. It excluded normative discourse and its value implications because values were essentially non-science. At the time, there did not exist a credible science of society as well. Adam Smith’s theoretical meditations did not subscribe to this as modern scholarship has amply demonstrated. † Braham has isolated four precepts in the corpus of Smith’s writings which clarify this issue. First, there is the assumption that when people are left alone to pursue their own interests, there rides along with this dynamic an invisible hand that indicates that society will benefit from this conduct as a whole. This idea is moderated by Smith’s moral egalitarianism, which implies that every person has equal moral worth. This brings us to Smith’s ideas of social justice, which are connected to moral egalitarianism. Here Smith was deeply influenced by the jurisprudence of natural law. Natural Law makes a distinction between commutative justice and distributive justice. In the latter, justice is done according to the right one has to compensate for a legal wrong done. The former is more complex. Smith’s work is permeated with discussions of the foundations of distributive justice.

Following this classical tradition, distributive justice is equated with beneficence, the application of ‘charity and generosity’ based on an individual or social assessment of ‘merit.’ Under this notion the rules that assign particular objects to particular persons, which is the nub of the concept of distributive justice, is a private and not a public matter or one of social norms; it is not a duty of the society at large and no one has a claim in morality against others to alleviate their condition. Smith subsumes this notion of justice under ‘all the social virtues’. ‡

Under the influence of the old normal model of economic theorizing, modern science added an important dimension to the evolution of the old model. In the early 19 th century, the social sciences and law came under the influence of positivism. The positivist impulse was meant to bring intellectual rigor, a rigorous commitment to objectivity, and an insistence that scientific inquiry be completely separated from inquiry into values, morals, and ethics. The influence of science and mathematics on economics has been enormous. Credible scientific work in economics required a reliance on mathematics and mathematical abstractions. This tended to remove theory from the critical scrutiny of intellectuals untrained in mathematics.

In the context of infusing complex mathematical equations into the theory of economics, the trend led to a greater formalization of economic theory and as a consequence, the formalistic emphasis was further abstracted from the concrete conditions of social life and human problems. Moreover, the principle that the market established an abstract equilibrium of absolute efficiency seemed to be conventional wisdom in policy-making circles. This approach to economic organization received a severe setback between 1929 and 1933. The conventional wisdom at the time was that the laissez-faire approach to a weakly regulated economy was the cause of the Great Depression, and there was no natural force within the market to self-regulate the economy out of the Depression. In later years a single American economist, Milton Friedman, claimed that the Depression was not a failure of the free natural market, but rather a failure of government policy. The government did not sufficiently monetize the economy and within three years the amount of money in the economy was reduced by a third. This he claimed was the cause of the Depression and not the fidelity to a weakly regulated market.

3. The New Normal in Economic Theory: Economic Neoliberalism − Milton Friedman and the University of Chicago’s Economic Department

Milton Friedman is generally acknowledged to be the architect of the New Normal Paradigm of economic thinking. He was a leader of the University of Chicago’s Economics Department, which was the institutional base for the New Normal Paradigm. The two significant influences that had emerged in particular after the Second World War was the Keynesian influenced American New Deal and the reach of Stalin’s influence in Eastern Europe. From the perspective of Friedman and his colleagues, the New Deal was a form of creeping socialism, and an indirect threat to freedom. With regard to Stalin’s socialism and its extinction of private property, the Stalinist State control of the economy was quite simply an extinction of freedom. In 1947, Friedrich von Hayek, Milton Friedman, and others formed the Mont Pelerin Society to address these questions intellectually.

The fundamentals of economic neoliberalism insist upon a radical privatization of property and value in society. In short: if a matter may be privatized, it should be privatized. Additionally, economic neoliberalism favored the notion of the minimal state. In short: the more deregulation and limitation on the state’s power to regulate, the better. A strong belief in corporate tax cuts and reduced taxes for the wealthy. A strong belief in trade liberalization and open markets. Finally, with regard to the minimal state, there would be a massive diminution of the role of government in society: The writer Tayyab Mahmud describes economic neoliberalism as follows:

The neoliberal project is to turn the “nation-state,” one with the primary agenda of facilitating global capital accumulation unburdened from any legal regulations aimed at assuring welfare of citizens. In summary, neoliberalism seeks unbridled accumulation of capital through a rollback of the state, and limits its functions to minimal security and maintenance of law, fiscal and monetary discipline, flexible labor markets, and liberalization of trade and capital flows.

Friedman made several strong arguments as to why governmental intervention into the market is generally futile, or leaves the economy worse than it was without the intervention. These arguments were formed around the ideas of adaptive expectations and rational expectations. With regard to adaptive expectations, Friedman demonstrated that the government printing money increased inflation and businessmen neutralized the rate of increase in the money supply by predicting it. The rational expectations argument was based on the idea that the market would predict and undermine government intervention. These ideas were meant to show that markets are indeed self-regulating and that regulation is both unnecessary and dysfunctional. There are a vast range of critiques of economic neoliberalism, but the critique of N. Chomsky seems to be one of the most compelling.

Neoliberalism is actually closer to corporatism than any other philosophy in that, in its abandonment of the traditional regulatory function of the state and embracing of corporate goals and objectives, it cedes sovereignty over how its economy and society and are organized to a global cabal of corporate elite.

Since the economic crisis of 2008, the criticisms of economic neoliberalism have also focused on the deregulation of the global financial system. The critique of the financial system is that it is organized along the lines of a gambler’s nirvana. Additionally, this is an economic model that could not predict the financial catastrophe that was to accompany the crisis. The consequences of the theory and its practice have also led to a global crisis of radical inequality. In addition, the consequences of the theory would reflect on its absence of a credible theory of sustainable development. This is a theory that resists the concern of the impact of the economy on environmental degradation and climate change. Finally, the radical exclusion of values from economic theory means that the assignment of responsibility to the private sector for mismanagement and dangerous conduct is undermined.

The central thrust of our emphasis is to deemphasize the abstract formalism of economic neoliberalism pseudoscience and to develop a comprehensive theory for inquiry into economic phenomena from the local to the most comprehensive Earth-Space context. We recognize that putting theory into the most comprehensive context generates complexity and a critical need for expeditious knowledge integration. In short, economics should be enriched and informed by sociology, anthropology, political science, the psychological sciences, as well as lessons from the enhanced methods of the physical sciences. Therefore, our theory and method for inquiry set out as their initial task, the development of a theory that describes economics as it is in the broadest eco-social context.

4. The Fundamentals of a New Paradigm of Political Economy

The search for a new paradigm of political economy is in effect the search for a theory about political economy that should be comprehensive enough to embrace the context of the entire earth-space community. It must also be particular in adequately accounting for the specific localized effects of economic theory, policy, and practice. To this end, a new paradigm theory of political economy should include the following emphases:

• It must have a comprehensive global eco-social focus for relevant inquiry. This means theory must not only transcend but also include the relevance of the sovereign state while stressing the importance of transnational causes and consequences of economically related behavior. In particular, it must acknowledge the salience of the global inter-determination of economic perspectives and operations.
• It must engage in normative, value-based description and analysis including a clarification of the basic goal values of current world order. It must use these as markers to clarify the basic community policies implicated in all economic cooperation and contestation. Here the all inclusive value of universal human dignity may be a critical principle of political-economic normative guidance.
• Political economy is not animated by an autonomous machine. It is given dynamism by a sustained advocacy and very critically the vital importance of both authoritative and controlling decision making. The critical role of decision is a mandated focus of professional responsibility as well as responsible inquiry.
• Just as political economy must account for the structure of authority and control in the sovereign state, it must be alert to the principal features of global constitutional order. In particular, it must be alert to the way in which global constitutional order and its decision processes shape the evolving domains of world order.
• The evolving new paradigm of political economy must engage in the scientific task of illuminating and devaluating the conditions that inspire political economic outcomes. In short, it is a task that requires the identification and analysis of political and economically relevant causes and consequences that influence economic outcomes.
• The evolving new paradigm theory of political economy must consciously seek to anticipate and examine all possible relevant future scenarios to enhance the rationality of this function of theory, this function may well be guided by the clarification of the value bases that are desired for future scenarios.
• The new paradigm of political economy must infuse itself with the most important element of the human faculty—human creativity. In particular, this means that the new paradigm must focus on the alternative possibilities that may be anticipated from relevant future scenarios. This focus should have the creative element that creates the prospect of imaginative but realizable future outcomes that are compatible with the basic fundamental values that represent the common interest of the community as a whole.

* See http://cadmusjournal.org/author/winston-p-nagan-0

† See Matthew Braham, Adam Smith’s Concept of Social Justice , August 14, 2006

‡ Id . at 1

About the Author(s)

• Login to post comments

Subscribe here to free electronic edition

Lead articles.

Determinism and Reification: The Twin Pillars of the Amoral Society

- Gerald Gutenschwager

Breaking Free: Bringing the Overview Effect to Life and Work

- Charles Smith

Higher Education -Cornerstone of the New Era

- Federico Mayor

The Future of International Law

- John Scales Avery

EU between Monetarism and Keynesianism

- Mladen Staničić & Josip Sapunar

- Winston P. Nagan

Collabrocracy: Collaborative Intelligence and Governance of Globalised Society

- Dimitar Tchurovsky

Reforming Electronic Markets and Trading

- Hazel Henderson

Remarks on Visions of Sustainable Development

- Robert J. Berg

Analysis and Assessment of the Right to Peace in Light of the Latest Developments at the Human Rights Council

- Christian Guillermet-Fernández & David Fernández Puyana

Sustainability, Past and Future

- Michael Marien

Book Review

Download Volume 2 Issue 1

Terms of Use | Copyright Policy | Privacy Policy

Advertisement

The man reinventing economics with chaos theory and complexity science

Traditional economics makes ludicrous assumptions and poor predictions. Now an alternative approach using big data and psychological insights is proving far more accurate

By Thomas Lewton

16 April 2024

Ula Šveikauskaitė

In 2006, economists at the Federal Reserve Bank of New York started to worry about the overheating US housing market. Concerned that the bubble might burst, they used their best model to predict what would happen if house prices dropped by 20 per cent. Not much, was the answer it churned out. Soon after, house prices fell by almost exactly this amount, leading to probably the worst period of global economic decline in a century.

Economics is often lambasted for being a pseudoscience, with dense mathematical formulae that belie its subjectivity and a poor track record of making accurate predictions. J. Doyne Farmer thinks we can do better. In his new book, Making Sense of Chaos , he unpicks why standard economic approaches often fail – and presents a radical alternative. Complexity economics, as it is called, treats economies as systems akin to natural ecosystems or Earth’s climate. Giant computer simulations based on these ideas offer a better representation of how billions of people interact within the global economy.

