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Article Contents

1. introduction, 2. the united nature of heterodox economics, 3. the divided practice of heterodox economists, 4. conclusion, acknowledgements, bibliography, the nature of heterodox economics revisited.

• Article contents
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Yannick Slade-Caffarel, The nature of heterodox economics revisited, Cambridge Journal of Economics , Volume 43, Issue 3, May 2019, Pages 527–539, https://doi.org/10.1093/cje/bey043

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This paper revisits the conception of heterodox economics advanced by Tony Lawson in 2006 and critically assesses its reception. I consider the bearing of later contributions—most importantly, his 2013 paper ‘What is this “school” called neoclassical economics’—in which Lawson further develops his analysis of heterodox economics. The goal is to provide additional clarity to the discussion.

Amongst the contributions that Tony Lawson has made to the study of economics, there is a thesis that could be characterised as central to it all: the problem with mainstream economics is that its defining characteristic—an ‘insistence on mathematical modelling’—presupposes a vision of social reality that is inconsistent with how social reality really is ( Lawson, 2006 , p. 465). 1 This thesis is underpinned by a conception of social ontology that Lawson has elaborated and defended over the past 20 years, an outline of how he understands social reality really to be. 2

Lawson argues that social scientists should seek out methods of analysis that are appropriate for studying the social realm. By this, he means that the methods employed by a researcher studying the social realm should be relevant to what we know, or hold as our most explanatorily successful account, of the nature of social reality. Lawson argues that mainstream economics, by insisting on the use of mathematical modelling to study the social realm, does not do this.

His justification of this assessment, and his solution to the problem, come by way of providing a detailed description of the nature and broad contours of social reality. This account of social reality serves as a starting point, and a benchmark, from and against which we can build, and make normative claims with regards to, methods for studying social phenomena. In other words, by providing an explanatorily powerful account of the nature of social reality, Lawson hopes to contribute to the possibility that social scientists may choose and develop increasingly appropriate methods for studying the social realm.

Within the discipline of economics, those towards which Lawson’s arguments primarily are directed are heterodox economists and students. Lawson considers the mainstream of economics to be, quite frankly, a lost cause. So, heterodox economists and students are, he believes, the best and seemingly only hope if economics is to improve its explanatory relevance. However, the prevailing belief amongst heterodox economists is that there is no real identifiable coherence to the disparate collection of schools of thought housed under the banner of heterodoxy other than perhaps their common opposition to the mainstream 3 :

Current heterodox economics would consist, therefore, of all the schools of thought and approaches that differ from [...] the mainstream [...]. [...] For many scholars with whom I tend to concur, the current period seems to be one of these cases in which there are no significant ideas common to all heterodox approaches or schools of thought. ( Dequech, 2007 , p. 298)

And some have even gone so far as to suggest that not even this opposition to the mainstream is a source of real commonality:

[W]ithin the self-identified community of self-identified heterodox economists there is little agreement as to whether members are pluralist, or what their attitude is to the mainstream. Indeed, there is little agreement on any core concepts or principles. […] Based on this study, heterodox economics appears a complex web of interacting individuals and as a group is a fuzzy set. ( Mearman, 2011 , p. 480)

All this, if true, does not provide a strong basis for building coherent, positive, reform. In contrast, Lawson (2006) presents a view that there is indeed a larger coherence to heterodox economics. The nature of heterodox economics, he argues, is a shared commitment to a social ontology of the type that he has elaborated and defended. This is an assessment that, although influential, has, since it was proposed, by no means replaced the prevailing view. It has even been suggested that this fact is enough to argue for the inadequacy of Lawson’s thesis ( Hodgson, 2017 ).

Clearly a consensus, or lack of one, says nothing per se about accuracy. In my view, an important reason for the lack of uptake has been the mistaken interpretation that Lawson’s thesis implies that heterodox economists never, and ought never to, use mathematical models, whilst it is an empirical fact that many economists who consider themselves heterodox clearly do. It is perhaps understandable that this has been a common interpretation of Lawson’s position. Lawson’s 2006 assessment is made in an uncharacteristically positive fashion and expressed in a rather broad manner, which I will detail below.

