John S. Cline
July 30, 2009
Classical economics theory, founded in rational markets, is limited in application due to its inability to account for irrational behavior. Keynesianism, which takes human psychology into account, is despite of its ability to predict and prescribe for real markets similarly limited by its inability to affect the root cause of economic instability: income distribution. Neoclassical Synthesis was an attempt to use classical theory and Keynesian theory together in an uneasy macroeconomic alliance; however, by giving insufficient attention to finance economics, we have seen this alliance crumble into dust as the Crisis of 2008 swept much of the synthesis theory aside. What is needed now is a new economic theory which uses the most workable elements of Classical and Keynesian thought with real-world social and psychological theory. This time, a New Synthesis, combining proven economic methods with behavioral economics, dignitarian theory and inequality studies, and international institutional reform and infrastructure improvement, will be required to transcend the worst effects of free-market capitalism.
Classical economics theory, with its simplicity and ease of modeling, held sway for 140 years since the days of Smith and Ricardo. Then during the Great Depression, all of this great body of theory seemed to fall apart as no model could be produced to describe what was happening, much less prescribe a solution. Then in 1936, John Maynard Keynes rocked the entire economic community with the outlandish idea that government intervention in the economy could be beneficial, if not vital, and we entered the Age of Keynes. However, not all has been rosy in these many decades since, and Keynes ideas have been lauded, reviled, modified, turned on their head, and now seem to be on the resurgence.
In this paper, we will examine Keynes influence on economic thought in the 73 years since he published The General Theory, describe the limitations of Keynes theories, demonstrate why his theories are not fully applicable to today’s economic crisis in their original or even modified forms, and finally we will discuss the need for a completely new approach to economic thought and policy, with possible applications.
Keynes Influence on Economic Thought
John Maynard Keynes was the perfect man for his times, and a man before his time. A product of classical economics, his deep understanding of the economic theories of his day allowed him to examine them closely, interpret them in the light of what was happening in the Great Depression, and completely turn most of them on their head. From wage flexibility to the role of monetary and fiscal policy on the marketplace, his book, The General Theory of Employment, Interest and Money, forced economists the world over to re-think their understanding of prevailing theory and shaped the economic world we live in today. Even the growing field of behavioral economics stems from his General Theory where he playfully and artfully challenges decades of belief in the rational marketplace by introducing the concepts of confidence and psychological factors (his animal spirits) in consumer and business behavior (Keynes, 1936, pp. 161-162).
Perhaps Keynes' most important contribution to modern economic thought is his complete withdrawal from the classical economic principle of Say's Law, stemming from Ricardian economics, which states that economies can never experience a gain or loss of demand; the supply will always equal demand, and any imbalances that occur will quickly smooth themselves out (Keynes, 1936, pp. 18-22). Malthus, who influenced Keynes' thinking in this area, strongly disagreed with this Ricardian principle, pointing to objective, obvious examples of lack of demand; unfortunately, the Ricardian perspective won out and barely a mention of Malthus' views were to be found in classical economics textbooks (pp. 363-364). This puzzled and annoyed Keynes, and with the advent of the Great Depression (the epitomy of a loss of demand across the entire economy), set him onto a wholly unthinkable quest: to demonstrate that an economy, left to its own devices, could be in equilibrium without full employment (pp. 25-30, 280-286). Further, he showed that governments could intervene both fiscally and monetarily to manage the economy, especially during recessionary times, to maintain full employment and maximize potential production (p. 378).
The well-known "45-degree" curve describing this equilibrium tendency actually never appeared in The General Theory as such; it was graphically represented by Paul Samuelson in 1948 (Krugman, 2006), but is based on equations found in Chapter 3 of The General Theory as Keynes describes in detail how the aggregate demand depended on aggregate income, bringing his nascent behavioral economics to bear in the form of the marginal propensity to consume (MPC) (Keynes, 1936, pp. 29, 115). He maintained that aggregate income depends on the level of employment, so demand D is a function of labor N, and as employment is high, so too is the MPC, and therefore demand increases. When demand is small, producers cut back production and reduce staffing, increasing unemployment. Due to less than full employment, consumers spend less and therefore demand and supply reach a new equilibrium level far below potential.
Keynes' solution in this instance was for government to take up the slack in consumer spending by injecting money into the system. Through tax breaks and direct spending, government could boost production and thus raise employment. With increased employment, demand levels would increase, and a return to equilibrium at full capacity would be achieved (Keynes, 1936, p. 378).