Net-zero living: How your day will look in a carbon-neutral world

Farmer currently holds posts at the University of Oxford and the Santa Fe Institute in New Mexico, but his journey into economics has been unconventional. It began when he dropped out of graduate school, built the world’s first wearable computer and used it to beat the casino at roulette. In the 1990s, he set up Prediction Company, where he applied similar principles to the stock market. A pioneer of chaos theory and complex systems, he believes that complexity economics has recently come into its own, making reliable predictions about the…

Sign up to our weekly newsletter

Receive a weekly dose of discovery in your inbox! We'll also keep you up to date with New Scientist events and special offers.

To continue reading, subscribe today with our introductory offers

No commitment, cancel anytime*

Offer ends 2nd of July 2024.

*Cancel anytime within 14 days of payment to receive a refund on unserved issues.

Inclusive of applicable taxes (VAT)

Existing subscribers

More from New Scientist

Explore the latest news, articles and features

Environment

We can't get to net zero without tackling inequality.

Subscriber-only

AI forecaster can predict the future better than humans

Should everyone start eating snakes to save the planet, extreme heat could trigger the worst global financial crisis ever seen, popular articles.

Trending New Scientist articles

Transforming Post-Communist Political Economies (1998)

Chapter: 2 rethinking the theory of economic policy: some implications of the new institutionalism, 2 rethinking the theory of economic policy: some implications of the new institutionalism.

Thráinn Eggertsson

INTRODUCTION

The early postwar domination of welfare economics (Samuelson, 1947: Ch. 8; Bergson, 1938), the Keynesian revolution, and the new field of development economics (Kindleberger, 1958) ushered in an age of excessive expectations for the potency of economic policy. To organize their thoughts about the contribution of economics to policy, and confident of their capacity to control social systems, many economists relied on a popular framework, the theory of economic policy (Tinbergen, 1956). In the 1970s, this excessive optimism changed as policy failures and a clearer recognition of the role of private incentives buried naive hopes of fine-tuning the economic system or individual markets (Lucas, 1976; Posner, 1986:Part III). Events also diminished early hopes that development economics would provide strategies for rapid transition in the Third World (Hirschman, 1981). In economics, a new emphasis on information scarcity suggested that transaction costs seriously limit effective social engineering and complicate economic organization (Furubotn and Richter, 1993; Kreps, 1990; Milgrom and Roberts, 1992; North, 1990; Stiglitz, 1994; Williamson, 1985).

Growing pessimism about traditional approaches produced neither systematic reevaluation of development strategies nor a new consensus on the appropriate scope for public policy. Economists offer conflicting explanations of economic successes and failures among Third World countries, while the Eastern European revolution of 1989 took social science unawares when it required guidance for rapid transition to markets. Mainstream economics has lacked a general theory of economic systems and structural change. In recent

years, however, a new theory of institutions based on the economics of property rights and transaction costs has earned a measure of recognition among economists.

Although institutional analysis could potentially complement standard macro- and microeconomic theory in the design of policies for economic development, it has yet to develop a strong policy orientation. 1 This chapter introduces institutional analysis to the old theory of economic policy—to its policy models and its instruments, targets, and policy measures—in the hope that the new institutionalism will reveal its policy implications when viewed against the background of the traditional policy world. More particularly, the chapter explores the ways information scarcity affects policies aimed at social transformation.

The next section briefly summarizes the old theory of economic policy, associated with the Dutch economist Jan Tinbergen (1956). This is followed by an examination of three policy issues that were not a central concern of mainstream economics in the early post-war period: (1) the requirements of structural policy, (2) the need to extend the policy model, and (3) the implications of information scarcity. The chapter then presents a public policy view of the new institutionalism; problems of incomplete data and control and of incomplete models and decisions suggest an intricate policy world. Next is a discussion of the policy determinacy implicit in rational-choice political economy. The final section looks at the general policy implications of institutional analysis for major social transformations, such as those attempted in Eastern Europe and in the Third World.

THE OLD THEORY OF ECONOMIC POLICY

In a perceptive discussion of the theory of economic policy, Hansen ( 1963) emphasizes the central role of models in policy formulation. As almost all policy aims at influencing economic outcomes or processes, policymakers—politicians, administrators, social scientists, voters, or rulers—must rely on a model, or a description of the economic system, which sometimes is little more than a rough qualitative picture (Hansen, 1963:3). It is argued below that the information assumptions of institutional analysis assume that actors employ incomplete and variable models of their environments when attempting to advance their public or private policies.

A formal model of an economic system, such as a firm, a market, or an economy, can be written in the following general way:

In equation (1), x l , … , x n are n endogenous variables, and a 1 , … , a m are m exogenous variables, lagged variables, or parameters, some of which (for instance, exchange rates, tax rates, base money, price ceilings, import restrictions, plan indicators, or agricultural production quotas) are controlled by the policy actor (Hansen, 1963:5). Note a subtle distinction here in the meaning of exogeny. All the exogenous variables in equation (1) are exogenous to the actors of the social system that the model attempts to describe. The policymakers are distinct from the social system and control some of the exogenous variables, whereas other exogenous variables constrain their actions.

The policy model describes the choices open to policymakers: their opportunities to reach targets (desired values of endogenous variables) by applying instruments (exogenous variables they control). Policy targets (goals) are derived from the preferences of policymakers. The structure of the policy model prescribes what target values are attainable and how they are attained. Policy targets may be absolute, or the policymaker may weigh target variables together in a target preference function, T ( x 1 , … , x n ) . 2 Economic policy uses policy instruments either to attain absolute targets or to maximize the target preference function. When targets are fixed (or when target preference functions are maximized without limitations), basic logic suggests two well-known rules of thumb: (1) in general, "the number of instruments should be (at least) equal to the number of targets," and (2) individual instruments should not be assigned to specific targets, but all instruments should be coordinated and directed toward the set of targets (Hansen, 1963:7).

Finally, the structure of the policy model has important implications for policy. It describes the interrelationships among the variables in the model (equation [1]) and determines whether the model can be divided into autonomous departments. Following Simon (1953), all endogenous variables and instruments in a policy model can be arranged according to causal ordering from the first order to the highest, n th, order. Instruments of the n th order influence targets of the nth order without affecting lower orders of the system. However, the use of first-order instruments has repercussions not only for first-order target variables, but also for endogenous variables at higher levels, possibly throughout the system (Hansen, 1963:18-22).

NEW PERSPECTIVES AND THE OLD THEORY

The Tinbergen (1956) framework continues to be an essential part of our mental apparatus. When prescribing policy, economists think, explicitly or implicitly, in terms of instruments and target preference functions, and the notion of a model intervening between preferences and policy remains relevant. A new outlook in social science, however, has weakened economists' belief in their ability to prescribe economic outcomes and mold economic systems. We turn now to three related issues: (1) the requirements of structural policy, (2) the need to extend the policy model, and (3) the implications of information scarcity.

The Requirements of Structural Policy

The old theory of economic policy distinguished quantitative policy from qualitative or structural policy. Quantitative policy takes as given the basic structure of the economic system (or subsystem), i.e., equation (1), and seeks to manipulate existing economic relationships toward some particular end. Until recently, the findings of mainstream economic theory were relevant primarily for quantitative policy, because the theory made few attempts to endogenize or explain (parts of) the economic system. Structural policy, on the other hand, seeks to change the structure of equation (1), and sometimes to add new variables or new relationships. The (immediate) goal is not to achieve a new value for a target variable in the quantitative policy model, but to create a new relationship between (new) instruments and targets.

The discussion in this chapter emphasizes the distinction between quantitative and structural policy, although, as we shall see, the new emphasis on information and incentives has blurred this distinction. Economists have recognized that over time, what were assumed to be quantitative policy initiatives (e.g., rent control, increases in tax rates, or new welfare benefits) have often altered the structure of equation (1). However, it is useful conceptually to distinguish fundamental system transformations from behavioral responses to changes in relative prices within a given system.

Structural policy obviously invites new quantitative policy (and a new quantitative policy model) because the new system must be managed. Furthermore, if the transition to the target structure is slow, appropriate quantitative policy is required to ensure the orderly operation of the system during the transition period (McKinnon, 1991).

Unlike quantitative policy, structural policy cannot be employed effectively without a theory of institutions and institutional change. Policymakers can conserve their mental energy and use relatively simple models, however, as long as low-order instruments can generate spontaneous adjustments in higher-order variables—i.e., in critical institutions—throughout the system. For instance, policymakers would not require complex policy models to guide

the transition to markets in Russia and Eastern Europe if they believed that appropriate market institutions and organizations will emerge autonomously once "prices are set free" (Murrell, 1995). In the final analysis, the structure of the social system is an empirical question, but as a rule of thumb, policymakers in a world of scarce information usually do well to search for powerful low-order instruments.

The Need to Extend the Policy Model

The old theory, which was concerned primarily with quantitative microand macroeconomic relationships, assumed that the target preference functions of policymakers coincide with the normative standards of economic theory. Traditional policy analysis usually ignored the incentives and behavior of political actors or the influence of political processes on targets for growth, stability, pollution abatement, regulation, or the division of investment funds among sectors. Macroeconomics was concerned with stability and growth, while microeconomics focused on allocative efficiency, assuming that policymakers shared these goals.

In recent decades, various scholars have extended the policy model to incorporate endogenous politicians, and analyses of the latter's policies now appear in the literature. Fields such as public choice, political economy, and political macroeconomics attempt to endogenize the choice of targets and instruments, and to provide the elements for a positive theory of structural change (Mueller, 1989; Alt and Shepsle, 1990; Hettich and Winer, 1993; Alesina, 1991).

Pure quantitative economic policy typically (though not always) leaves the political equilibrium intact, particularly when the policy achieves the intended results. In political equilibrium, those in power tend to agree on traditional normative economic goals, such as stability, growth, and allocative efficiency, within the existing institutional framework. 3 Of course, the prevailing institutional framework may leave little or no scope for economic progress. In a relatively stable world, the role of those who control and coordinate key policy instruments is usually well known and clearly established. Generally, there is little doubt about the policy sphere of actors such as the central bank, the finance ministry, the environmental protection agency, or the central planning bureau. Policy analysts have relatively little need for elaborate positive political theory to identify the set of politically sustainable policies. 4

Structural policy, on the other hand, is frequently associated with political instability. Substantial structural measures usually alter the distribution of wealth and power and often emerge in times of political upheaval. The choice of new economic structures frequently involves political disputes and struggles that render the control and coordination of policy instruments uncertain, especially over time. To formulate viable economic policy in an unstable environment and minimize the likelihood of policy reversals, the analyst needs to model interactions among economic, political, and social forces. The need to expand the policy model to incorporate this interaction is particularly obvious when policy experts seek strategies for instituting economic measures that (at least in the short run) have tenuous support among the general public, those in power, and those seeking power. Some policy analysts, for instance, recommended shock treatments or big-bang measures in part because strong measures are likely to overwhelm a disillusioned public and unreliable politicians. They are also more likely to create irreversible structural change (Åslund, 1995). 5

Implications of Information Scarcity

The last decades of the twentieth century have seen increasingly explicit concern with the role of information in social systems and in social science (Coase, 1960; Diamond and Rothschild, 1989; Hirshleifer and Riley, 1979, 1992; Stiglitz, 1994). The very concept of a social system operating with full information staggers the imagination, yet the impression that early postwar neoclassical economics assumed full information is widespread.

