Heterodox economics challenges conventional economics, including the neoclassical synthesis and rational choice theory. It encompasses various schools of thought that reject mainstream economic thinking and methodology. Many heterodox economists criticize the definition and scope of the economy and the assumption of rational decision-making.
Heterodox economics includes methods and theories outside of conventional economics. It is an umbrella term that links several schools of economic thought, many of which have little agreement with each other. A common criticism, however, is that the neoclassical synthesis – a combination of earlier economic theories – is inherently imprecise. Another unorthodox criticism is the methodology used by other economists. Many heterodox economists reject rational choice theory, the assumption that individual choices will reflect rational decisions.
The term heterodox connects hetero “different” and -dox for orthodox. Literally, heterodox economics means “different from orthodox economics”. Heterodox economists disagree with one or more central tenants of mainstream economic thinking.
Mainstream economics, the economics accepted by most economists, is a combination of previous economic theories. Neoclassical economics focuses on free markets that will achieve efficiency through supply and demand. Keynesian economics, named after British economist John Maynard Keynes, holds that a significant amount of government intervention is necessary for economic efficiency. Modern mainstream economics is largely a combination of elements from these two theories.
The mixture of neoclassical and Keynesian economics has been dubbed the neoclassical synthesis. Specifically, neoclassical theories are applied primarily to microeconomics, the study of individual decisions in an economy. Keynesian economics, on the other hand, is applied primarily to macroeconomics, the study of an economy as a whole. Many theorists of the heterodox school of economics reject part or all of the neoclassical synthesis. They claim that this places constraints on a fuller understanding of economic activity.
Many heterodox economists criticize the methodology of conventional economics. At issue may be the definition and scope of the economy itself. Economics is inherently difficult to draw a line because it is so interconnected with other psychological and social phenomena. Another common issue in heterodox economics is the boundary between experimental and theoretical approaches. In other words, economists disagree about what assumptions about individual behavior can be made without first gathering supporting evidence.
Indeed, mainstream economics generally assumes that people will behave as rational agents. This means that they will tend to act in ways that maximize their material condition and well-being. The problem, however, is how to define a term like “well-being” and whether people actually act in seemingly rational ways all the time. Some schools of heterodox economics challenge the assumption that people make generally rational decisions. Instead, people’s choices are often altered by limited information to make them act in seemingly irrational ways.
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