The Limitations of Keynes
Although this methodology worked well during the Great Depression, and provided a means for economic stability for many decades, in the 1970's and 1980's Keynes fell out of favor with economists because they felt his models did not adequately account for "stagflation", which was the glut of overproduction combined with high inflation due to the rise of post-WWII European and Japanese industrial capacity (Krugman, 2006; Bello, 2009). Classical economists hailed the end of the hated Keynes, and Keynesians began trying to piece together models and theories that would account for this unaccountable economic morass. Neo-liberalism and New Keynesianism were two of many schools that flourished, most often using tools from both Classical and Keynesian economics in what is known as Neo-Classical Synthesis. This is a somewhat uneasy truce between two warring camps more than an actual synthesis; the Monetarists on one side, ideologically content with the idea that monetary methods were sufficient to keep an economy on track, the Keynesians on the other ready to flick the switch on fiscal intervention when necessary, and the New Keynesians in between moderating between monetary and fiscal policy. This macroeconomic catfight spun off many useful tools and theories, just as in war there are technological breakthroughs despite the awful destruction. The growing new field of behavioral economics, social applications of chaos and games theory, newly-refined and data-backed social theories in inequality studies, egalitarianism (now dignitarianism), and new thought in encouraging institutional reform abroad have all been the result of successes and failures of Neo-Classical Synthesis. For the most part, however, these have been ignored or considered interesting but ultimately fringe elements.
Until now. With the advent of the Crisis of 2008, new attention is being given to the defects of current economic thinking, and this is exposing to the daylight many of the theories and results of these exciting new fields. Before we get into these, perhaps a brief revisiting of Keynes is in order.
What the Keynesians Missed in The General Theory
The policies and methodologies employed by Keynesian economists that led to stagflation and also to our current crisis resulted from a misreading of Keynes, and a historical blind-spot. Keynes more than adequately explains the role of monetary and fiscal policy in his General Theory, and highlights very clearly that his was a limited case; his purpose was to diagnose and propose a cure for the Great Depression. Perhaps one great failing in The General Theory is that Keynes expected the economic conditions of the Great Depression to continue: only modest growth, limited available channels for entrepreneurship, and an industrial base that had essentially mapped out all available resources and thus had nowhere else to turn for expansion (Krugman, 2006). He did not foresee (nor in all fairness, did anybody else in his day) the boom years following WWII, the technological explosion following the invention of solid-state electronics and computers, nor the interlinking of globalized markets. Therefore, his solution applied to a static model, not a dynamic one. The Great Depression was a problem of wage-price equilibrium far below full employment, and his prescriptions worked quite well to resolve those problems.
Unlike the wage-price issue of Keynes’ day, however, we are now faced with a credit-value issue (Scot, 2009). As in his day, interest rates are near zero, but banks are refusing to lend because of massive amounts of toxic debts on their books and on those of other banks. Homes, previously the public's common currency of stored wealth, became artificially inflated in value and when that value dropped, even homeowners who had put in sizeable down payments found their equity upside-down. An enormous crisis of confidence ensued, leading to even further deflation of home values. These mortgages had been securitized and resold on the open market, often bundled and re-bundled to "spread the risk" until it was virtually impossible to know who held whose paper. As more and more defaults occurred, these formerly AAA-rated securities quickly turned toxic, worth cents on the dollar or even completely without value. Firms that had invested heavily in securitized mortgages began to face bankruptcy, and some like Lehman Brothers were indeed allowed to fail. Others, like AIG, were saved by government intervention in a move following Keynes script. But the problem remains, and unlike Keynes’ Great Depression and the wage-price issue, the credit-value issue is as yet unresolved.
A government injecting money into the economy, creating a deficit and raising employment by spurring demand, would today be considered a practical means of achieving the Keynesian full-employment goal during an economic downturn. However, though we are not by any means at full employment (and getting further from it with each passing day), the underlying problem is not wages or employment. It is confidence (Gross, 2009; Bello, 2009). And this is what Keynes was most passionately trying to get across in The General Theory. Confidence, both in the consumer and the producer, is required for a market to perform efficiently. With credit essentially tied up in Gordian knots, and a Damocles sword of currency devaluation and depression dangling from the frayed ends of the rope, simply spending more money in the public sector to boost employment will not free up the economy, and it will continue to only increase deficits without spurring production in the private sector. Lending, the lifeblood of the private sector, is languishing due to trillions of dollars in toxic assets which cannot simply be "forgiven" or written off the books. Overconfidence led to over-speculation and Ponzi schemes, which when confidence collapsed, took the global economy with it (Minsky, 1992, p. 8). This isn’t Keynes’ Great Depression, nor is it any longer an economic landscape Keynes would likely recognize.