A theory of social systems that explicitly models the information environment of its participants confronts three types of information problems: (1) data are scarce, (2) actors economize on scarce information by formulating simplifying models of their environments (as do scientists), and (3) actors have limited capacity to absorb and process data (learn and make decisions). These three issues can be characterized as incomplete data, incomplete models, and incomplete decisions, respectively. The information revolution that has taken place in the social sciences during the last few decades has focused on problems of incomplete data, although the notion of incomplete models and decisions has received some attention. 6 Yet it can be argued that a new theory of economic policy must recognize all three information problems. It must also determine their impact on public policy and the interaction between private and public policy.

The old theory of macroeconomic policy, or rather several scholars in that field, did acknowledge that incomplete data and models can undermine the efforts of policymakers (Hansen, 1963:31-36; Friedman, 1961). In particular, it was argued that various lags of uncertain length can pervert the timing of corrective measures and even turn them into destabilizing impulses. 7 In the 1970s, when macroeconomics acquired formal microfoundations, the theory even attempted to incorporate the interplay between public and private policy models. The early rational expectations school assumed that economic actors would be able to absorb the policy models used by the authorities, thereby enabling the actors to second-guess the authorities' intentions and undertake actions that would undermine economic policy. Random policy measures, however, would not produce this effect (Lucas, 1976). 8

Similarly, the interactions between public and private policy models in individual markets are implicit in the work of Steven N. S. Cheung, who pioneered the economics of contracts (Cheung, 1969). For instance, in his studies of rent control in Hong Kong, Cheung recognized that public policy models were incomplete in that regulators lacked knowledge of how economic actors would establish a new equilibrium in response to official price ceilings in rental markets (Cheung, 1975, 1976). As rent control constrained the price mechanism, the new equilibrium (and private policy) involved various nonprice margins, including the transformation of residential buildings into unregulated warehouses and (premature) demolition and rebuilding. Cheung's empirical work demonstrates, however, that skillful regulators are often able to use trial and error to acquire knowledge about private models, which they may then use to revise the public policy model, design more effective policy measures, avoid unwanted side effects, and eventually come tolerably close to their policy targets.

INSTITUTIONS, INFORMATION, AND CONTROL

We now turn to a discussion of the general implications of the new economics of institutions for the theory of economic policy.

In its initial phase, as is common for new fields of scholarship, the economics of institutions has emphasized explanation, empirical work, and policy analysis—in that order. Most studies, whether examining institutional change or the economic consequences of alternative institutions, are concerned with

the link between institutions and wealth or the social dividend. Therefore, wealth is frequently the (implicit) policy target in these studies. The distribution of power and wealth usually enters into these works as a determinant of economic outcomes or as an important force propelling institutional change.

Incomplete Data and Control

Information and incentives are the driving forces behind theories of social systems that rely on methodological individualism. Institutions are of critical importance for economic performance because they affect both incentives and the cost of information. The economics of institutions derives the structure of the policy model (our equation [1]) from the systems underlying institutions or, in other words, from the rules that, in the language of game theory, affect the expected payoffs of the actors. 9 Therefore, a change in the formal or informal rules that leaves all payoff equations unaffected does not count as institutional change. Institutions emerge from the fusion of social customs and habits; formal rules and regulations; and various enforcement mechanisms, including internalized social norms. The primary weakness of the economics of institutions is its limited understanding of this amalgam of formal and informal rules and their attendant enforcement mechanisms. Most studies ignore social values, while others treat them either as constants or as exogenous variables. 10

In the economics of institutions, the notion of information scarcity usually enters into the analysis through the assumption of incomplete data, but it is the union of incomplete data and what may be called the control problem that gives the new institutionalism its distinctive flavor. 11 Simply stated, costly measurement is responsible for incomplete data. Incomplete data raise the cost of verifying quality and monitoring behavior. This draws attention to one of the central complexities of economic life: commodities and behavior usually have multiple valuable dimensions or margins. Rising marginal cost in acquiring data suggests that actors are usually unable to control fully all margins of the resources over which they have nominal control. Therefore, in-

complete control is a general condition, and, as economics first recognized in the case of open-access fisheries, lack of control generates incentives that can lead actors to dissipate wealth (Barzel, 1989).

The control actors exercise over resources can derive from both external and internal sources: institutions, which represent socially assigned control, are external sources; the various measures actors take themselves, such as monitoring, fencing and locking up valuables, and contracting with other actors, are internal sources. In the literature, the costs of establishing and maintaining control over resources both in exchange and in use are commonly known as transaction costs. High transaction costs act as barriers to productive activities. The policy lesson is clear: structural policy that seeks to increase the capacity of an economic system in order to generate wealth must design institutions that lower transaction costs (North, 1990).

An increase in the social dividend has the potential to benefit all members of a social system, but imperfect institutions (imperfect in terms of the wealth criterion) often persist. To explain imperfect institutions, the new institutionalism typically looks to the political domain and uses high transaction costs in the political process to explain why actors are unable to agree on institutions that would be more conducive to economic growth (Bates, 1990; Moe, 1990; Weingast, 1995). The literature also recognizes that many social institutions and structures that facilitate economic growth emerge spontaneously and not through design. The role of shared social values in economic growth is of particular interest (North, 1990). Scholars in the rational choice tradition have had little success in explaining the emergence and evolution of social values, and it is not clear how policymakers could target social values. Consequently, the role of norms and customs in structural policy is ambiguous. A poor society that attempts to create incentives and information environments for economic growth by launching institutional change can hope for rapid success (1) if its underlying social values are consistent with the new institutions of growth, (2) if social values are malleable and adjust quickly to other aspects of the institutional environment, and (3) if the importance of social values in lowering transaction costs has been overrated. We return to these issues in the final section of the chapter. 12

Incomplete Models and Incomplete Decisions

In a world of scarce information, those who seek to accomplish structural

change must recognize that they are dealing with incomplete, competing models. Although the theory of economic policy has always been stated in terms of policy models, institutional analysis and the information perspective suggest that additional elements are needed:

When attempting to advance their private goals, the subjects of public policy (economic actors, households) rely on private policy models of the physical world, the social system, and the moral order.

Successful structural policy must allow for interactions between public policy models and private models, and revisions to both in response to new data.

An important aspect of public policy is to provide the subjects of policy—actors whose behavior the policymaker seeks to change—with the information needed to revise their private models. This will assist in coordinating models at different levels. 13

When we recognize that revision of models (learning) is often critical for the success of public policy, the revision process itself becomes of great practical interest. Rational-choice social science relies on rules drawn from logic, mathematics, and probability theory, and assumes that social actors use the universal logical rules of science for updating their beliefs or models. Even when this approach treats the origins of private models as exogenous, the assumption that actors use the general rules of science to update their models (for instance, Bayes' rule) implies that the models originate as purely logical or statistical interpretations of available data. In general, the logical approach cannot explain creative and selective interpretation of available data.

For many purposes, however, scholars can use standard logic to explain how actors revise their models and behavior. For instance, in a recent study, Bates and Weingast (1995) investigate revolutionary transformations in Zambia (movement to democracy) and in the former Yugoslavia (eruption of violent communal conflict) in terms of the updating of shared private beliefs (models). Bates and Weingast model interactions among the players as signaling games, where Bayes' rule is used to update models when new data (signals) become available. The paper demonstrates how a policymaker (Milosevic) can bring about a major change in social systems by manipulating signals.

Some scholars question whether actors use standard mathematical logic to update their models. Cognitive psychology and evolutionary biology argue that the human mind relies on ''a large and heterogeneous network of functionally specialized computational devices," rather than functioning as a general-purpose computer (Cosmides and Tooby, 1994:329; Tooby and Cosmides, 1992). A union of evolutionary psychology and economics "might be able to create a science of preferences" (Cosmides and Tooby, 1994:331) and im-

prove our understanding of how actors model their environment, especially the moral order.

In sum, a new theory of structural policy must recognize variable and incomplete models at different levels and allow for interactions between public policy models and private models. In its present state, social science is equipped to do this only on the basis of the general-purpose rational methods of science.

A DIGRESSION ON POLICY DETERMINACY

Rational-choice social science, which assumes that all actors optimize under constraints, implicitly suggests a high degree of policy determinacy. As long as neither social nor political actors were seen as rigorous optimizers, analysts believed there still was considerable scope for reforms. However, when the policy model was expanded to include political and social activity, and optimization under constraints was assumed throughout the social system, the policy choice set seemed to shrink and approach an empty set. This meant that structural policy appeared to have zero degrees of freedom.

The notion of incomplete data, incomplete models, and incomplete decisions changes this picture and expands the policy choice set. The changing fortunes of the Nordic welfare state illustrate this point. Lindbeck (1994, 1995) discusses the ways in which welfare state policies created not only a virtuous circle of benefits, but also an unexpected, undesired, and vicious circle of problems. The problems were associated with delayed changes in the behavior of households, interest groups, public-sector administrators, and politicians. These changes in behavior affected work effort, labor force participation, savings, asset choice, entrepreneurship, and short-term macroeconomic stability, and thereby shrank the tax base of the welfare state.

In analyzing these changes in behavior, Lindbeck recognizes the importance of incomplete data (for instance, delays in obtaining information about new welfare programs), but he puts the greatest weight on what might be called incomplete and variable private policy models. As the welfare system unfolded, the various types of actors, from households to politicians, revised their policy models. Lindbeck (1995) argues that the actors did more than revise their positive models of the social system and adjust their strategies for a new environment; they also revised their models of the moral order and updated their shared social values.

Lindbeck's analysis suggests, therefore, that we need to examine social policies in the Nordic welfare state in terms of incomplete public and private models. At the highest level, public policy models (presumably) did not allow for delayed regime changes in various structural relationships with the system as a whole (for instance, in labor supply or in savings ratios). This policy failure at the top is related to a misreading of private policy models, in particu-

lar a failure to recognize that actors will revise their models, targets, and policies. A revision of private policy models may change not only individual behavior, but also the structure and performance of organizations (households, social networks, firms, public agencies) that are the engine of social action (North, 1990). In Nordic social networks, the interactive revision of private models apparently first lowered the cost (stigma) of being a bona fide welfare recipient, and then the cost of being a welfare chiseler (Lindbeck, 1995).

The notion of policy determinacy, which introduced this section, is an in-house problem in the social sciences and relates to broader ambiguities in the concept of efficiency in the economics of institutions (Furubotn, 1994). A world of incomplete information cannot be determinate: with variable and changing policy models, there is ample scope for new policy directions.