However, this perceived problem also follows a pattern of misunderstanding with regard to Lawson’s views on the use of mathematical modelling. Lawson is regularly accused of upholding an anti-mathematics stance. And it is often claimed that his critique of mainstream economics implies that there should be no mathematical modelling by economists whatsoever. But this, as I will take the time to show below, is simply not the case. Rather, Lawson’s argument is one that is about understanding the contexts in which the use of mathematical modelling is appropriate.

When misrepresentations are left unchallenged, they may start to be taken as fact. It is, therefore, important to provide clarification. As I will show, Lawson’s assessment of heterodox economics does not imply that if an economist uses mathematical modelling then they are necessarily mainstream. Whilst this can perhaps be read into Lawson (2006) , later papers do give a fuller picture of his conception of heterodox economics. Specifically, Lawson (2013) observes that many heterodox economists do indeed use mathematical modelling, a method that is largely inconsistent with the conception of social ontology he defends, whilst arguing that, for reasons I will elaborate below, such economists are still committed to that ontological conception.

I will proceed by first outlining the manner in which Lawson (2006) arrives at his thesis regarding heterodox economics. I will then demonstrate how arguments made in Lawson (2013) clarify his views on the use of mathematical modelling by heterodox economists. Finally, I will show that Lawson’s assessment allows for heterodox economists who use mathematical modelling, whilst also identifying why this is, in most cases, inappropriate. Indeed, this is the strength of Lawson’s thesis.

Due to mistaken interpretation, I believe that the importance of this contribution has not been fully appreciated. Therefore, it warrants revisiting. When properly understood, Lawson’s conception of the nature of heterodox economics is powerful as it is able to coherently capture the current variety of approaches categorised as heterodox, explain why a distinction between the heterodoxy and the mainstream is still justified, whilst also providing a clear avenue towards improving the general explanatory success of contributions made by heterodox economists.

[H]eterodox economics is, in the first instance, an orientation in ontology ( Lawson, 2006 , p.498)

The assessment at which Lawson (2006) arrives is that what unites heterodox economics is a common, if implicit, commitment to a conception of social reality such as that which he defends:

[S]omething like the alternative ontology described [...] systematises the implicit preconceptions of the various heterodox traditions, and ultimately explains their enduring opposition to the mainstream. ( Lawson, 2006 , p. 497)

How does he get there? Lawson sets out to counter the aforementioned idea that heterodox economics is only united, if at all, by its enduring opposition to mainstream economics:

[W]e appear to reach an apparently widely shared assessment of heterodox economics only in terms of what it is not, or rather in terms of that to which it stands opposed; the one widely recognised and accepted feature of all the heterodox traditions is a rejection of the modern mainstream project. ( Lawson, 2006 , p. 485)

Lawson, however, quickly points out that this shared assessment does not say much more than a dictionary definition of the term heterodox:

According to the Shorter Oxford English Dictionary , for example, the qualification heterodox just means ‘[n]ot in accordance with established doctrines or opinions, or those generally recognised as orthodox’. ( Lawson, 2006 , p. 486)

Lawson’s aim is to take our understanding further, towards deeper factors that, he argues, underpin this opposition. Importantly, Lawson observes that this opposition is approved by heterodox economists, continually, and across the board:

[T]he phenomenon to explain is not just that a heterodox opposition exists, but that it is, as noted, relatively widespread, firm, often highly vocal and enduring. ( Lawson, 2006 , p. 492)

As such, he reasons that there must be something common to all mainstream contributions to account for all the features towards which the heterodoxy aim their opposition:

[A]n explicit rejection of orthodoxy in any sphere is presumably undertaken for certain reasons. And a sustained opposition, such as we find in modern economics, leads us to expect that the reasons for resistance are deep ones. Further, in addition to explicitly formalised grounds for an opposition to any orthodoxy, there are often other less-than-clearly-unrecognised presuppositions. I think this is so with heterodox economics [...]. ( Lawson, 2006 , p. 486)

Therefore, the question becomes: is there anything common to all mainstream contributions? Lawson answers that there is indeed a unifying characteristic to mainstream economics:

I believe there is a feature of modern mainstream economics that is essential to it. And it is an aspect so taken for granted that it goes largely unquestioned. This is just the formalistic-deductive framework that mainstream economists everywhere adopt, and indeed insist upon. […] The truth is that modern mainstream economics is just the reliance on certain forms of mathematical (deductivist) method. ( Lawson, 2006 , pp. 488–89)

Heterodox economics has shown itself to be, and is, more or less by definition, the collection of approaches that are opposed to mainstream economics. Consequently, on the surface, Lawson argues, it stands to reason that it is towards this methodological dogma that heterodox economics is collectively opposed:

If [heterodox economics] […] is first and foremost a rejection of modern mainstream economics […] then heterodox economics, in the first instance, is just a rejection of [the insistence that forms of mathematical-deductive method should everywhere be utilised]. Notice that this does not amount to a rejection of all mathematical-deductive modelling. But it is a rejection of the insistence that we all always and everywhere use it. In other words, heterodox economics, in the first instance, is a rejection of a very specific form of methodological reductionism. It is a rejection of the view that formalistic methods are everywhere and always appropriate. ( Lawson, 2006 , p. 492)

Lawson (2006 , p. 494), then argues that ‘any presumption of the universal relevance of mathematical-modelling methods […] ultimately presupposes the ubiquity of strict event regularities’. That is, a closed system of isolated atoms, where the term ‘atom’ means factors or:

[I]tems which exercise their own separate, independent and invariable (and so predictable) effects (relative to, or as a function of, initial conditions). ( Lawson, 2006 , p. 494)

Therefore, underlying all mainstream economics are ontological presuppositions that the world is characterised by strict or probabilistic event regularities, which are guaranteed only if human beings and any other agents are formulated in terms of isolated atoms. His critique of mainstream economics is, in the simplest terms, that this ontology does not generally seem to be how social reality really is:

[A] world of isolated atoms [...] may actually be rather rare in the social realm. I draw this conclusion on the basis of an (a posteriori derived) theory of social ontology, a conception of the nature of the material of social reality [...]. ( Lawson, 2006 , p. 495)

It is, however, important to clarify what Lawson means exactly by his opposition to the ‘insistence’ on mathematical modelling and the fact that ‘this does not amount to a rejection of all mathematical deductive modelling’. Lawson takes great care regularly to reiterate that his ‘argument is not at all an anti-mathematics one; and it never has been’ ( Lawson, 2004 ). What then is Lawson’s position exactly? The answer begins with the fact that mathematical modelling, like all methods, has ontological presuppositions:

[A]ll methods have ontological presuppositions or preconditions, that is conditions under which their usage is appropriate. To use any research method is immediately to presuppose a worldview of sorts. [...] [M]ethods of mathematical-deductivist modelling, like all methods, do have ontological presuppositions. ( Lawson, 2003 , p. 12)

Therefore, Lawson argues, as with any method, the use of mathematical modelling is appropriate only in certain contexts:

I recognise that all tools, including mathematical ones, are limited in their scope of application […] and that the relevance of mathematics in any specific application depends on the context-specific merits of the case. ( Lawson, 2009d , p. 190)

Methods of mathematical modelling, Lawson argues, are appropriate only when their ontological presuppositions are consistent with the nature of the stuff being studied: phenomena generated in closed systems of isolated atoms, where a closed system is the term Lawson uses for any situation in which an event regularity occurs. And, as Lawson argues, this is the case for all mathematical modelling of the sort pursued by economists regardless of how apparently complex the model might be:

Consider complexity theory […]. Its implicit ontology is still one of closed systems of isolated atoms. […] [T]he path mapped out in any simulation will be irreversible. But there is no history, no time and no real process. There is merely a one-way relationship. If we consider the functional relationship y = x 2 , then we find that for any given value of x we can determine a unique value of y , but we cannot take the reverse path, a given value of y does not lead us “back” to a unique x . Complexity economics, as it stands, is merely a complex version of such a functional relationship. […] [T]he ontology is clearly still one of isolated atoms. ( Lawson, 2009c , p. 104)

Therefore, for Lawson, the only context in which it is appropriate to use such mathematical modelling—of any level of complexity—is in the analysis of closed systems of isolated atoms, and, as Lawson observes, this seems to be a rare occurrence in the social realm. However, that is not to say that Lawson rules out the possibility of local closures occurring, nor does he wish to preclude an ontologically aware experimentation with the use of mathematical modelling:

To date, formalistic methods that presuppose an atomistic ontology have met with very little success, and from the perspective of the ontological framework I defend, this is none too surprising. But even if the ontology I defend is roughly right, there may yet be pockets of social reality that provide the appropriate conditions for successes with formalistic modelling […]. ( Lawson, 2009c , p. 121) [O]ntological argument (even if correct – and like everything else it is fallible) cannot establish that localised closures may not occur here and there. So not only do I not criticise explorative endeavour, I do not rule out the idea that the use of standard econometric methods may occasionally prove useful either […]. ( Lawson, 2009b , p. 312)

It is clear, then, that Lawson is not against mathematical modelling. Rather, he is against any dogmatic insistence on it, and he is for restricting its use to contexts where it is appropriate: closed systems of isolated atoms. That said, Lawson does consider that any sustained successful use of mathematical modelling to study the social world is unlikely, and he acknowledges that were this to occur it would likely require some substantial revisions to his social ontology:

To put the matter bluntly (the pun may be useful), it is like attempting to cut the grass with a hammer or a piece of paper. The latter objects have their uses, but mowing the lawn is not one of them. Methods of applied mathematics of the sort economists wield have their uses, but illuminating social reality is not one of them, or at best, is so only in exceptional circumstances. I hope that it is clear that this explanation, whether correct or not, reflects a stance that is not anti-mathematics but anti a mismatch of tool and object – and so, given the circumstances, anti the abuse of mathematics. ( Lawson, 2017b , p. 27)

This assessment rests upon his arguments about the nature of the social realm. So how does Lawson suppose social reality to exist? Lawson broadly upholds that social reality is in some sense brought into existence by, and depends on, human beings. It emerges from, and is reproduced and transformed by, our interactions. Social structures are the transformed and/or reproduced results of socio-historically specific social relations between human beings. And concurrently these social structures have a power of conditioning over the actions of human beings who, in turn, transform and reproduce them. It is a never-ending dynamic back and forth. According to this conception of social ontology, any occurrence of strict or probabilistic event regularities would, if present at all, be very limited; social reality is fundamentally open ( Lawson, 2006 , 2012 , 2015a ).

As already noted, Lawson proposes that it is something like this social ontology that unites heterodox economics:

My claim is that something like the alternative ontology described above [...] systematises the implicit preconceptions of the various heterodox traditions, and ultimately explains their enduring opposition to the mainstream. […] [T]he post-Keynesian emphasis on fundamental uncertainty is easily explained if openness is a presupposition, just like the institutionalist emphasis on evolutionary method and on technology as a dynamic force […] are explained if it is presupposed that the social system is a process, and the feminist emphasis on caring and interdependence presupposes an ontology of internal relationality, amongst other things. The dominant emphases of the separate heterodox traditions, in other words, are just manifestations of categories of social reality that conflict with the assumption that social life is everywhere composed of isolated atoms; as I say, they are categories best explained by an implicit attachment to something like the social ontology outlined above. ( Lawson, 2006 , p. 497) [M]odern heterodoxy is […] first and foremost an orientation in ontology. It is to be distinguished from the mainstream by its willingness to approach theory and method in a manner informed by the available insights into the nature of social reality. ( Lawson, 2006 , p. 502)

Lawson argues that if the social ontology presupposed by mainstream economics is one of a ubiquity of closed systems couched in terms of human beings interpreted as isolated atoms, then any sustained heterodox opposition to the mainstream is likely grounded in something like the conception of social ontology that he defends, whether this is fully appreciated and explicitly acknowledged, or not. Lawson argues that heterodox economists reveal an at least implicit commitment to the ontology defended because the main categories he observes are used in heterodox research all require the world to exist in a manner similar to how he has described it.

One of the strengths of Lawson’s assessment here is that whilst it focusses on what unites heterodox economics, it also serves to clarify what is distinctive about the various heterodox traditions, that is, they focus on different aspects of this shared underlying conception of social ontology. And finally, Lawson argues that it is due to a shared belief that the world exists in a fashion similar to how he has described it that heterodox economists are generally more open to studying the world in a variety of ways that attempt to take into account the open reality of social existence. This, accordingly, explains why most heterodox economists express support for a greater pluralism of method.