Keynes lived and worked in a closed world, still enmeshed in a colonial mentality and with clear national borders and demarcated lines of international concourse. He saw the world as the developed and the colonized. His theories, therefore, work best in closed societies (Bello, 2009). But with the advent of globalization, Keynesian methods simply are not sufficiently effective. Money, trade, labor, and resources are internationalized; jobs previously performed in domestic markets are now performed for a fraction of the wages in developing countries, and enormous trade deficits are now considered the fair price of a consumerized economy. Debtor nations hang on with bated breath to the every whim of the creditor nations, for fear of having the debts called in, resulting in overwhelming economic uncertainty. There is an unprecedented amount of U.S. currency held abroad, and today’s economy dwarfs that which existed in Keynes’ day. Due to these factors, Keynesian economics alone will at best have a modest effect on a globalized international economy, with a multiplier close to, or even less than, one for any “normal” Keynesian methods (Bello, 2009). Keynes signature prescription will help more people return to employment, and bring about a temporary relief, but it will not help the core of the problem: income disparity, both domestically and abroad. With this still in place, and growing daily, this Crisis of 2008 will be only one of many down the road, perhaps leading to a systemic and catastrophic collapse of economies worldwide. What is needed is not just more Keynesianism, but a complete overhaul of economics theories and practices for a new kind of economy (Fuller and Scheff, 2009).
Keynes Points the Way
One of Keynes most often-missed contributions to economic thought was his insistence that international egalitarianism was a vital component of any economic policy. In his view, the key driver of economic turmoil was only partly due to the business cycle; the business cycle itself was directly influenced by income distribution (Keynes, 373-377). As long as large disparities in income distribution existed between the richest and poorest in society, a swing in the business cycle would be amplified and hamper the smooth functioning of the entire economy. Though no socialist, Keynes felt that income inequality should be addressed: rich nations should put more effort into helping poorer nations, because reducing income inequality not only at home but also abroad was key to prosperity for all.
To some degree, his advice was heeded after WWII, as evidenced in the Marshall Plan and increases in foreign aid that occurred in the following decades. This new internationalism had mixed results: in the former Axis countries of Germany and Japan, where a complete overhaul of the economic and political infrastructure ensued, there was great success. In countries that received foreign aid where institutional reform had not occurred, often there was little or no change in income equality; at times, situations became worse, as the aid was confiscated by corrupt regimes or badly distributed by inept ones. Often, the main problem was one of a lack of sufficient institutional and social infrastructure to adequately meet the needs of their populations (Heilbroner, 238-258; Gwartney, Stroup, Sobel, and Macpherson, 2009, p. 341-342).
Another area of concern was foreign business investment. Private businesses that invested in poorer countries often took advantage of loose or non-existent regulation, rarely used profits to provide direct investment in infrastructure or institutional reform within the host countries, and often exacerbated the disparity in income between the richest and poorest in those nations. Various trade agreements and regulatory efforts, such as GATT and later the WTO, have reduced these harmful effects to some extent, but depredations still occur and in most cases, meaningful institutional reform and social infrastructure is still lacking.
Obviously, it is not feasible (or wise) to overthrow entire countries to rebuild them from the ground-up as was done in post-WWII Europe and Japan, or in modern-day Iraq and Afghanistan. Nor is it effective to simply pump more money into foreign governments that are often corrupt or that have inadequate means to fully translate funds into institutional or infrastructure improvement. And expecting corporate largess to rescue developing, and especially failed states, from extremes of poverty and income inequality is an exercise in folly. Even social entrepreneuring, a promising new area of entrepreneurship which seeks to promote social welfare and environmentally-sound practices in business, are not in the business of radically reshaping entire nations of people.
We know that income inequality effects a country’s ability to maintain a stable economy; we also know that strong institutions, such as a good educational system, a foundation in the rule of law, and a reasonably corruption-free political system combined with a modern physical infrastructure such as roads, bridges, Internet access, telephones, cellular service, and clean food and water are vital to ensure a country at least has the opportunity for economic growth. So what can be done to bring about institutional and infrastructure change while at the same time reducing the harmful effects of pronounced income inequality?
