Heterodox economic theories focus on the human desires to spend, to save, to obtain credit in order to anticipate spending and future earnings, to increase or to reduce debt or even to deplete existing savings, on human behaviour. Those theories neither think that humans are rational nor that markets are efficient.
While Simon Kuznets did most of his initial research on the intentions of economic actor to spend or to save and on “secular” cyclical movements that are often caused by those intentions. Kuznets was of the opinion that the savings rate most often remained stable, while Keynes suggested that it fell with rising income.1.
He finally improved national income accounting and discovered a new concept that was called Gross National Product (GNP). This new concept was able to outpace the importance of the savings rate and those secular movements.
Heterodox economic theories comprise Michael Pettis, Richard Koo, Steve Keen, the Financial Times editor Martin Wolf, Post-Keynesians, Modern Monetary Theory (MMT), “New Arthurian Economics” and Austrian Economics. The ideas of Austrian economics are mostly identical to the classic economic theory but – due to the Keynesian revolution – it has become a heterodox “outsider” instead of being “orthodox and classic”.
Many of these theories economic theories focus on the human desires to spend, to save, to obtain credit to anticipate spending and future earnings, to increase or to reduce debt or even to deplete existing savings, on human behaviour. Those theories neither think that humans are rational nor that markets are efficient.
Some approaches roll back the wheel to Simon Kuznets’ original work and simply ignore the misleading concept called GDP that may lead to misleading market valuations.
Orthodox economic theories
The neoclassical synthesis or “orthodox” economic theories focus on concepts like rational economic actors, on individualism and on the economy as equilibrium. Orthodox economists often want to achieve a certain GDP growth that leads to “moderate inflation” between 0 and 2% per year. If this targeting is called nominal growth targeting or inflation targeting is a purely academic detail, given that nominal GDP and inflation are closely related.
All heterodox economic theories do not agree that economic actors are rational.
Savings, GDP and irrationality
We often use the term “Gross Domestic Consumption (GDC)” for economic growth in Western economies because GDP is essentially a function of consumption. Changes in investments are often positively correlated to consumption, where net exports have a negative correlation. Investment- and savings-driven growth, however, only play a role in Emerging Markets, in particular in Asia.
For us, mainstream economists, including many monetarists, use Quantitative Easing to increase artificial wealth in the form of housing and stock markets valuation. High valuations, however, may destabilize the savings rate on personal income and create irrationality.
We see the global macro world as a combination of multi-country sector balances possibly depict-able in Steven Keen’s Minsky models.
Bawerk (Pseud. for the Austrian economist Eugen Böhm von Bawerk): The Misleading Concept Called GDP
Richard Koo: The Balance Sheet Recession
Michael Pettis: Abenomics is just a measure to enforce higher household savings
Simon Kuznets: Uses and Misuses of National Income Accounting, in St. Louis Fed National Income, 1929-1932 : Letter from the Acting Secretary of Commerce Transmitting in Response to Senate Resolution No. 220 (72nd Cong.) a Report on National Income, 1929-32, Online Link
Chicago Booth: How Simon Kuznets codified modern economic growthReferences
- Hugo A. Keuzenkamp, “Probability, Econometrics and Truth: The Methodology of Econometrics“ [↩]