PUBLIC POLICY AND SOCIAL TRANSFORMATIONS

The new institutionalism has paid little attention to the role of policymakers and to the specification of policy instruments for institutional change. With few exceptions, the theory provides only implicit policy lessons. 14 The chapter concludes with a few thoughts about these implicit lessons for major structural transformations.

A General Theory?

Institutional analysis emphasizes that the creation of wealth depends in complex ways on institutions, and argues that institutions are rooted in political and social domains. Social science, however, is fragmented into insular disciplines and offers only partial, and often contentious, insights, rather than a reliable, comprehensive view of social systems. 15

Furthermore, major advances in social science need not provide policymakers with the means to orchestrate major structural changes. Successful transition requires a strategy that will overcome opposition, particularly when the short-term costs of structural adjustment are high, which they frequently will be. In a world of uncertainty, this is a formidable task (Dewatripont and Roland, 1995) . As social science evolves and provides better strategies for institutional change, it is also likely to supply the opponents of change with more sophisticated counter-policies. More knowledge can be a two-edged sword, unless conflict over structural policy involves primarily dispute over the effectiveness of different means to a common end.

Complexity, Learning, and Feedback

The current strength of the new institutionalism (and related fields, such as the new theory of the firm, industrial organization, and positive political economy) lies in partial or sectoral analysis where theory offers various policy insights. The policy implications include (1) methods for containing the control problem and thereby reducing misallocation and the waste of resources, and (2) measures to facilitate the revision of incomplete private and public policy models, thus allowing actors to reach their goals more effectively. The old theory of economic policy explicitly demanded the coordination of a set of policy instruments toward clear-cut goals, but many of the policy insights of institutional analysis are far less specific, particularly concerning the measures needed to restructure actors' information environments.

The literature on property rights, agency theory, asymmetric information, organization, and related topics contains a growing body of theories that examine how to structure control and align incentives with policy goals (Milgrom and Roberts, 1992; McMillan, 1995; Williamson, 1985).

At the macro level, the state contributes to low transaction costs and effective control structures in several ways:

By providing stable standards of measurement in exchange, including stable prices, and generally by creating a solid macroeconomic environment.

By credibly committing to honor ownership rights and avoid using state power to seize resources capriciously, and by following a stable and predictable policy of taxation (Weingast, 1993).

By protecting economic actors from each other through various means, including legal processes, and by facilitating (central) organizations that help establish reputation and detect fraud (Greif et al., 1994).

The extent to which private rules and private enforcement are able to substitute for an effective legal system and provide the necessary foundation for long-term economic growth is an unresolved issue. Recent empirical evidence shows that private actors often invent mechanisms for strengthening

control and lowering transaction costs when they encounter permissive regimes (China) or bureaucratic and inefficient states (Latin America) (McMillan, 1995; Stone et al., 1996). Although these private arrangements often appear to be quite effective, two types of uncertainty surround them: first, private arrangements may create forces that eventually challenge the political status quo, and thus it is uncertain how long permissive or bureaucratic regimes will tolerate unofficial control systems; and second, it is uncertain whether in the long run, private control systems are capable of supporting a modern, integrated national economy.

A final point about the design of control systems concerns the choice between centralization and decentralization. The direct links among measurement costs, incomplete data, and control, combined with the propensity of measurement costs to increase with distance, slant structural policy toward decentralization in structuring both economic organizations and public administration. As a result, concern with the limits of central control is a recurrent theme in the new institutional analysis (Ostrom et al., 1993).

The idea of incomplete and competing models has various implications for policy, although the literature is particularly weak in this area. This outlook weighs against attempts at great experiments or the rapid implementation of structural changes, and suggests modesty, incrementalism, and learning by doing. A new category of instruments emerges in a world of incomplete models: measures for changing the information environment and for creating incentives for actors to revise their models and make them more compatible with policy targets. In a closed society, for instance, policymakers can alter the information environment dramatically by opening the system and facilitating international contacts, such as trade, telecommunications, direct investments, and educational exchanges. Although such measures may have profound implications for structural change, the actual outcome in a dynamic environment is inherently uncertain and generally cannot be modeled in specific terms as a relation between instruments and targets in a Tinbergen policy world.

Various feedback mechanisms are crucial both for coping with incomplete and competing models and for directing outcomes in social processes. Makers of public policy can advance their aims if they are able to design, or facilitate, feedback mechanisms that inform or punish actors who operate with policy models, data, or even goals that are inconsistent with public policy. A properly structured competitive market provides effective feedback in terms of the aggregate wealth criterion. Public policy can push economic enterprises in the direction of more efficiency by fostering various forms of competition and by providing suitable institutions for structuring exit and entry. Empirical evidence from various parts of the world, including China, indicates that not only private firms, but also various hybrid forms of organization will operate relatively efficiently in a competitive environment (McMillan and Naughton, 1996).

The feedback from competition also constrains political units. If the members of agricultural cooperatives operated by local governments can easily exit and join more desirable cooperatives in other localities, poor management is likely to bring corrective feedback and compel local authorities to revise their policy models or targets. Similarly, free entry and exit discipline higher political units, such as the states of a federation, as Weingast (1995) has shown in his work on market-preserving federalism.

Policy Lags and Pathological Path Dependence

With incomplete models, there will be lengthy lags between when a policy is initiated and when relevant actors have the new structures right. During transitions, public and private actors need to experiment for some time once the fundamental incentives are in place before they are able to master the organizations of a modern market economy, including financial organizations, manufacturing firms, apolitical legal systems, and public administration. Few scholars doubted that structural change would involve substantial lags in learning and adjustment, but the institutional literature increasingly refers to far more dramatic lags, which are attributed to increasing returns and path dependence (Arthur, 1994; David, 1994; North, 1990). Several scholars have argued (1) that communities that share specific private policy models (and related informal institutions) resist public policy measures aimed at lowering transaction costs and increasing efficiency, and (2) that these models are extremely durable, enduring sometimes for centuries or even millennia.

In his study of modern reforms in regional administration in Italy, Putnam (1993) explains regional variations in the success of these reforms by variations in social capital and finds the roots of perverse policy models in the twelfth century. For Russia, Hedlund and Sundström (1996:32) trace perverse policy models to the Middle Ages and argue "that the future for Moscow represents a choice between a hierarchy dominated by strong, authoritarian 'organs', or a total breakdown of all organized societal functions."

This strong version of path dependence (which is still controversial) can be compared to the discovery of debilitating genes in specific human groups, and the implications for structural policy are devastating. The new institutionalism does not appear to propose any instruments or measures for manipulating models at this level, which indicates a new type of policy determinacy and calls for more research.

Alesina, A. 1991 Macroeconomics and politics. In Macroeconomics Annual , Stanley Fisher, ed. Cambridge, MA: National Bureau of Economic Research.

Alt, J.A., and K.A. Shepsle, eds. 1990 Perspectives on Positive Political Economy . Cambridge, England: Cambridge University Press.

Arthur, B.W. 1994 Increasing Returns and Path Dependence in the Economy . Ann Arbor: University of Michigan Press.

Åslund, A. 1995 How Russia Became a Market Economy . Washington, DC: Brookings Institution.

Barzel, Y. 1989 Economic Analysis of Property Rights . Cambridge, England: Cambridge University Press.

Bates, R.H. 1990 Macropolitical economy in the field of development. Pp. 31-54 in Perspectives on Positive Political Economy , J.A. Alt and K.A. Shepsle, eds. Cambridge, England: Cambridge University Press.

Bates, R.H., and B.R. Weingast 1995 Rationality and Interpretation: The Politics of Transition. Paper prepared for the annual meeting of the American Political Science Association, Chicago, August 31-September 3.

Benham, A., L. Benham, and M. Merithew 1995 Institutional Reforms in Central and Eastern Europe: Altering Paths with Incentives and Information . San Francisco: International Center for Economic Growth.

Bergson, A. 1938 A reformulation of certain aspects of welfare economics. Quarterly Journal of Economics 52(2):310-334.

Cheung, S.N.S. 1969 Transaction costs, risk aversion, and the choice of contractual arrangements. Journal of Law and Economics 12(1):23-42.

1975 Roofs or stars: The stated intents and actual effects of rent ordinance. Economic Inquiry 13:1-21.

1976 Rent control and housing reconstruction: the postwar experience of prewar premises in Hong Kong. Journal of Law and Economics 17(1) : 27-53 .

Coase, R.H. 1960 The problem of social cost. Journal of Law and Economics 3(1):1-44.

Cosmides, L., and J. Tooby 1994 Better than rational: Evolutionary psychology and the invisible hand. American Economic Review 84(2):327-332.

David, P.A. 1994 Why are institutions the "carriers of history"? Path dependence and the evolutions of conventions, organizations and institutions. Structural Change and Economic Dynamics 5(2):205-220.

Denzau, A.T., and D.C. North 1994 Shared mental models: Ideologies and institutions. Kyklos 47:3-31.

Dewatripont, M., and G. Roland 1995 The design of reform packages under uncertainty. American Economic Review 85(5): 1207-1223.

Diamond, P., and M. Rothschild, eds. 1989 Uncertainty in Economics . San Diego, CA: Academic Press.

Eggertsson, T. 1990 Economic Behavior and Institutions . Cambridge, England: Cambridge University Press.

1994 The economics of institutions in transition economies. In Institutional Change and the Public Sector in Transitional Economies , Salvatore Schiavo-Campo, ed. Washington, DC: The World Bank.

Friedman, M. 1961 The lag in effect of monetary policy. Journal of Political Economy . Reprinted in Milton Friedman: Critical Assessments. Vol. 1, J. Cunningham and R.N. Woods, eds. New York and London: Routledge.

Furubotn, E.G. 1994 Future Development of the New Institutional Economics: Extension of the Neoclassical Model or New Construct? Jena Lectures Vol. 1. Jena, Germany: Max-Planck Institute for Research into Economic Systems.

Furubotn, E.G., and R. Richter, eds. 1993 The new institutional economics: Recent progress, expanding frontiers. Journal of Institutional and Theoretical Economics (Special Issue) 149(1). Tubingen, Germany: JITE.

Greif, A., P. Milgrom, and B.R. Weingast 1994 Coordination, commitment, and enforcement: The case of the merchant guild. Journal of Political Economy 102(3):745-776.

Hansen, B. 1963 Lectures in Economic Theory: Part III: The Theory of Economic Policy . Cairo: United Arab Republic Institute of Planning.

Heckman, J.J. 1992 Haavelmo and the birth of modern econometrics: A review of The History of Econometric Ideas by Mary Morgan. Journal of Economic Literature 30(2):876-886.

Hedlund, S., and N. Sundström 1996 Does Palermo represent the future for Moscow? Journal of Public Policy 19(2): 113-156.

Hettich, W., and S.L. Winer 1993 Economic efficiency, political institutions and policy analysis. Kyklos 46(1):3-25.