Failings of Current Economic Theory
To bring Classical and Keynesian economic theory into harmony with political and social reality, we must first identify the key factors which modern economic theory lacks:
First, as mentioned above, Classical economics relies entirely on rational markets, while Keynesian economics takes the psychology of both the consumer and the producer into account but only in limited ways. Further, even New
Keynesian theories fail to provide predictive models of irrational behavior; instead, they seek to describe such behavior and analyze its effects after the fact, much like a sports commentator describes a botched quarterback “fake” as dependent on a prior knee injury. It is instructive to be able to describe what caused what, but this does not necessarily allow us to predict future events. Knee injury or not, the next time the quarterback tries to fake a pass, he may succeed.
Second, no current economic theory addresses the underlying problem of disproportionate income distribution, which is largely seen as a political and not an economic problem, or is seen as a microeconomic issue rather than macroeconomic.
Third, there is a very real disconnect between theory and practice, despite decades of policy prescriptions based on apparently sound economic models; often, theories are supported or discarded based on observations of crises like the one now facing us, rather than on any kind of formal or empirical studies. In essence, this means that macroeconomic theories are for the most part tested in a macro-laboratory, without controls, and the success or failure of a particular policy prescription is determined by the volume of human suffering it either eliminates or causes (Economist, 2009).
And fourth, the economics profession teaches every first-year student that economists must avoid normative arguments, such as “The minimum wage should be higher” or “There are too many poor people in the country”. Although on the face of it, this is a perfectly reasonable and scientifically sound condition (is there a mathematical operator for “should be”?), it also has a serious flaw: people are normative, not positive by nature. Since people make up the body politic, economics is driven by normative public policy, not positive rationalist planning. Therefore, any economic theory (or policy derived from such) which does not take normative arguments into account is unable to satisfy two basic human psychological needs: fairness and an individual’s sense of self-worth (recognition) (Akerlof and Shiller, 20-21; Fuller, 2009).
The Missing Element: Social Equity
This last deserves a bit more explanation: recognition is not mere fame or public acclaim, nor does it involve equal pay; perhaps a better way to describe this desire for recognition is through the concept of social equity. Social equity is that quality intrinsic in each human being in which they provide some value to society as a whole. Measured in the usual thinking of modern economics, a doctor is more valuable than a ditch-digger; anyone in decent health can dig a ditch, whereas a doctor takes years of training to acquire the skills needed to perform medicine. Additionally, the conditions of birth statistically prescribe the likely outcomes of two children; by age 35, a child born in a slum is far more likely to become the ditch-digger, while a child born in a middle-class suburb is far more likely to become the doctor. In social equity terms, however, every human being has an equal measure of social value; at birth, all children are the same. What determines the child becoming a doctor or a ditch-digger is environment, not intrinsic value, rank, or station of birth. Modern economics has not yet divorced itself from its Malthusian past; we still think that a poor person is somehow inferior to a person of means. This misconception is called rankism; an abuse of natural rank differences leading to malrecognition and disconnection of those abused from society. This creates an atmosphere of distrust: those of higher rank fear those of lower rank, and those of lower rank resent those of higher rank due to perceived abuses (Fuller, 2009).
Therein lies the problem; because rankism exists, social inequality exists, and perverse income inequality follows. Distrust naturally heightens problems of confidence during economic downturns, and is exacerbated by an income distribution which is considered “unfair”. Of course a doctor must be paid more than a ditch-digger; skills and training must be rewarded, and the ditch-digger having his broken arm set does not consider it unfair if the doctor treating him makes ten times as much in compensation. However, if the ditch-digger observes a cosmetic surgeon who works twenty hour weeks dealing only with Hollywood stars and makes fifty times what they make, they will find this unfair. In isolation, this would not be much of a problem; however, when this is repeated multiple times across society in many different arenas a general sense of unfairness sets in among the lower-ranking members of society, leading to further drops in aggregate confidence which multiplies during economic downturns. As Akerlof and Shiller point out, just as there are multipliers for consumption, investment, and expenditures, there is a confidence multiplier (2008, pp. 14-16). It is this that modern economics theories fail to include.
Therefore, economics theories must include a place for normative arguments in their models, because the underlying problem in society is a normative one, not a positive one: too many people are living in societies with radically disproportionate income inequalities, being (or feeling) abused by rankism, perceiving society as unfair, damaging confidence. This normative argument affects all the others, and it must be addressed.
