The critical role for economic theory is no longer simply to explain how the existing system works, but also to explore how the economic system can be changed to become more adaptive and resilient in the face of the challenges of the 21st century, and how it can be more directly designed to support human well-being, in the present and the future. Simultaneous changes are needed, in both the actual economy (how it functions, by what rules, how it can be made responsive to constraints) and also in economic theory.Contextual economics; economic theory; economic goals; bias in economic theory

Goodwin, Neva

English

Research Papers in Economics

A New Economics for the Twenty-first Century 
Neva R. Goodwin 
Forthcoming in World Future Review 
 
The critical role for economic theory is no longer simply to explain how the existing 
system works, but also to explore how the economic system can be changed to become 
more adaptive and resilient in the face of the challenges of the 21
st century, and how it 
can be more directly designed to support human well-being, in the present and the future.  
Simultaneous changes are needed, in both the actual economy (how it functions, by what 
rules, how it can be made responsive to constraints) and also in economic theory.  
 
The economic theory that was accepted as standard in the non-communist world during 
the second half of the twentieth century erects serious impediments to meeting the 
challenges of the twenty-first century.  These impediments include: 
1.      Inappropriate goals: standard economic theory prizes wealth creation above all, 
and most often defines this goal in terms of steadily growing GDP – instead of focusing 
on what economies should really produce, which is human well-being, in the present and 
the future.   
2.     A bias toward monetary values: application of cost/benefit analysis or a focus on 
narrow measures of economic success often lead to an effort to apply monetary measures 
to human values, such as dignity, health, or fairness.  The focus on what can be submitted 
to the measure of money leads to an overemphasis on formal markets, and pays 
insufficient attention to essential unpaid economic activities. 
3.     Difficulty in dealing with the future: the standard use of discounting often leads to 
conclusions that make future concerns appear less significant than they are. 
4.     A de-contextualized view of the economy: economic systems are viewed as 
operating in a vacuum, without regard for the critical ways in which the economy affects, 
and is affected by, its ecological and social contexts.   
5.     Bias toward the status quo: a number of tools and concepts used in economic 
analysis accept the existing distribution of resources as “given” – not really up for 
discussion.  These include the concepts of Pareto optimality, aspects of the Coase 
theorem, and a focus on aggregate growth indices at the expense of disaggregated 
inequality indicators. The strong assumptions of rationality at the root of the theory often 
are used to assert that the existing system is the best possible; if it could have been made 
better, it would have. (This is the basis for the joke about the economist who walks past a 
ten dollar bill lying on the sidewalk.  When asked why, he says “it couldn’t have been 
real; if it were, someone would have already picked it up.”) 
6.    Bias against the public sector and in favor of markets: economists, business 
people and politicians have joined in a chorus of disparagement against government, 
buttressed by an increasingly blind, but fervent, belief that markets can solve all 
problems. In fact, while markets can be a part of the solution to many human needs, they 
rarely can be the whole solution. Markets need boundaries, rules, and safeguards against 
their internal tendency toward concentration of power and their lack of internal 
motivation to work for the wider good. In many situations markets are, in fact, the 
problem. Some attention to environmental concerns has led to the idea that, if there are 
  1market failures, they can be corrected by internalizing externalities. It needs to be 
emphasized that market actors have no inherent incentive to do this: that incentive has to 
come from outside the market system.   
7.   Methods of analysis that exclude non-economists: Students, policy makers, and 
other citizens frequently complain about economists’ increasing reliance on highly 
mathematized modeling techniques. These require extreme simplifying assumptions –  
such as perfect competition, perfect information, and complete markets – and create a 
mindset reluctant to grapple with issues that are not amenable to such modeling.  
Meanwhile, the very sophistication of the mathematics used in these models means that 
fewer and fewer people can participate in an ever more obscure – and less relevant – 
discourse. 
 
In order to redirect economics to be more useful, and more truly reflect the world we now 
face, a good starting point is to go back to the goals that are embedded in economic 
thinking.  Here it is useful to make the distinction between intermediate and final goals. 
Final goals are ends that are worth achieving in themselves, while intermediate goals are 
pursued because they are expected to contribute to the final goals.   
 
