By John Komlos
The 2008 financial crisis, the rise of Trumpism and the other populist movements which have followed in their wake have grown out of the frustrations of those hurt by the economic policies advocated by conventional economists for generations. Despite this, textbooks continue to praise conventional policies such as deregulation and hyperglobalization.
Foundations of Real-World Economics is a textbook that demonstrates how misleading it can be to apply oversimplified models of perfect competition to the real world. The math works well on college blackboards but not so well on the Main Streets of America. This volume explores the realities of oligopolies, the real impact of the minimum wage, the double-edged sword of free trade, and other ways in which powerful institutions cause distortions in the mainstream models. Bringing together the work of key scholars, such as Kahneman, Minsky, and Schumpeter, this book demonstrates how we should take into account the inefficiencies that arise due to asymmetric information, mental biases, unequal distribution of wealth and power, and the manipulation of demand.
Foundations of Real-World Economics offers students a valuable introductory text with insights into the workings of real markets, not just imaginary ones formulated by blackboard economists. A must-have for students studying the principles of economics as well as micro- and macroeconomics, this textbook redresses the existing imbalance in economic teaching. Instead of clinging to an ideology that only enriched the 1%, Komlos sketches the outline of a capitalism with a human face, an economy in which people live contented lives with dignity instead of focusing on GNP.
Larry Allen on Review of Political Economy wrote:
"This is a very original textbook, a good answer to the call from the Rethinking Economics movement to revise our economics textbooks and programmes. [...] His book demonstrates how misleading it can be to apply oversimplified models of perfect competition to the real world. [...] This book offers students a valuable introductory text with insights into the workings of real markets not just imaginary ones formulated by blackboard economists. A must-have for students studying the principles of economics as well as micro- and macroeconomics. It is a very original book, in the ambition, in the way it is written, even in its evocative chapter titles and in the unusual tables, carts, diagrams and pictures."
George H. Blackford on Contributions to Political Economy wrote:
"John Komlos has written a unique and thought-stirring book that exposes students to alternative views on every microeconomic and macroeconomic subject found in encyclopedic principles textbooks, hardly missing one issue or subject. [...] Komlos is well qualified to write such a book: he has two doctoral degrees from the University of Chicago, one in economics and one in history, and he has an impressive record of publications in the fields of economics and economic history. [...] While the mainstream concentrates on perfectly competitive models, Komlos, arguing that such markets are a negligible part of the economy, emphasizes the role oligopolies and monopolistic competition play in the real world. With this foundation, the book insightfully examines the most hallowed concepts of textbook economics in light of the most recent economic research. [...] The book has its weak points. Komlos’s talk of zero unemployment and zero government deficits strikes me as utopian, and he underplays the degree to which technological progresshas improved working conditions for countless workers. His bare-knuckled treatment of thefinancial crisis spares none of the top policy-makers and seems more like a plaintiff’s briefthan a dispassionate analysis. But these are small defects that do not mar the real value ofthis book. This is an intelligent and useful book, written with a serious purpose, rich inscope and depth on weighty topics. Students of economics who do not read this book willhave missed a rich source of information and insight."
"the academic models that are supposed to explain how, and under what circumstances the ideal system of human interaction in markets is supposed to work as well as the prerequisites for the existence for such a system to actually work not only ignore the essential role of government in our economic, social,and political lives, but the assumptions on which these models depend [...] are impossible to achieve in the real world as is explained so beautifully by John Komlos in the second edition of his book, Real–World Economics: What Every Economics Student Needs to Know. Komlos explains in detail the nature of the assumptions on which the economic arguments of the utopian capitalist are based and the way in which these assumptions lead to conclusions that are contradicted by reality in those situations in which these assumptions do not apply. He also explains why the way in which economics is taught distorts the view of reality presented to students when the results of experimental and behavioral economics and the contributions of other social sciences to our understanding of human behavior are ignored. And he explains the nefarious social, political, and economic consequences that result when this distorted view of reality becomes part of the conventional wisdom imbued in the body politic. [...] John Komlos’ Real–World Economics is a must read, not only for economics students and professors who teach economics,but for psychology, sociology, political science, history, and philosophy students and professors as well. That is, it is a must read for anyone who wishes to understand the discipline of economics and the way in which it has contributed to the conservative / neoliberal economic, social, and political policies that have guided us to the dysfunctional social and political systems we find ourselves in the midst of today."
- Interview with John Komlos about the book (podcast) - New Books Network, 3 April 2019
Table of Contents of Foundations of Real-World Economics
- Welcome to Real-World Economics (My Credo / Humanistic Economics / A Primer on Blackboard Economics / Toward a Paradigm Shift in Economics / Real-World Economics Is Preferable / Simple Is for Simple Minded / “It’s Only a Model!”)