As demonstrated here, the economics profession must strive to include normative decision-making, the concept of fairness, and the harmful effects of rankism in their prescriptive models for economic policy. Additionally, a focus on institutional reform both domestically and abroad combined with infrastructure improvements that allow dissemination of economic benefits to a wider audience also needs to be incorporated as part of economic policy.
The rapidly emerging field of behavioral economics provides solutions for many of these issues, and often tests its theories in real-world socio-economic experiments. Building on Keynes “animal spirits” ideas and various attempts to fit irrationality into utility maximization models (ie. Palley, 2005, 13-14), behavioral economics seeks to combine economics with psychology; to determine how human minds actually work when making economic decisions. The work of Richard Thaler and others has been nothing short of startling: where Classical economics holds that people will always tend towards rational decision-making, and even Keynesian economics holds that although individuals will act irrationally but in aggregate, they will trend towards a rational outcome, behavioral economics shows that even in aggregate, markets can be totally irrational (Thaler, Mullainathan and Kahneman, 2008). Our current economic crisis bears this thinking out quite nicely; irrational exuberance, combined with decisions based on emotions rather than logic, inflated a bubble economy which soon burst.
To explain how economic decisions can be made on emotional, irrational grounds, let us look at the concept of fairness. In Classical economics, this is completely missing; it has no influence on decision-making. If I wish a glass of milk, I would rationally choose to pay the lowest price I could for it, maximizing my expenditure, while the marketplace will price that milk at a value I am willing to pay, maximizing their profit. In behavioral economics, this plays out completely differently (and as we shall see, in a completely recognizable way) (Akerlof and Shiller, 21-22).
Now consider this same glass of milk, but in a real-world scenario. I am home-bound, and wish a glass of milk. A friend is going out for an hour, and offers to get the milk. I give him a ten-dollar bill. In the first instance, my friend is going to meet a business client at a fancy hotel restaurant for lunch. He goes to lunch, and returns with my milk, and five dollars in change. Knowing beforehand that he was going to a fancy restaurant, having paid five dollars for a glass of milk seems fair. In the second instance, my friend is going to a grocery store. He returns with my milk, and five dollars in change. Knowing beforehand that he was going to the grocery store, having paid five dollars for a glass of milk now seems unfair. In Classical economics, the glass of milk should have cost the same; in behavioral economics, paying the same price at a grocery store versus a fancy restaurant places a different cognitive frame around the purchase (Worch, 2006, pp. 3-5). I expect to pay more for milk from a fancy restaurant than I would from a grocery store, because in my mind there is a frame containing “fancy restaurant” and a frame containing “grocery store”. This is an example of irrational decision-making that goes beyond the microeconomic; entire populations make similar framing judgments daily, resulting in economic decisions that are unpredictable with either Classical or Keynesian methods. Behavioral economics models can both describe and predict for this irrationality in aggregate markets by applying known psychological principles (Akerlof and Shiller, 169-171).
Dignitarianism: the Science of Egalitarianism
In addition to behavioral economics, a growing body of theory has developed around the issue of rankism (Fuller, 2009). Previous economists and philosophers have discussed the need for egalitarian social models to offset abuses of rank in society, such as poverty, income inequality, fairness issues, access to food and healthcare, and educational inequality. Modern thinking has advanced egalitarian ideals in the form of “dignitarianism”, or the promotion of dignity within a society. Unlike socialistic theories, dignitarianism regards differences in rank within a society as a natural human construct; it is not the differences in rank, but the abuses of rank (whether actual or perceived) that harm society as a whole. Therefore, institutions and the overall social structure must be organized in such a way that abuses in rank are less likely to occur. This includes eliminating perverse income inequality, providing a price floor on wages (a “living wage” indexed to inflation, not simply a static minimum wage), ensuring social safety nets are ample in extent and efficient in outcomes, providing universal healthcare for all citizens regardless of ability to pay, and ensuring that all members of society are able to obtain an equal quality of education if they so desire (national or international curriculum standards, funding for schools, teachers and materials, and ample financial aid for students to attend college are some examples) (Fuller, 2009).