As final goals for any economy I would propose two overarching concepts. The first is 
well-being and equity in the present. A successful economy will maintain or increase 
human well-being especially among those who now lack the essentials for a healthy life. 
The second is productive capital for the future. The economic system must maintain 
and, where necessary, rehabilitate, the productive resources required to preserve or 
increase human well-being in the future. These must include not only the obvious things, 
like factories and roads and other infrastructure.  Productive capital needed to maintain 
well-being also necessarily includes natural resources, as well as human health and 
education, and cohesive social systems. 
 
Increasing production and consumption are important intermediate goals for humankind 
in some times and places. They are often important means to the ends of well-being, but 
are positive if, and only if, they do actually enhance well-being. But in cases where we 
find that the pursuit of increased production and consumption – that is, of growing GDP –  
creates negative externalities that reduce over-all well-being in the long run, then these 
goals should be recognized as subsidiary to end goal of general well-being.   
 
With that said, it is critically true that at least two-fifths of the world’s people suffer from 
nutritional, health and educational deficits that severely depress their well-being, and that 
could be overcome with some of the things that money can buy. With respect to these 
individuals, increased production and consumption obviously remain very important 
intermediate goals.   
 
Another critically important intermediate goal is the reduction of inequality. Some even 
argue that this should be placed in the category of final goals. Other obviously critical 
intermediate goals include climate mitigation, and promoting resilience and adaptation 
within both human society and ecological systems. Responding to global inequity as well 
as global climate change requires coordinated public policy to fundamentally redirect 
  2existing economic systems. Standard economics, with its various principles that create a 
status-quo bias, is often used as a justification for not addressing this task.   
 
In addition to a much greater emphasis on equity, economic theory that is appropriate to 
the needs of the twenty-first century will need to be more concerned with the meta-
externalities of the economic system. Meta-externalities are unwanted side-effects of the 
whole system affecting its physical and social contexts. In the cultural context, examples 
of negative meta-externalities emanating from the economic system we now have would 
include the way values like thrift have been replaced by conspicuous consumption, and  
concern for integrity has been replaced by obsession with winning.  Climate change is 
perhaps the greatest negative meta-externality ever imposed by human economic systems 
on the natural world.   
 
Positive meta-externalities should be looked for in the common assets upon which society 
at large depends. A sustainable system works, for example, to ensure an ethically and 
intellectually educated populace and a supportive physical environment.  
 
To summarize the argument thus far, the major problems with mainstream economic 
theory begin with its assumption of final ends – most notably, maximizing GDP – that are 
not appropriate to a resource-constrained world.  It views the economy as separate from 
its social and ecological contexts, understanding neither its dependence on these contexts 
nor the impacts of meta-externalities from the economic system upon them. It only counts 
things that go through the market, and it has a bias against the public sector and in favor 
of the status quo. 
 
So what is the alternative? There are, of course, many: ecological, radical, feminist, 
social, humanistic, old and new Institutionalist, old and new Keynesian, and many other 
kinds of economics. Each of these emphasizes one part – sometimes a critically important 
part – of what is missing in the standard approach. But it doesn’t work just to plug in 
something new: there’s too much wrong with the whole approach. It is necessary, I 
believe, to start afresh, using as building blocks the best pieces from each of the various 
alternatives, as well as from standard theory, but fitting them all into a new design. This 
is what I set out to do nearly 20 years ago, when I began collecting what I judged to be 
the most useful alternatives within a system that I have called Contextual Economics. 
 
There is no better way to force yourself to think through an entire theory than to write a 
textbook. I have now been the lead author on two textbooks for the college level: 
Microeconomics in Context and Macroeconomics in Context.  In addition to the U.S. 
editions there are Italian, Russian and Vietnamese editions of these books. Roughly 40% 
of their content is similar to what can be found in a standard, neoclassical textbook. Much 
of the new material came from existing alternative schools of economics. 
 
The starting premise for Contextual Economics is that an economic system is embedded 
within a social context that includes ethics, norms and human motivations, and the 
culture that expresses them. It also includes politics – that is, the deployment of economic 
and other kinds of power – as well as institutions, and history. Equally important is the 
  3recognition that an economic system is embedded within a physical context that includes 
the built environment, as well as the natural world from which all the materials we use  
ultimately derive. The health of any economic system is absolutely dependent on the 
health of these embracing contexts.   
 
