Housing in a Sane Global Economy – Starting Economics: Again!, Australasian Housing Research Conference 2019, Adelaide, 6 – 8 February, 26 pages (2019)
This paper presents, all too briefly, some thoughts on a radically different version of economics and its implications for our understanding of the economics of housing.
Despite its acknowledged weaknesses and ongoing failures and, despite the proliferation of alternate forms, neoclassical economics still dominates the economics taught in our universities, housing and urban research and, subsequently, economic and housing policy.
Neoclassical economics has led us not just nowhere but to regular disasters, global and local. The orthodox single-flow analysis is inadequate and has trapped us all into a destructive tunnel of thinking. It promotes gambling on the stock exchange, on house prices, on foreign exchange, on derivatives etc. to the detriment of the production of good and services. It distorts measures of economic well-being. It promotes the externalization of costs onto the environment, other industries, government and consumers.
In the 1970s, Joan Robinson declared: “It is time to go back to the beginning and start again”. Despite the global financial crisis, calls for a new approach to economics have largely failed.
So, this paper outlines a framework within which to consider a new theory of economics and its general characteristics. It briefly distinguishes two different forms of production and, systematically exploit this distinction to develop a two-flow analysis of the economy. The paper then outlines, in broad terms, a new theory of economics and its implications for housing research and policy. This theory will slowly cultivate a sane local and global economy.
Attached is my 15 minute presentation to a Research-in-Progress Seminar at the Swinburne Centre for Urban Transitions. It presents some thoughts on a radically different economics. The economics taught in universities and used in housing and urban research has led to financial, environmental and social disasters. The orthodox single-flow analysis is inadequate and promotes gambling on the stock exchange, house prices, foreign exchange, derivatives etc. The emergence of a science of economics will slowly cultivate a sane global economy.
For more than a decade now, AHURI has been exploring the linkages between research and policy. In recent years, it has sought to make its housing research more relevant by engaging with policy-makers through its new policy development research model of evidenced-based policy inquiries which seek “to integrate[s] the traditionally separate processes of evidence building and policy development into one set of practices”.
Thomas Piketty’s Capital in the Twenty-First Century is one example of evidenced-based policy in which housing has key role. Various commentators, even those very supportive of Piketty’s overall conclusion about growing inequality, have disputed his use of data, his framework of analysis and definition of capital and the efficacy of his policy proposals for a progressive income tax and an annual tax on capital.
While he draws upon a vast range of data across centuries and across countries, Piketty’s plight (McShane 2014), and even that of his commentators, is an inadequate economic framework for understanding this data based on a view of research that massively underestimates our capacity to understand how economies work.
Using Piketty’s Capital and his commentators as an example, this paper will argue that data derived from quantitative and qualitative methods are not a sufficient basis for policy-making nor is this data a sufficient basis for other methods. If we are to develop good housing policies, we also need methods that develop heuristic frameworks, identify the dynamics of history, evaluate and critique these dynamics and, articulate a vision of society that these policies pre-suppose.
This submission is a response to a Productivity Commission Discussion Paper “Increasing Australia’s future prosperity”. It cover three areas:
- Housing and productivity
- Towards a new understanding of an economy, and
- How we bring about progress, innovation and reform.
It presents an interesting view of the economy – a dynamic view rather than a static view.
It focuses initially on the production process rather than, as in contemporary economics, the flow of funds between entities.
It distinguishes between two modes of production: a basic mode which produces the goods and services that constitute a standard of living within a society; a surplus mode which produces and maintains equipment for the basic mode. By tracing the impact of new technology through these modes, we can understand the different phases of an economy and take action to avoid the extremes of booms and busts
Lonergan’s economic theory: a template which challenges current social and economic research, in N Ormerod, R Koning and D Braithwaite (eds), Fifty Years of Insight: Bernard Lonergan’s contribution to philosophy and theology, ATF Theology, Adelaide, pp.175-204 (2011)
Lonergan’s heuristic anticipates the understood as a complex ecology of schemes of recurrence. Such a heuristic also underpins his understanding of society as a complex ecology of technological, economic, political and cultural schemes of recurrence.
Lonergan’s economics provides a template, an example of how we can shift from a common sense understanding of our society to a theoretical understanding. A common sense understanding of economics does not distinguish between various aspects of society concluding, for example, that human motivations such as greed are the reason for the extremes in poverty and wealth in our world. Lonergan, on the other hand, in his ‘pure’ analysis of the exchange economy distinguishes between economic and political schemes of recurrence and between an ethic of economics and the motivations of participants within that economy concluding, for example, that ignorance not greed is the prime cause of poverty. To understand our society is to understand both the systematic (through classical method) and the non-systematic (through statistical method) elements of these schemes of recurrence, their complex inter-relationships and their development. Implementation of social and economic policy through which progress will be realised requires an integration of the ethic operative in various schemes of recurrence.
This paper outlines the unique aspects of Lonergan’s economics and its basis in his notion of a scheme of recurrence as developed in Insight. It argues that Lonergan’s heuristic, the scheme of recurrence, poses a challenge for current social and economic research, particularly where it is dominated by common sense thinking.
Understanding Lonergan’s economics presents some difficult challenges for current economists and social scientists. His 1944 text is unlike any other economic text. It systematically unfolds an understanding of economics, yet it is sparse, with few references to economic texts. But more significantly for the reader, it demands some major shifts in current thinking.
So how are we to find a way into the text? What shifts do we need to make to understand the text?
As a prelude to reading Lonergan’s economics, this paper outlines some of the major shifts which a current economist or social scientist has to make if they are to understand his text. The primary shift is from a common sense understanding to a theoretical understanding of economics.
An understanding of Lonergan’s heuristic notion of schemes of recurrence is one way into understanding this basic shift from common sense to theory. This heuristic anticipates that a society (and an economy) can be understood as a complex ecology of schemes of recurrence with layers of systematic (through classical method) and non-systematic (through statistical method) elements.
An understanding of this heuristic notion of schemes of recurrence will assist the reader to:
- Distinguish between technological, economic and political schemes of recurrence – thus, locating Lonergan’s ‘pure’ analysis of the exchange economy and the purpose of economics within this complex ecology of human schemes of recurrence;
- Contrast Lonergan’s focus on functional relations within an economy with the traditional focus on entities such as household, firms and government;
- Discern an ethic within economic processes – thus, economic activities can be evaluated internally rather than using arbitrary external criteria;
- Distinguish between an ethic of economics and the motivations of participants and thus, why he would conclude that “ignorance, not greed, is the prime cause of poverty”;
- Contrast Lonergan’s concern for progress through a democratic approach to the economy with the current emphasis on central planning through government and government agencies.
This presentation outlines Lonergan’s heuristic notion of schemes of recurrence and the importance of this notion to understanding Lonergan’s writings. In this context, it explores those shifts that a reader has to make if they are to understand Lonergan’s economics.
Lonergan’s economic theory as a template which challenges current social and economic research, 50 Years of Insight: Lonergan’s contribution to philosophy and theology Conference, Australian Catholic University, Melbourne, 20 pages (2007)
See the book chapter above for a final version of this Conference paper and a summary of its content