To get an idea of how this affects a society and that society’s economy, let us return to the doctor and the ditch-digger for a moment. In a society that has no rankism, the ditch-digger is there by choice, and is not resentful of those who have more lucrative positions. Why? Because all means are available to him to change his rank in society. He is not digging ditches because of lack of available education, or because he belongs to the wrong caste, or because he married the wrong family. Further, he is not worried about his future, because he knows that should ditch-digging no longer provide employment, a safety net exists to help keep his family fed and housed. In addition, he is not worried about his health, because he has excellent healthcare whether he is currently employed or not. The incentive is still there to work and achieve more, but the psychological and physical harm that worry and stress causes is diminished. The ditch-digger is able to lead a happier life because of less stress, and is more productive in the process. Even if he is the lowest-ranking member of society, his social equity is recognized, and he retains his dignity.
So how does the doctor benefit from a lack of rankism? In our rank-less society, the doctor is free to practice wherever and however she chooses; she is not tied to the whims of insurance companies or corporate hospitals. She can treat patients as people, not as parts on an assembly line. In addition, and perhaps most importantly, she is able to earn her large pay without feeling guilt, which is also a stressor. She knows that her higher income is due to her higher skill level and demand for her expertise, not because of an artificial rank distinction. Without this rank abuse, the doctor is better able to perform her duties with less need to justify her salary or social position. This reduces her stress levels, improving her health and productivity as well. Her social equity is recognized, and she retains her dignity.
It should be obvious, then, that in a dignitarian society higher worker productivity results because of less stress, and also less friction between ranks in society. In addition, less stress results in less stress-related illness, reducing healthcare costs and lost work-days (Fuller, 2009). The economic benefits may be obvious, but achieving a truly dignitarian society is decades away at best; a combination of political will and economic incentives such as those listed above must be put in place over time to gently guide society in this direction.
Institutions and Infrastructure
Two means to achieve these ends include institutional reform and infrastructure improvements. Both are nothing new; it is common sense that when you have a society with poor infrastructure and inept institutions, all sorts of economic instability occurs, and sometimes disaster follows. One has only to look at the tragedy of the Ethiopian famine of 1984: in a country where over one million people starved to death in the northern provinces, the southwestern provinces were yielding surpluses of food, and in fact crops were in such abundance they were left to rot in the fields. Where less than two hundred miles separated them, inadequate infrastructure and governmental institutions and the depredations of civil war resulted in a failure to connect the food to the people (Cycles, 1988).
As previously mentioned, direct aid to developing countries has had mixed, and often counterproductive, results. For the United States, the solutions here are obvious and directly actionable; rebuild crumbling roads, extend broadband Internet to rural areas, develop nationally-recognized curriculum standards and properly fund schools, restructure political incentives to ensure politicians act for their constituents rather than moneyed special interests, etc. But how to enact such reforms and improvements abroad? International institutions are already in place that can aid in such efforts. Three of these include the International Monetary Fund (IMF), the United Nations Economic and Social Council (ECOSOC), the World Bank, and a large variety of Non-Governmental Organizations (NGOs) (IMF, 2009; ECOSOC, 2009, World Bank, 2009). Much has already been done to tie economic aid to real institutional reform, and more needs to be done. Further, international legal protections for NGOs needs improvement, perhaps by allowing NGOs to operate under a non-fiduciary arm of the UN charter and thus gain the same protections as UN operations. Expanding the reach and targeting of social entreprenuering programs such as “microloans” is also a proven method of increasing prosperity in developing nations (Sama, 2009). Finally, developing an international fund for an expanded International Peace Corps to help build roads, bridges, and telecommunications lines as well as agricultural technology also needs attention.
In Conclusion: The New Synthesis
One of the motivators in physics is a development of what is often called a “Theory of Everything”, that takes the theory of quantum electrodynamics and finds a way to incorporate the theory of gravity to produce one overall synthesis theory. Modern economic thought must also seek its own Theory of Everything, by incorporating the Neo-Classical Synthesis with behavioral economics, dignitarianism, and commitments to domestic and international institutional reform and infrastructure improvements, as a formal model of economic policy prescription. Only then will social ills ignored by Classical economics or inadequately handled by Keynesian economics be addressed. The opportunity to finally drive a nail in the coffin of the economic causes of poverty, perverse income inequality, insufficient or non-existent social safety nets, and discrepancies in educational equality and opportunity, is to be found in a New Synthesis, with behavioral economics at the core, not the periphery. Libertarian and Classical economists believe that a rising tide will lift all boats; Keynesians argue about the best way to stir the ocean; New Synthesis economists will recognize that most of those boats are leaky, and will work as much on repairing the boats as on raising the tide.
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