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Economics versus Reality: How to be Effective in the Real World in Spite of Economic Theory


John M Legge


Published January 30, 2016
ISBN 9781412862516 - CAT# Y336296

ISBN 9781412857161 - CAT# Y336290


ISBN 9781351295680 - CAT# YF26962



















John M. Legge shows the many ways in which the real world diverges from economics textbooks. He argues that mainstream economic theory took a disastrous turn 140 years ago, when it attempted to use calculus to explain human behaviour. A real economy involves people who are not variables in equations. This error led to a second, mainstream economics becoming obsessed with equilibrium. However, constant change is the reality and one cannot explain the present without understanding the path taken to get here.

This book presents economics in historical context. It includes a short account of the contributions by some of the key figures in economic theory, starting with Adam Smith. Smith placed great weight on morality: he believed that economic activity took place in a society and could not be justified except insofar as it advanced the interests of that society.

Too many economists have come to believe that the interests of society can be measured by a number: that if a policy change raises GDP it is justified, whatever its impact on people. Legge places the economy within society, and society within the environment, explaining that every significant decision has a social and environmental impact, as well as an economic dimension. Seeking to provide answers to students, professional business managers, and those interested in the political process, this work addresses the gap between theory and reality.



Note on Measurements


1     Uses and Abuses of Economics
Textbook Economics
Economics and the Environment
Economics and Infallibility
Economic Miracles
Class War
Models and Reality

2     Names to Reckon With
The Classical Economists
Thomas Malthus
Neoclassical Economists
Jevons and Walras
Alfred Marshall
Paul Samuelson
The Chicago School
Public Choice and Regulatory Capture
Neoliberalism Stage 3 in Practice
The Washington Consensus

3     Competition: Real or Perfect?
Teaching Perfection
The Welfare Flaw
The Mathematical Error
The Attractions of Perfect Competition
The F-twist
Realistic Competition
IO Economics
Monopolistic Competition
Price in the Real World
Representative Consumers?
Representative Firms?
Unique Attributes
Change and Continuity

4     Money and Banking
Fiat Currencies
Banking in Theory and in Practice
Fractional Reserve Banking
Dustytown, United States
Reality Turned Upside Down
Political Consequences
Regulated Banking
Saving and Investment

5     Macroeconomics
Crises Are Endogenous
Drivers of Employment and Unemployment
Monetary Neutrality
The Politics of Trade
Trade in General
Contemporary Issues
Trade and Investment

6     Inflation
Prices and Wages
Innovation, Prices, and Employment
Origins of Inflation
Normal Inflation
Asset Price Inflation
The 1970s and After
The Great Moderation
The Politics of Inflation

7     The Great Recession and the Eurozone Crisis
How the Scene Was Set
Limitations on Liberalism
Enter Chaos and Complexity
The Keynesian Revolution
Neoliberalism Ascendant
The Southeast Asian Crisis
Crisis Phase 1: Subprime
Crisis Phase 2: The Eurozone

8     The Labor Market
Classical Theory
Neoclassical Theory: Outline and Critique
The Inside/Outside Disparity
Labor Market Structure: The Galbraith Analysis
How It Really Works
Keynes on Unemployment
NAIRU and Full Employment
Equity Considerations
Matching Skills to Need
Winner Takes All?
Education and Experience
Policies and Results
Responding to the Skills Crisis
Proven Labor-Market Alternatives

9     The Engine of Growth
Growth in Theory
Schumpeter’s Spiral Staircase
Neoclassical Growth Theory
Product Differentiation: Consumer Fraud or Valuable Innovation?
Innovation in