Hirschman, A.O. 1981 The rise and decline of development economics. Pp. 1-24 in Essays in Trespassing: Economics to Politics and Beyond , A. Foxley, M.S. McPherson, and G. O'Donnell, eds. Cambridge, England: Cambridge University Press.

Hirshleifer, J., and J.G. Riley 1979 The analytics of uncertainty and information: An expository survey. Journal of Economic Literature 17(December):1375-1421.

1992 The Analytics of Uncertainty and Information . Cambridge, England: Cambridge University Press.

Kindleberger, C.P. 1958 Economic Development . New York: McGraw-Hill.

Kreps, D.M. 1990 A Course in Microeconomic Theory . New York: Harvester Wheatsheaf.

Lindbeck, A. 1994 Overshooting, reform and retreat of the welfare state. De Economist 104:1-19.

1995 Welfare state disincentives with endogenous habits and norms. Scandinavian Journal of Economics 97(4):477-494.

Lucas, R.E. 1976 Econometric policy evaluation: A critique. In Stabilization of the Domestic and International Economy , Karl Brunner and Allen H. Meltzer, eds. Amsterdam, The Netherlands: North Holland Publishing Co.

McKinnon, R. 1991 The Order of Economic Liberalization . Baltimore: Johns Hopkins University Press.

McMillan, J. 1995 Markets in Transition. Symposium address at the Seventh World Congress of the Econometric Society, August, Tokyo. Department of Economics, University of California at San Diego.

McMillan, J., and B. Naughton, eds. 1996 Reforming Asian Socialism: The Growth of Market Institutions . Ann Arbor: University of Michigan Press.

Milgrom, P., and J. Roberts 1992 Economics, Organization and Management . Englewood Cliffs, NJ: Prentice Hall.

Moe, T.M. 1990 Political institutions: The neglected side of the story. Journal of Law, Economics and Organization (Special Issue) 6:213-254.

Mueller, D.C. 1989 Public Choice II . Cambridge, England: Cambridge University Press.

Murrell, P. 1995 The transition according to Cambridge, Mass. Journal of Economic Literature 33(1):164-178.

North, D.C. 1990 Institutions, Institutional Change, and Economic Performance . Cambridge, England: Cambridge University Press.

1993 Institutions and credible commitment. Journal of Institutional and Theoretical Economics 149(1): 11-23.

1994 Economic performance through time. American Economic Review 84(3):359-368.

Ostrom, E. 1990 Governing the Commons . The Evolution of Institutions for Collective Action . Cambridge, England: Cambridge University Press.

Ostrom, E., L. Schroeder, and S. Wynne 1993 Institutional Incentives and Sustainable Development. Infrastructure Policies in Perspective . Boulder, CO: Westview Press.

Ostrom, E., R. Gardner, and J. Walker 1994 Rules Games, and Common Pool Resources . Ann Arbor: University of Michigan Press.

Posner, R.A. 1986 Economic Analysis of Law . Third Edition. Boston, MA: Little, Brown.

Putnam, R.D. 1993 Making Democracy Work: Civic Traditions in Modern Italy . Princeton, NJ: Princeton University Press.

Samuelson, P.A. 1947 Foundations of Economic Analysis . Cambridge, MA: Harvard University Press.

Simon, H.A. 1953 Causal ordering and identifiability. In Studies in Econometric Method , W.C. Hood and T.C. Koopmans, eds. New Haven, CT: Yale University Press. Reprinted in Herbert A. Simon (1957) Models of Man . New York: Garland Publishers.

Stiglitz, J.E. 1994 Whither Socialism . Cambridge, MA: The MIT Press.

Stone, A., B. Levy, and R. Paredes 1996 A comparative analysis of the legal and regulatory environment in Brazil and Chile. In Empirical Studies in Institutional Change , L. Alston, T. Eggertsson, and D. North, eds. Cambridge, England: Cambridge University Press.

Tinbergen, J. 1956 Economic Policy: Theory and Design . Amsterdam, The Netherlands: North Holland Publishing Co.

Tooby, J., and L. Cosmides 1992 The psychological foundation of culture. In The Adaptive Mind: Evolutionary Psychology and the Generation of Culture , J. Barkow, L. Cosmides and J. Tooby, eds. New York: Oxford University Press.

Weingast, B.R. 1993 Constitutions as governance structure: The political foundations of secure markets. Journal of Institutional and Theoretical Economics 149:286-311.

1995 The economic role of political institutions: Market preserving federalism. Journal of Law, Economics and Organization 7(1):1-31.

Werin, L., and H. Wijkander 1992 Contract Economics . Oxford, England: Blackwell.

Williamson, O.S. 1985 The Economic Institutions of Capitalism. Firms, Markets, Relational Contracting . Boston: The Free Press.

This ground-breaking new volume focuses on the interaction between political, social, and economic change in Central and Eastern Europe and the New Independent States. It includes a wide selection of analytic papers, thought-provoking essays by leading scholars in diverse fields, and an agenda for future research. It integrates work on the micro and macro levels of the economy and provides a broad overview of the transition process.

This volume broadens the current intellectual and policy debate concerning the historic transition now taking place from a narrow concern with purely economic factors to the dynamics of political and social change. It questions the assumption that the post-communist economies are all following the same path and that they will inevitably develop into replicas of economies in the advanced industrial West. It challenges accepted thinking and promotes the utilization of new methods and perspectives.

READ FREE ONLINE

Welcome to OpenBook!

You're looking at OpenBook, NAP.edu's online reading room since 1999. Based on feedback from you, our users, we've made some improvements that make it easier than ever to read thousands of publications on our website.

Do you want to take a quick tour of the OpenBook's features?

Show this book's table of contents , where you can jump to any chapter by name.

...or use these buttons to go back to the previous chapter or skip to the next one.

Jump up to the previous page or down to the next one. Also, you can type in a page number and press Enter to go directly to that page in the book.

Switch between the Original Pages , where you can read the report as it appeared in print, and Text Pages for the web version, where you can highlight and search the text.

To search the entire text of this book, type in your search term here and press Enter .

Share a link to this book page on your preferred social network or via email.

View our suggested citation for this chapter.

Ready to take your reading offline? Click here to buy this book in print or download it as a free PDF, if available.

Get Email Updates

Do you enjoy reading reports from the Academies online for free ? Sign up for email notifications and we'll let you know about new publications in your areas of interest when they're released.

Articles on Economic theories

Displaying 1 - 20 of 46 articles.

Judas and the economics of betrayal

Renaud Foucart , Lancaster University

What Ireland’s smoking ban 20 years ago can teach us about big changes to human behaviour

New findings show a direct causal relationship between unemployment and suicide

Jo-An Occhipinti , University of Sydney ; Adam Skinner , University of Sydney ; Ian Hickie , University of Sydney , and Yun Ju Christine Song , University of Sydney

How to change our collective mindset to tackle ecological crisis?

Jane Goodall , Western Sydney University

AI will increase inequality and raise tough questions about humanity, economists warn

Yingying Lu , CSIRO

How the philosophy of the past can help us imagine the economy of the future

Johannes Steizinger , McMaster University ; Helen McCabe , University of Nottingham , and Thimo Heisenberg , Bryn Mawr College

How Monopoly informs academia and economics, even when it’s not obvious

Thomas Michael Mueller , Université catholique de Louvain (UCLouvain)

Is liberal governance unable to deal with global threats?

Eric Muraille , Université Libre de Bruxelles (ULB) ; Julien Pillot , INSEEC Grande École , and Philippe Naccache , INSEEC Grande École

The inconvenient truth of Herman Daly: There is no economy without environment

Jon D. Erickson , University of Vermont

Orthodox thinking won’t cut it: why Mathias Cormann’s leadership of the OECD has economists worried

Steve Keen , UCL

Wealth of nations: Why some are rich, others are poor – and what it means for future prosperity

Amitrajeet A. Batabyal , Rochester Institute of Technology

Why we can’t just ‘stop printing money’ to get inflation down

Jacqueline Best , L’Université d’Ottawa/University of Ottawa

Truth, lies and honey

François Lévêque , Mines Paris - PSL

For the EU’s ‘Green Deal’ to succeed, economic theory must take into account qualitative growth

Sergio Focardi , Pôle Léonard de Vinci ; Davide Mazza , Pôle Léonard de Vinci , and Manon Rivoire , Pôle Léonard de Vinci

How a radical interpretation of the Great Depression became the orthodoxy behind solving the COVID economic crisis

Mary O'Sullivan , Université de Genève

Why the return of high inflation can no longer be excluded

Radu Vranceanu , ESSEC and Marc Guyot , ESSEC

John Weeks: a leading critic of economic orthodoxy who dedicated his life to building a better world

Ben Fine , SOAS, University of London and Alfredo Saad Filho , SOAS, University of London

Manchester City and Saracens – economic theory in action

Paul Downward , Loughborough University

Economic democracy: how handing power back will fix our broken system

Andrew Cumbers , University of Glasgow

Debate: Economics needs to understand complexity and qualitative change

Sergio Focardi , Pôle Léonard de Vinci

Related Topics

• Climate change
• Economic growth
• Interest rates
• Macroeconomics
• The Conversation France
• United States

Top contributors

Professor of Economics, UNSW Sydney

The University of Queensland

Professeur d’économie, Mines Paris - PSL

Senior Lecturer in Economics, Lancaster University Management School, Lancaster University

Professor of Finance at l’ESILV et à l'EMLV, member of De Vinci Research Center, Pôle Léonard de Vinci

Emeritus Professor, Writing and Society Research Centre, Western Sydney University

MPhil, Economic History, London School of Economics and Political Science

Adjunct Professor, Crawford School of Public Policy, Australian National University

Senior Lecturer in Economics, The Open University

Professor of Macroeconomics, University of Sydney

Senior Lecturer in Corporate Finance, University of Bath

Senior Professor, People, Organizations and Society, Grenoble École de Management (GEM)

Professor of Economics, Cardiff University

Professor, School of Accounting and Finance, UWA Business School, The University of Western Australia

Professor of Finance, University of York

• X (Twitter)
• Unfollow topic Follow topic

New Economic Theories

• Published: April 1998
• Volume 11 , pages 365–381, ( 1998 )

Cite this article

• Carlo Carraro 1  

228 Accesses

6 Citations

Explore all metrics

This paper analyses some of the most important spillovers of recent developments of economic theory into environmental economics. Attention is given to the anlaysis of sustainable economic development paths, where endogenous growth models are used; the implications of environmental dumping and more generally of policies concerning global environmental issues, where new trade theories are very useful; and, the effectiveness of environmental policy instruments when markets are imperfectly competitive, where industrial organisation theory is employed. The paper does not only note recent developments in environmental economics, but also relates these to the previous environmental economics literature. Thus, it can be assessed whether new results actually improve our knowledge of crucial economic and environmental issues.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price includes VAT (Russian Federation)

Instant access to the full article PDF.

