toward new pradigim
Towards A New Paradigm for Economics
International Institute of Islamic Economics
International Islamic University
Abstract. Current economic theory is mainly concerned with the factors which affect the wealth of nations. Issues of income distribution and elimination of poverty and deprivation is secondary. The present paper invites discussion on a new paradigm: hunger and homelessness to make the subject of economics really serve the humankind.
1. Focus of Conventional Economics is Wealth and not Poverty
Current Economic theory is firmly set in the mold structured by Adam Smith 1904). His concern was to ...view middle of the document...
There is no natural way to define poverty in our microeconomic theory, and our tools shape the way we look at the world. To a much bigger extent than realized, the failure of our theories to recognize the poor affects their fates. Trade theorists insist that free trade generates more global wealth (under ideal conditions) and hence can lead to a Pareto improvement if the wealth is redistributed. At the policy level, economists press hard for free trade but make no attempt to ensure that the redistribution will also take place. The failure of our theories at the macro and micro levels to recognize the existence of the poor leads numerous types of policy failures both at the theoretical and at the practical levels.
Numerous attacks have been mounted on the neoclassical paradigm. On the empirical side, it appears that people rarely behave “rationally,” when rationality is defined in the neoclassical sense. A prominent challenger on this side has been Herbert Simons (1982), who developed the concept of “bounded rationality.” Studies of decision making by psychologists show systematic deviations from neoclassical rationality, as documented by Kahneman, and Tversky (1985), etc. Applied studies of consumer behavior show systematic flaws in the utility model, the main ones being the relative instability of consumer preferences, and the effects of information/misinformation. In econometric studies, systems of demand equations based on utilities can be constructed only under rather restrictive assumptions. Such assumptions typically show systematic violations of predictions such as Slutsky (1937) symmetry conditions. On the other hand, with no restrictions, it shows that all patterns of aggregate demand are compatible with some underlying utility functions. Thus the theory is vacuous, in the sense that it yields no implications about observable aggregate demand functions. Experimental game theorists have also confirmed systematic violations of even the simple dominance principle (according to which people prefer more money to less) in the ultimatum game.
Kuhn (1996) has shown that counter examples never suffice to replace a paradigm. It is only the emergence of a new paradigm which displaces the old one. Convincing demonstrations of the failures of conventional micro and macro theories have been given by many economists, working from numerous different points of view and different schools of thought. However, no clear and well-defined alternative has emerged, partly because there is no agreement to a common framework among those who seek to displace conventional theory. In this paper we propose a simple alternative which could be used to replace conventional micro theory, and could command consensus among very diverse schools of thought which are critical of conventional theory. Adoption of this as shared paradigm, regardless of further refinements which may be added by adherents of different schools, would create a unity among the dissenters and...