Next, contextual economics understands that the economy itself contains at least three 
spheres. In addition to the for-profit business sphere – the focus of mainstream 
economics – there is also the core sphere, consisting of families and communities; this is 
the focus of a good deal of work in feminist and social economics. Third is the public 
purpose sphere, which includes governments as well as institutions that are both non-
governmental and not-for-profit, such as not-for-profit hospitals and universities, 
environmental advocacy groups, foundations, etc.. 
 
The business sphere is currently creating meta-externalities of culture and politics that 
place great burdens on the core sphere, and that tie the hands of governments. This does 
not necessarily imply that the for-profit sphere is “bad” and the others “good” – rather 
that institutional changes must be made to bring the purposes and functions of all three 
spheres into better harmony. 
 
Another foundational question addressed by contextual economics is: What, in fact, 
constitutes economic activity? The list found in all standard textbooks is “production, 
exchange, and consumption.” Beyond these it is critical to include activities of resource 
maintenance such as work directed toward maintaining environmental sustainability, 
infrastructure maintenance, and caring activities. Theoretical economics, which has been 
praised for its ability to improve efficiency in production, will gain in relevance if it also 
teaches how to sustain and build human, social, natural and built capital. 
 
The preceding is a bird’s eye overview of the content of what I believe needs to be 
included in an alternative system of economic theory – which is, of course, what is 
included in contextual economics. As noted, contextual economics has been woven 
together with strands of everything I and my colleagues could lay our hands on that 
appeared useful.  . 
 
There is not perfect harmony among the various schools of heterodox, or alternative, 
economics.  Ecological economists emphasize environmental sustainability.  Socio-
economists and others emphasize individual well-being, often within a communitarian 
context. Radical economists emphasize social justice, and often align with Keynesians in 
assuming that the only way to achieve that is by growing the economy – as Paul 
Krugman keeps urging.   
 
There are real conflicts among these visions of what constitutes a good society, and how 
to get there. As I look at these, I am struck by the realization that we may not actually 
have the choice as to which value should be uppermost. The natural world imposes 
absolute resource constraints – e.g., on water, fish, wood, and land – that, if used in one 
way, are not available for another use. Not to mention the limits on the atmosphere’s 
ability to absorb climate changing pollutants.   
  4 
If we start with nature as the binding constraint, the resource limits of a finite world mean 
that economic growth, as we currently understand the term, cannot continue indefinitely.   
 
If we must accept the end of economic growth as we know it, this means that social 
justice cannot be achieved through the Keynes’s or Krugman’s prescriptions.  In a non-
growing global economy there is only one way for the poor to have more: that is for the 
rich to have less.  Please note: this means less stuff, not necessarily less well-being.  
 
There has recently been much good work directed to better understanding what really 
does contribute to well-being. Hedonic psychology and related studies suggest that there 
may be a reasonably good resolution to the dilemma of how to achieve environmental 
sustainability and equity and well-being: it lies in cultural and value change, to better 
understand what truly makes us feel happy and fulfilled.   
 
Some of the unsustainable material pleasures and conveniences of the rich world may 
need to be given up: casual use of transportation; very large houses; water-skiing; the 
convenience of massive throw-away packaging, including in medical applications – and 
so on.  But better urban design can offer compensating benefits, such as vastly reduced 
commuting time and more pleasant living environments.   
 
If labor productivity continues to increase, as it has for the last two hundred years, in a 
post-growth world one result could be ever greater unemployment.  But the obviously 
preferable alternative would be policies to promote an ever shorter work-week – hence 
more free time.   
 
Keynes himself imagined this, in his paper on “Economic Possibilities for our 
Grandchildren.” He projected economic progress forward a hundred years – to the year 
2030 – when there would be very little reason for anyone to scramble for life’s 
necessities, and we could mostly devote our lives to the arts of leisure. I would look for 
those arts of leisure to include active participation in arts, crafts, and other makings, such 
as gardening, as well as athletics, time with family and friends, and more time available 
to give every child a superb education. 
 
2030 is only two decades away.  We may not have achieved Keynes’ vision by then, but 
the barriers to doing so lie not so much in the physical constraints posed by nature and 
technology as in human culture, politics, and values. To change these we need to change 
much more than economic theory – but changing economic theory is a good start. 
 
  5  6
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A New Economics for the 21st Century

A New Economics for the 21st Century

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