Rent this article via DeepDyve

Institutional subscriptions

Similar content being viewed by others

Environmental policy, tax, and the target of sustainable development

Environmental Economics, the Bioeconomy and the Role of Government

Is environmental innovation the key to addressing the dual economic and sustainability challenge of the Italian economy?

Barrett, S. (1994), ‘Strategic Environmental Policy and International Trade’, Journal of Public Economics 54 , 325–338.

Article   Google Scholar  

Baumol, W. and W. Oates (1988), The Theory of Environmental Policy . Cambridge: Cambridge University Press.

Google Scholar  

Beltratti, A. (1996), Sustainability of Growth: Reflections on Economic Models . Dordrecht: Kluwer Academic Publishers.

Beltratti, A., G. Chichilniski and G. Heal (1993), ‘Sustainable Growth and the Green Golden Rule’. FEEM Discussion Paper, 61.93, Milan.

Beltratti, A. (1997), ‘Growth with Natural and Environmental Resources’, in C. Carraro and D. Siniscalco, eds., New Directions in the Economic Theory of the Environment . Cambridge: Cambridge University Press.

Beckman, M. and J. Thisse (1986), ‘The Location of Production Activities’, in P. Nijkamp, ed., Handbook of Regional and Urban Economics . Amsterdam: North-Holland.

Boetti, M., M. Botteon, C. Carraro and A. Soubeyran (1997), ‘On the Effects of Industrial, Trade and Environmental Policies on the Location Choices of Firms’, Revue d ’ Economie Industrielle , forthcoming.

Bovenberg, L. and S. Smulders (1995), ‘Environmental Quality and Pollution Augmenting Technological Change in a Two Sector Endogenous Growth Model’, Journal of Public Economics 57 , 369–391.

Brander, J. and B. Spencer (1985), ‘Export Subsidies and International Market Share Rivalry’, Journal of International Economics 18 , 83–100.

Buchanan, J. M. (1969), ‘External Diseconomies, Corrective Taxes and Market Structure’, American Economic Review 59 , 174–177.

Carraro, C. (1997) ‘Induced Technical Change in Environmental Models: Theoretical Results and Implementations’, presented at the International Workshop on ‘Induced Technological Change and the Environment’; IIASA, 26–27 June 1997.

Carraro, C. and D. Siniscalco (1997), New Directions in the Economic Theory of the Environment . Cambridge: Cambridge University Press.

Carraro, C. and A. Soubeyran (1996a), ‘Environmental Taxation, Market Share and Profits in Oligopoly’, in Carraro, C., Y. Katsoulacos and A. Xepapadeas, eds., Environmental Policy and Market Structure . Dordrecht: Kluwer Academic Publishers.

Carraro, C. and A. Soubeyran (1996b), ‘Environmental Feedbacks and Optimal Taxation in Oligopoly’, in A. Xepapadeas, ed., Economic Policy for the Environment and Natural Resources . Cheltenham: Edward Elgar.

Carraro, C. and A. Soubeyran (1996c), ‘Environmental Policy and the Choice of Production Technology’, in Carraro, C., Y. Katsoulacos and A. Xepapadeas, eds., Environmental Policy and Market Structure . Dordrecht: Kluwer Academic Publishers.

Carraro, C. and A. Soubeyran (1997), ‘R&D Cooperation, Innovation Spillovers and Firm Location in a Model of Environmental Policy’, in E. Petrakis, E. Sartzetakis and A. Xepapadeas, eds., Environmental Regulation and Market Structure . Cheltenham: Edward Elgar.

Carraro, C. and G. Topa (1994), ‘Should Environmental Innovation Policy Be Internationally Coordinated’, in C. Carraro, ed., Trade, Innovation, Environment . Dordrecht: Kluwer Academic Publishers.

Carraro, C. and G. Topa (1995), ‘Environmental Taxation and Innovation’, in C. Carraro and J. Filar, eds., Control and Game-Theoretic Models of the Environment . New York: Birckauser.

Conrad, K. (1993), ‘Taxes and Subsidies for Pollution Intensive Industries as Trade Policy’, Journal of Environmental Economics and Management 25 , 121–135.

Copeland, B. (1994), ‘International Trade and the Environment: Policy Reform in a Polluted Small Open Economy’, Journal of Environmental Economics and Management 26 , 44–65.

DArge, R. C. and K. C. Kogiku (1973), ‘Economic Growth and the Environment’, Review of Economic Studies 40 , 61–77.

Ethier, W. (1986), ‘The Multinational Firm’, Quarterly Journal of Economics 101 , 805–833.

Gradus, R. and S. Smulders (1993), ‘The Trade-off Between Environmental Care and Long-Term Growth – Pollution in Three Prototype Growth Models’, Journal of Economcis 58 , 25–51.

Grossman, G. and E. Helpman (1991), Innovation and Growth . Cambridge: MIT Press.

Heal, G. (1982), ‘The Use of Common Property Resources’, in V. K. Smith and J. V. Krutilla, eds., Explorations in Natural Resource Economics . Baltimore: John Hopkins University Press.

Heal, G. (1995), ‘Interpreting Sustainability’, FEEM Discussion Paper 1.95, Milan.

Helpman, E. (1985), ‘Multinational Corporations and Trade Structure’, Review of Economic Studies 52 , 443–458.

Helpman, E. and P. Krugman (1985), Market Structure and Foreign Trade . Cambridge: MIT Press.

Helpman, E. and P. Krugman (1989), Trade Policy and Market Structure . Cambridge: MIT Press.

Hoel, M. (1994), ‘Environmental Policy as a Game between Governments when Plant Locations are Endogenous’, presented at the CEPR workshop on ‘Environmental Policy, International Agreements and International Trade’, London, 11–12 November 1994.

Hung, V., P. Chang and K. Blackburn (1994), ‘Endogenous Growth, Environment and R&D’, in C. Carraro, ed., Trade, Innovation, Environment . Dordrecht: Kluwer Academic Publishers.

Jung, C., K. Krutilla and R. Boyd (1996), ‘Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives’, Journal of Environmental Economics and Management 30 , 95–111.

Kamien, M. I. and N. L. Schwartz (1982), ‘The Role of Common Property Resources in Optimal Planning odes with Exhaustible Resources’, in V. K. Smith and J. V. Krutilla, eds., Explorations in Natural Resource Economics . Baltimore: John Hopkins University Press.

Katsoulacos, Y. and A. Xepapadeas (1994), ‘Pigouvian Taxes under Oligopoly’, mimeo. Athens University.

Katsoulacos, Y. and A. Xepapadeas (1995), ‘Environmental Policy under Oligopoly with Endogenous Market Structure’, Scandinavian Journal of Economics 97 , 411–420.

Katsoulacos, Y. and A. Xepapadeas (1996a), ‘Emission Taxes and Market Structure’, in Carraro, C., Y. Katsoulacos and A. Xepapadeas, eds., Environmental Policy and Market Structure . Dordrecht: Kluwer Academic Publishers.

Katsoulacos, Y. and A. Xepapadeas (1996b), ‘Environmental Innovation, Spillovers and Optimal Policy Rules’, in Carraro, C., Y. Katsoulacos and A. Xepapadeas, eds., Environmental Policy and Market Structure . Dordrecht: Kluwer Academic Publishers.

Krugman, P. (1991), Geography and International Trade . Cambridge: MIT Press.

Laffont, J. J. (1994), ‘Regulation of Pollution with Asymmetric Information’, in C. Dosi and T. Tomasi, eds., Non Point Source Pollution Regulation: Issues and Analysis . Dordrecht: Kluwer Academic Publishers.

Laffont, J. J. and J. Tirole (1996), ‘A Note on Environmental Innovation’, Journal of Public Economics .

Levinson, J. (1996), ‘Environmental Policy and Plant Location’, Journal of Public Economics 62 , 1–18.

Lucas, R. (1988), ‘On the Mechanics of Economic Development’, Journal of Monetary Economics 22 , 3–42.

Malueg, D. A. (1990), ‘Welfare Consequences of Emission Trading Credit Programs’, Journal of Environmental Economics and Management 18 , 66–77.

Markusen, J. (1984), ‘Multinationals, Multi-Plant Economies and the Gains from Trade’, Journal of International Economics 16 , 205–226.

Markusen, J. (1996), ‘The Economic Theory of Trade and Firm Location’, mimeo. FEEM, Milan.

Markusen, J. R., E. R. Morey and N. Olewiler (1993), ‘Environmental Policy when Market Structure and Plant Locations are Endogenous’, Journal of Environmental Economics and Management 24 , 69–86.

Markusen, J. R., E. R. Morey and N. Olewiler (1995), ‘Competition in Regional Environmental Policies with Endogenous Plant Location Decisions’, Journal of Public Economics 56 , 55–77.

Michel, P. (1993), ‘Pollution and Growth towards the Ecological Paradise’, FEEM Discussion Paper 80.93, Milan.

Michel, P. and G. Rotillon (1992). ‘Pollution Disutility and Endogenous Growth’, mimeo. University of Paris I.

Misiolek, S. W. (1980), ‘Effluent Taxation in Monopoly Markets’, Journal of Environmental Economics and Management 7 , 103–107.

Motta, M. and J. Thisse (1994), ‘Does Environmental Dumping Lead to Delocation?’ European Economic Review 38 , 555–564.

Musu. I. (1995), ‘Transitional Dynamics to Optimal Sustainable Growth’, FEEM Discussion Paper 50.95, Milan.

Oates, W. E. and D. L. Strassman (1984), ‘Effluent Fees and Market Structure’, Journal of Public Economics 24 , 29–46.

Porter, M. (1991), ‘America's Green Strategy’, Scientific American , 168.

Rauscher, M. (1994), ‘On Ecological Dumping’, Oxford Economic Papers 46 , 822–840.

Rauscher, M. (1995), ‘Environmental Regulation and the Location of Polluting Industries’, International Tax and Public Finance 2 , 229–244.

Rauscher, M. (1997), ‘Environmental Regulation and International Capital Allocation’, in C. Carraro and D. Siniscalco, eds., New Directions in the Economic Theory of the Environment . Cambridge: Cambridge University Press.

Reinganum, J. F. (1989), ‘The Timing of Innovation: Research, Development and Diffusion’, in R. Schmalensee and R. D. Willig, eds., Handbook of Industrial Organisation . Amsterdam: North-Holland.

Requate, T. (1995), ‘Incentives to Adopt New Technologies under Different Pollution-Control Policies’, International Tax and Public Finance 2 , 295–317.

Roberts, M. J. and M. Spencer (1976), ‘Effluent Charges and Licenses under Uncertainty’, Journal of Public Economics 5 , 193–208.

Romer, P. (1994), ‘The Origins of Endogenous Growth’, Journal of Economic Perspectives 8 , 5–22.

Sala i Martin, X. (1990), ‘Lectures Notes on Economic Growth’, NBER Working Papers 3563 and 3564, Cambridge.