- Markets are Neither Omniscient nor Omnipotent (Markets Are Not Created by Divine Power / The Downside of Free Markets / Government Is an Essential Component of the Economy / Markets Have Limitations / The “Achilles Heel” of Markets / Morality Should Take Precedence over Markets / Economics Is a Social Science and Not a Natural Science / Ideology Is Unavoidable)
- The Nature of Demand (What Is Scarce? / Consumer Sovereignty and Endogenous Tastes / Wants and Basic Needs / The Metaphor of the Invisible Hand / The Magic of Competition / Consumerism)
- Homo Oeconomicus is Extinct: The Foundations of Behavioral Economics (Utility Maximization / Optimization Is Impossible for Finite Minds / Our Brain Is Imperfect / Neuroeconomics / Bounded Rationality / Satisficing Instead of Optimizing / Biases and Wonders of Intuition / Heuristics / Framing, Accessibility, and Anchoring / Prospect Theory / Behavioral Economics / Cognitive Endowment / Genetic Endowment)
- Taste Makers and Consumption (The Influence of Corporate Power / Interdependent Utility Functions / Society / Culture / Fairness / Efficiency vs. Equity / Self-Interest and Altruism / Positive and Normative Economics / Expected vs. Realized Utility / Imperfect Information / Signaling)
- Firms and Imperfect Competition (Firms / The Illusion of Perfect Competition / Imperfect Competition: Oligopolies and Monopolies / Prices / Equilibrium and Disequilibrium / Adverse Selection)
- Returns to the Factors of Production (Marginal Theory / Wages / The Returns on Capital / Profits / Institutions as Capital / Intangible Forms of Capital / Natural Resources / Income Distribution / The Second Gilded Age / Growth in Welfare / Ethics and the Skewed Distribution of Income)
- The Case for Oversight, Regulation, and Control of Markets (Principal-Agent Problem / Moral Hazard / Transaction Costs / Opportunistic Behavior / Regulation in the Public Interest / Regulatory Capture / Moral Constraints / Market Failures / Exploitation / Time and Space / Path Dependence / Limits and Standards)
- Microeconomic Applications on and off the Blackboard (Minimum Wage Is Good Economics / Price Controls Can Be Good / Unions and Countervailing Power / The American Medical Association Is a Cartel / Discrimination Is Pernicious / Redistribution Would Help)
- What Is Macroeconomics? (Keynes the Savior / Keynesian Fiscal Policy / Monetary Policy / The Liquidity Trap / Neoclassical Synthesis / The Monetarist Counterrevolution / A Macroeconomic Policy Void / GNP Is an Estimate of Production and Not of Welfare / Production Possibilities Frontier)
- Macroeconomics Part II (Unemployment and Underemployment / The Natural Rate of Unemployment / Economic Growth / Economic Growth Does Not Increase Life Satisfaction / Technological Change Is a Two-Edged Sword / Missing Markets / Environment)
- Macroeconomics Part III (The Government Is Part of the Solution / The Challenges of Keynesian Fiscal Policy / Crowding Out / The Threat of a Mushrooming National Debt / Taxes Are Good for Us / Savings or the Lack Thereof / Inflation and Deflation / Nominal vs. Real Wages / The Obama Stimulus)
- International Trade: Open Economy Macroeconomics (The Theory of Comparative Advantage / The Effects of Tariffs on Welfare Are Complicated by Underemployment / Free Trade Is Not an Engine of Growth / The Protection of Infant Industries / Unbalanced Trade Creates Underemployment / Import Certificates Are the Only Safe Way to Eliminate the Trade Deficit / New Trade Theory)
- The Financial Crisis of 2008 (Preliminaries / Financial Innovations / Double Trouble: Greenspan’s Bubbles / Early Warnings Fell on Deaf Ears / The Minsky Moment: The Meltdown of 2008 / Thirty-One Factors That Contributed to the Crisis / The Bailout: A Crisis Obama Wasted / Nationalization of the Banks as Pre-privatization)
- Conclusion: The Foundations of Real World Economics (Imaginary vs. Real Markets / The Inconvenient Truth about the Current State of the U.S. Economy / The U.S. Economy Is Facing 14 Headwinds, None of Which Is Fixable in the Foreseeable Future)
About John Komlos
John Komlos is Professor Emeritus of Economics and of Economic History at the University of Munich, Germany. He has also taught at universities such as Harvard, Duke, UNC-Chapel Hill, University of Vienna, and Vienna School of Economics and Business. In 2003 Komlos founded the field of Economics & Human Biology with the journal of the same name, and through his research he has come to realize the limitations of conventional economic theory and has been an ardent advocate of humanistic economics.