Page 116 - Global Political Economy_Understanding The International Economic Order

CHAPTER FIVE
New Economic Theories

LTHOUGH NEOCLASSICAL economics is extremely useful in
A static analysis, it does not provide an adequate conceptual
framework for the analysis and understanding of economic change
and the dynamics ofthe global economy; for example, it cannot ex-
plain the exogenous factors such as changes in taste and technology
that are important in understanding the long-term dynamics ofan
economy. Moreover, as Paul Krugman has observed, the neoclassical
approach to economic affairs lacks both a temporal and a spatial
dimension and assumes that economic activities take place in an ab-
1
stract universe devoid ofhistory and geography. As a consequence,
it can not adequately analyze the historical development or geograph-
ical structure ofan economy. Most importantly, despite general
agreement in the economics discipline on the significance oftechno-
logical progress for economic change and long-term growth, neoclas-
sical economics gives inadequate attention to technology and the
sources oftechnological change. Neoclassical economics also ignores
2
the importance ofeconomic and other institutions. Although econo-
mists acknowledge that nations must establish rules to govern eco-
nomic activities, provide a favorable environment for private entre-
preneurs, and assist in overcoming market failures, economic analysis
gives short shrift to the role of governments and other institutions.
In recent years, a number ofeconomists have developed new theo-
ries that help to compensate for the limitations specified above. As a
group, these novel and still highly controversial theories—the new
growth theory, the new economic geography, and the new trade the-
ory—challenge such fundamental assumptions of neoclassical theory
as perfect competition, constant returns to scale, and complete infor-
mation. These new theories emphasize the importance ofoligopolistic
competition, economies ofscale, and technological innovation, and
they also incorporate historical processes, institutions, and spatial re-

1
Paul R. Krugman, Geography and Trade (Cambridge: MIT Press, 1991).
2
An important analysis ofthe importance ofinstitutions is Richard R. Nelson and
Sidney G. Winter, An Evolutionary Theory of Economic Change (Cambridge: Belknap
Press ofHarvard University, 1982).
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