Siebert, H. (1985), ‘Spatial Aspects of Environmental Economics’, in A. V. Kneese and J. L. Sweeney, eds., Handbook of Natural Resources and Environmental Economics . Amsterdam: North-Holland, pp. 125–164.

Ulph, A. (1994), ‘Environmental Policy, Plant Location, and Government Protection’, in C. Carraro, ed., Trade, Innovation, Environment . Dordrecht: Kluwer Academic Publishers.

Ulph, A. (1997), ‘Environmental Policy, Strategic Trade and Innovation’, in C. Carraro and D. Siniscalco, eds., New Directions in the Economic Theory of the Environment . Cambridge: Cambridge University Press.

Ulph, D. (1994), ‘Strategic Innovation and Strategic Environmental Policy’, in C. Carraro, ed., Trade, Innovation, Environment . Dordrecht: Kluwer Academic Publishers.

Ulph, D. (1997), ‘Environmental Policy and Technological Innovation’, in C. Carraro and D. Siniscalco, eds., New Directions in the Economic Theory of the Environment . Cambridge: Cambridge University Press.

Ulph, A. and D. Ulph (1996), ‘Trade, Strategic Innovation and Strategic Environmental Policy – A General Analysis’, in C. Carraro, Y. Katsoulacos and A. Xepapadeas, eds., Environmental Policy and Market Structure . Dordrecht: Kluwer Academic Publishers.

Ulph, A. and L. Valentini (1996), ‘Plant Location and Strategic Environmental Policy with Intersectoral Linkages’, presented at the CEPR workshop on ‘Environmental Policy, International Agreements and International Trade’, London, 11–12 November 1994.

Van Egteren, H. and M. Weber (1996), ‘Marketable Permits, Market Power and Cheating’, Journal of Environmental Economics and Management 30 , 161–173.

Venables, A. (1996), ‘Equilibrium Location of Vertically Integrated Industries’, International Economic Review 37 , 341–359.

Verdier, T. (1995), ‘Environmental Pollution and Endogenous Growth: a Comparison between Emission Taxes and Technological Standards’, in C. Carraro and J. Filar, eds., Control and Game-Theoretic Models of the Environment . New York: Birckauser.

Von der Fehr, N. (1993), ‘Tradable Emission Rights and Strategic Interactions’, Environmental and Resource Economics 3 , 129–151.

Xepapadeas, A. (1997a), ‘Economic Development and Environmental Traps’, Structural Change and Economic Dynamics , forthcoming.

Xepapadeas, A. (1997b), Advanced Principles in Environmental Policy . Cheltenham: Edward Elgar.

Download references

Author information

Authors and affiliations.

University of Venice and FEEM, S. Giobbe 873, Venice, Italy

Carlo Carraro

You can also search for this author in PubMed   Google Scholar

Rights and permissions

Reprints and permissions

About this article

Carraro, C. New Economic Theories. Environ Resource Econ 11 , 365–381 (1998). https://doi.org/10.1023/A:1008204826571

Download citation

Issue Date : April 1998

DOI : https://doi.org/10.1023/A:1008204826571

Share this article

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• economic theory
• endogenous growth
• environmental innovation
• imperfect competition
• international trade
• Find a journal
• Publish with us
• Track your research

New Economic Theory

• Request new password

• Share full article

For more audio journalism and storytelling, download New York Times Audio , a new iOS app available for news subscribers.

The Evolving Danger of the New Bird Flu

An unusual outbreak of the disease has spread to dairy herds in multiple u.s. states..

This transcript was created using speech recognition software. While it has been reviewed by human transcribers, it may contain errors. Please review the episode audio before quoting from this transcript and email [email protected] with any questions.

From “The New York Times,” I’m Sabrina Tavernise, and this is “The Daily.”

[MUSIC PLAYING]

The outbreak of bird flu that is tearing through the nation’s poultry farms is the worst in US history. But scientists say it’s now starting to spread into places and species it’s never been before.

Today, my colleague, Emily Anthes, explains.

It’s Monday, April 22.

Emily, welcome back to the show.

Thanks for having me. Happy to be here.

So, Emily, we’ve been talking here on “The Daily” about prices of things and how they’ve gotten so high, mostly in the context of inflation episodes. And one of the items that keeps coming up is eggs. Egg prices were through the roof last year, and we learned it was related to this. Avian flu has been surging in the United States. You’ve been covering this. Tell us what’s happening.

Yes, so I have been covering this virus for the last few years. And the bird flu is absolutely tearing through poultry flocks, and that is affecting egg prices. That’s a concern for everyone, for me and for my family. But when it comes to scientists, egg prices are pretty low on their list of concerns. Because they see this bird flu virus behaving differently than previous versions have. And they’re getting nervous, in particular, about the fact that this virus is reaching places and species where it’s never been before.

OK, so bird flu, though, isn’t new. I mean I remember hearing about cases in Asia in the ‘90s. Remind us how it began.

Bird flu refers to a bunch of different viruses that are adapted to spread best in birds. Wild water birds, in particular, are known for carrying these viruses. And flu viruses are famous for also being shapeshifters. So they’re constantly swapping genes around and evolving into new strains. And as you mentioned back in the ‘90s, a new version of bird flu, a virus known as H5N1, emerged in Asia. And it has been spreading on and off around the world since then, causing periodic outbreaks.

And how are these outbreaks caused?

So wild birds are the reservoir for the virus, which means they carry it in their bodies with them around the world as they fly and travel and migrate. And most of the time, these wild birds, like ducks and geese, don’t even get very sick from this virus. But they shed it. So as they’re traveling over a poultry farm maybe, if they happen to go to the bathroom in a pond that the chickens on the farm are using or eat some of the feed that chickens on the farm are eating, they can leave the virus behind.

And the virus can get into chickens. In some cases, it causes mild illness. It’s what’s known as low pathogenic avian influenza. But sometimes the virus mutates and evolves, and it can become extremely contagious and extremely fatal in poultry.

OK, so the virus comes through wild birds, but gets into farms like this, as you’re describing. How have farms traditionally handled outbreaks, when they do happen?

Well, because this threat isn’t new, there is a pretty well-established playbook for containing outbreaks. It’s sometimes known as stamping out. And brutally, what it means is killing the birds. So the virus is so deadly in this highly pathogenic form that it’s sort of destined to kill all the birds on a farm anyway once it gets in. So the response has traditionally been to proactively depopulate or cull all the birds, so it doesn’t have a chance to spread.

So that’s pretty costly for farmers.

It is. Although the US has a program where it will reimburse farmers for their losses. And the way these reimbursements work is they will reimburse farmers only for the birds that are proactively culled, and not for those who die naturally from the virus. And the thinking behind that is it’s a way to incentivize farmers to report outbreaks early.

So, OK, lots of chickens are killed in a way to manage these outbreaks. So we know how to deal with them. But what about now? Tell me about this new strain.

So this new version of the virus, it emerged in 2020.

After the deadly outbreak of the novel coronavirus, authorities have now confirmed an outbreak of the H5N1 strain of influenza, a kind of bird flu.

And pretty quickly it became clear that a couple things set it apart.

A bald eagle found dead at Carvins Cove has tested positive for the highly contagious bird flu.

This virus, for whatever reason, seemed very good at infecting all sorts of wild birds that we don’t normally associate with bird flu.

[BIRD CRYING]

He was kind of stepping, and then falling over, and using its wing to right itself.

Things like eagles and condors and pelicans.

We just lost a parliament of owls in Minneapolis.

Yeah, a couple of high profile nests.

And also in the past, wild birds have not traditionally gotten very sick from this virus. And this version of the virus not only spread widely through the wild bird population, but it proved to be devastating.

The washing up along the East Coast of the country from Scotland down to Suffolk.

We were hearing about mass die-offs of seabirds in Europe by the hundreds and the thousands.

And the bodies of the dead dot the island wherever you look.

Wow. OK. So then as we know, this strain, like previous ones, makes its way from wild animals to farmed animals, namely to chickens. But it’s even more deadly.

Absolutely. And in fact, it has already caused the worst bird flu outbreak in US history. So more than 90 million birds in the US have died as a result of this virus.

90 million birds.

Yes, and I should be clear that represents two things. So some of those birds are birds who naturally got infected and died from the virus. But the vast majority of them are birds that were proactively culled. What it adds up to is, is 90 million farmed birds in the US have died since this virus emerged. And it’s not just a chicken problem. Another thing that has been weird about this virus is it has jumped into other kinds of farms. It is the first time we’ve seen a bird flu virus jump into US livestock.

And it’s now been reported on a number of dairy farms across eight US states. And that’s just something that’s totally unprecedented.

So it’s showing up at Dairy farms now. You’re saying that bird flu has now spread to cows. How did that happen?

So we don’t know exactly how cows were first infected, but most scientists’ best guess is that maybe an infected wild bird that was migrating shed the virus into some cattle feed or a pasture or a pond, and cattle picked it up. The good news is they don’t seem to get nearly as sick as chickens do. They are generally making full recoveries on their own in a couple of weeks.

OK, so no mass culling of cows?

No, that doesn’t seem to be necessary at this point. But the bad news is that it’s starting to look like we’re seeing this virus spread from cow to cow. We don’t know exactly how that’s happening yet. But anytime you see cow-to-cow or mammal-to-mammal transmission, that’s a big concern.

And why is that exactly?

Well, there are a bunch of reasons. First, it could allow the outbreak to get much bigger, much faster, which might increase the risk to the food supply. And we might also expect it to increase the risk to farm workers, people who might be in contact with these sick cows.

Right now, the likelihood that a farmer who gets this virus passes it on is pretty low. But any time you see mammal-to-mammal transmission, it increases the chance that the virus will adapt and possibly, maybe one day get good at spreading between humans. To be clear, that’s not something that there’s any evidence happening in cows right now. But the fact that there’s any cow-to-cow transmission happening at all is enough to have scientists a bit concerned.

And then if we think more expansively beyond what’s happening on farms, there’s another big danger lurking out there. And that’s what happens when this virus gets into wild animals, vast populations that we can’t control.

We’ll be right back.

So, Emily, you said that another threat was the threat of flu in wild animal populations. Clearly, of course, it’s already in wild birds. Where else has it gone?

Well, the reason it’s become such a threat is because of how widespread it’s become in wild birds. So they keep reintroducing it to wild animal populations pretty much anywhere they go. So we’ve seen the virus repeatedly pop up in all sorts of animals that you might figure would eat a wild bird, so foxes, bobcats, bears. We actually saw it in a polar bear, raccoons. So a lot of carnivores and scavengers.

The thinking is that these animals might stumble across a sick or dead bird, eat it, and contract the virus that way. But we’re also seeing it show up in some more surprising places, too. We’ve seen the virus in a bottle-nosed dolphin, of all places.

And most devastatingly, we’ve seen enormous outbreaks in other sorts of marine mammals, especially sea lions and seals.

So elephant seals, in particular in South America, were just devastated by this virus last fall. My colleague Apoorva Mandavilli and I were talking to some scientists in South America who described to us what they called a scene from hell, of walking out onto a beach in Argentina that is normally crowded with chaotic, living, breathing, breeding, elephant seals — and the beach just being covered by carcass, after carcass, after carcass.

Mostly carcasses of young newborn pups. The virus seemed to have a mortality rate of 95 percent in these elephant seal pups, and they estimated that it might have killed more than 17,000 of the pups that were born last year. So almost the entire new generation of this colony. These are scientists that have studied these seals for decades. And they said they’ve never seen anything like it before.

And why is it so far reaching, Emily? I mean, what explains these mass die-offs?

There are probably a few explanations. One is just how much virus is out there in the environment being shed by wild birds into water and onto beaches. These are also places that viruses like this haven’t been before. So it’s reaching elephant seals and sea lions in South America that have no prior immunity.

There’s also the fact that these particular species, these sea lions and seals, tend to breed in these huge colonies all crowded together on beaches. And so what that means is if a virus makes its way into the colony, it’s very conducive conditions for it to spread. And scientists think that that’s actually what’s happening now. That it’s not just that all these seals are picking up the virus from individual birds, but that they’re actually passing it to each other.

So basically, this virus is spreading to places it’s never been before, kind of virgin snow territory, where animals just don’t have the immunity against it. And once it gets into a population packed on a beach, say, of elephant seals, it’s just like a knife through butter.

Absolutely. And an even more extreme example of that is what we’re starting to see happen in Antarctica, where there’s never been a bird flu outbreak before until last fall, for the first time, this virus reached the Antarctic mainland. And we are now seeing the virus move through colonies of not only seabirds and seals, but penguin colonies, which have not been exposed to these viruses before.

And it’s too soon to say what the toll will be. But penguins also, of course, are known for breeding in these large colonies.

Probably. don’t have many immune defenses against this virus, and of course, are facing all these other environmental threats. And so there’s a lot of fear that you add on the stress of a bird flu virus, and it could just be a tipping point for penguins.

Emily, at this point, I’m kind of wondering why more people aren’t talking about this. I mean, I didn’t know any of this before having this conversation with you, and it feels pretty worrying.

Well, a lot of experts and scientists are talking about this with rising alarm and in terms that are quite stark. They’re talking about the virus spreading through wild animal populations so quickly and so ferociously that they’re calling it an ecological disaster.

But that’s a disaster that sometimes seems distant from us, both geographically, we’re talking about things that are happening maybe at the tip of Argentina or in Antarctica. And also from our concerns of our everyday lives, what’s happening in Penguins might not seem like it has a lot to do with the price of a carton of eggs at the grocery store. But I think that we should be paying a lot of attention to how this virus is moving through animal populations, how quickly it’s moving through animal populations, and the opportunities that it is giving the virus to evolve into something that poses a much bigger threat to human health.

So the way it’s spreading in wild animals, even in remote places like Antarctica, that’s important to watch, at least in part because there’s a real danger to people here.

So we know that the virus can infect humans, and that generally it’s not very good at spreading between humans. But the concern all along has been that if this virus has more opportunities to spread between mammals, it will get better at spreading between them. And that seems to be what is happening in seals and sea lions. Scientists are already seeing evidence that the virus is adapting as it passes from marine mammal to marine mammal. And that could turn it into a virus that’s also better at spreading between people.

And if somebody walks out onto a beach and touches a dead sea lion, if their dog starts playing with a sea lion carcass, you could imagine that this virus could make its way out of marine mammals and into the human population. And if it’s this mammalian adapted version of the virus that makes its way out, that could be a bigger threat to human health.

So the sheer number of hosts that this disease has, the more opportunity it has to mutate, and the more chance it has to mutate in a way that would actually be dangerous for people.

Yes, and in particular, the more mammalian hosts. So that gives the virus many more opportunities to become a specialist in mammals instead of a specialist in birds, which is what it is right now.

Right. I like that, a specialist in mammals. So what can we do to contain this virus?

Well, scientists are exploring new options. There’s been a lot of discussion about whether we should start vaccinating chickens in the US. The government, USDA labs, have been testing some poultry vaccines. It’s probably scientifically feasible. There are challenges there, both in terms of logistics — just how would you go about vaccinating billions of chickens every year. There are also trade questions. Traditionally, a lot of countries have not been willing to accept poultry products from countries that vaccinate their poultry.

And there’s concern about whether the virus might spread undetected in flocks that are vaccinated. So as we saw with COVID, the vaccine can sometimes stop you from getting sick, but it doesn’t necessarily stop infection. And so countries are worried they might unknowingly import products that are harboring the virus.

And what about among wild animals? I mean, how do you even begin to get your head around that?

Yeah, I mean, thinking about vaccinating wild animals maybe makes vaccinating all the chickens in the US look easy. There has been some discussion of limited vaccination campaigns, but that’s not feasible on a global scale. So unfortunately, the bottom line is there isn’t a good way to stop spread in wild animals. We can try to protect some vulnerable populations, but we’re not going to stop the circulation of this virus.

So, Emily, we started this conversation with a kind of curiosity that “The Daily” had about the price of eggs. And then you explained the bird flu to us. And then somehow we ended up learning about an ecological disaster that’s unfolding all around us, and potentially the source of the next human pandemic. That is pretty scary.

It is scary, and it’s easy to get overwhelmed by it. And I feel like I should take a step back and say none of this is inevitable. None of this is necessarily happening tomorrow. But this is why scientists are concerned and why they think it’s really important to keep a very close eye on what’s happening both on farms and off farms, as this virus spreads through all sorts of animal populations.

One thing that comes up again and again and again in my interviews with people who have been studying bird flu for decades, is how this virus never stops surprising them. And sometimes those are bad surprises, like these elephant seal die-offs, the incursions into dairy cattle. But there are some encouraging signs that have emerged recently. We’re starting to see some early evidence that some of the bird populations that survived early brushes with this virus might be developing some immunity. So that’s something that maybe could help slow the spread of this virus in animal populations.

We just don’t entirely know how this is going to play out. Flu is a very difficult, wily foe. And so that’s one reason scientists are trying to keep such a close, attentive eye on what’s happening.

Emily, thank you.

Thanks for having me.

Here’s what else you should know today.

On this vote, the yeas are 366 and the nays are 58. The bill is passed.

On Saturday, in four back-to-back votes, the House voted resoundingly to approve a long-stalled package of aid to Ukraine, Israel and other American allies, delivering a major victory to President Biden, who made aid to Ukraine one of his top priorities.

On this vote, the yeas are 385, and the no’s are 34 with one answering present. The bill is passed without objection.

The House passed the component parts of the $95 billion package, which included a bill that could result in a nationwide ban of TikTok.

On this vote, the yeas are 311 and the nays are 112. The bill is passed.

Oh, one voting present. I missed it, but thank you.

In a remarkable breach of custom, Democrats stepped in to supply the crucial votes to push the legislation past hard-line Republican opposition and bring it to the floor.

The House will be in order.

The Senate is expected to pass the legislation as early as Tuesday.

Today’s episode was produced by Rikki Novetsky, Nina Feldman, Eric Krupke, and Alex Stern. It was edited by Lisa Chow and Patricia Willens; contains original music by Marion Lozano, Dan Powell, Rowan Niemisto, and Sophia Lanman; and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly. Special thanks to Andrew Jacobs.

That’s it for “The Daily.” I’m Sabrina Tavernise. See you tomorrow.

• April 24, 2024   •   32:18 Is $60 Billion Enough to Save Ukraine?
• April 23, 2024   •   30:30 A Salacious Conspiracy or Just 34 Pieces of Paper?
• April 22, 2024   •   24:30 The Evolving Danger of the New Bird Flu
• April 19, 2024   •   30:42 The Supreme Court Takes Up Homelessness
• April 18, 2024   •   30:07 The Opening Days of Trump’s First Criminal Trial
• April 17, 2024   •   24:52 Are ‘Forever Chemicals’ a Forever Problem?
• April 16, 2024   •   29:29 A.I.’s Original Sin
• April 15, 2024   •   24:07 Iran’s Unprecedented Attack on Israel
• April 14, 2024   •   46:17 The Sunday Read: ‘What I Saw Working at The National Enquirer During Donald Trump’s Rise’
• April 12, 2024   •   34:23 How One Family Lost $900,000 in a Timeshare Scam
• April 11, 2024   •   28:39 The Staggering Success of Trump’s Trial Delay Tactics
• April 10, 2024   •   22:49 Trump’s Abortion Dilemma

Hosted by Sabrina Tavernise

Produced by Rikki Novetsky ,  Nina Feldman ,  Eric Krupke and Alex Stern

Edited by Lisa Chow and Patricia Willens

Original music by Marion Lozano ,  Dan Powell ,  Rowan Niemisto and Sophia Lanman

Engineered by Chris Wood

Listen and follow The Daily Apple Podcasts | Spotify | Amazon Music

The outbreak of bird flu currently tearing through the nation’s poultry is the worst in U.S. history. Scientists say it is now spreading beyond farms into places and species it has never been before.

Emily Anthes, a science reporter for The Times, explains.

On today’s episode

Emily Anthes , a science reporter for The New York Times.

Background reading

Scientists have faulted the federal response to bird flu outbreaks on dairy farms .

Here’s what to know about the outbreak.

There are a lot of ways to listen to The Daily. Here’s how.

We aim to make transcripts available the next workday after an episode’s publication. You can find them at the top of the page.

Special thanks to Andrew Jacobs .

The Daily is made by Rachel Quester, Lynsea Garrison, Clare Toeniskoetter, Paige Cowett, Michael Simon Johnson, Brad Fisher, Chris Wood, Jessica Cheung, Stella Tan, Alexandra Leigh Young, Lisa Chow, Eric Krupke, Marc Georges, Luke Vander Ploeg, M.J. Davis Lin, Dan Powell, Sydney Harper, Mike Benoist, Liz O. Baylen, Asthaa Chaturvedi, Rachelle Bonja, Diana Nguyen, Marion Lozano, Corey Schreppel, Rob Szypko, Elisheba Ittoop, Mooj Zadie, Patricia Willens, Rowan Niemisto, Jody Becker, Rikki Novetsky, John Ketchum, Nina Feldman, Will Reid, Carlos Prieto, Ben Calhoun, Susan Lee, Lexie Diao, Mary Wilson, Alex Stern, Dan Farrell, Sophia Lanman, Shannon Lin, Diane Wong, Devon Taylor, Alyssa Moxley, Summer Thomad, Olivia Natt, Daniel Ramirez and Brendan Klinkenberg.

Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly. Special thanks to Sam Dolnick, Paula Szuchman, Lisa Tobin, Larissa Anderson, Julia Simon, Sofia Milan, Mahima Chablani, Elizabeth Davis-Moorer, Jeffrey Miranda, Renan Borelli, Maddy Masiello, Isabella Anderson and Nina Lassam.

Advertisement