Lawson’s motivation for writing the 2006 article appears to have been to counteract the still popular idea that there is no real unity amongst the different approaches that are collected under the banner of heterodox economics. Lawson was convinced that there is something fundamentally different between mainstream and heterodox economics. In 2006, he wished to explain the situation as he found it: despite ostensibly large differences, it was possible to discuss the variety of philosophical and methodological issues that plague economics with those economists that call themselves heterodox. With those who identified as mainstream, these discussions had been all but impossible.

Lawson (2006) represents an attempt to provide an ontological explanation for this phenomenon. In this, Lawson seeks to differentiate heterodox economics as clearly as possible from mainstream economics. And, as I will now discuss, the strength of the contribution comes from achieving this whilst managing to encompass the full range of approaches that make up heterodox economics. Moreover, the understanding of heterodoxy provided does not impede critique and, if anything, is useful in pinpointing precisely the problems that have held heterodox economics back from achieving greater explanatory success.

Several years after the publication of the paper outlining his thesis on the nature of heterodox economics, Lawson took up a project in which he systematically focussed on contributions that revealed an inconsistency or tension between the methods employed and the conception of social ontology to which the contributors otherwise seemingly subscribed. A paper in which he presents some of the assessments derived from this research, entitled ‘What is this “school” called neoclassical economics’, proposes that the term ‘neoclassical’, as it was intended by the economist Thorstein Veblen, who coined it, refers precisely to this type of inconsistency. In it, Lawson observes that many heterodox economists do, indeed, make use of mathematical modelling in their research:

[A] good deal of sustained heterodox research is couched in conceptual frameworks consistent with the sort of causal-processual ontological conception just described. All too often, however, this goes hand in hand with a lack of realisation that methods of mathematical modelling require formulations that are in severe tension with this ontology. This lack of realisation both underpins a misapprehension of the source of the unrealistic nature of many competing claims, as well as the recourse of many heterodox economists to using mathematical modelling methods in seeking to advance insights obtained by other means. ( Lawson, 2013 , p. 957)

As I will show, although this does not undermine his earlier assessment, it does provide an important development by clearly acknowledging that there is a problem posed by the fact that, within the heterodoxy, many contributors make significant use of mathematical modelling. Lawson does, of course, consider this sustained use of mathematical modelling to be a problem—a ‘lack of realisation’, as he terms it. As such, an aim in his 2013 paper is to differentiate explicitly between those heterodox contributions where methods are consistent with the more sustainable social ontology that he has described and defended and those where they are not.

In the later paper, Lawson proposes that the term ‘neoclassical’, in its Veblenian sense, is perhaps appropriately used to refer to heterodox economists who employ mathematical modelling:

I am suggesting that Veblen introduces the term “neoclassical” to distinguish a line of thinking that is ultimately characterised by possessing a degree of ontological awareness whilst persevering with a methodology inconsistent with this awareness; it is a line of thinking identified precisely by this ontological/methodological tension or inconsistency. ( Lawson, 2013 , p. 971)

Using this distinction, Lawson identifies three different categories of economists, specifically, mainstream economists along with two strands of heterodox economists. The latter, I believe, might be best labelled consistent heterodox economists and inconsistent heterodox economists. Indeed, Lawson also refers in later contributions to the consistent heterodoxy:

Not all heterodox economists adopt methods consistent with ontological presuppositions they appear (at least in a general way) to support. Some do – the consistent heterodoxy. Others do not, in particular those that focus heavily on mathematical modelling. So, coherence is not complete. ( Lawson, 2018c )

The inconsistent heterodox category then matches Lawson’s Veblenian notion of neoclassical, and was provisionally referred to as such by Lawson (2013) before he concludes by suggesting we might ultimately drop the term. These distinctions are expressed as follows, with category (1) referring to mainstream economists, category (2) referring to consistent heterodox economists, and category (3) referring to inconsistent heterodox economists:

(1) […] a group dominated in modern times by those that accept mathematical deductivism as an orientation to science for us all, and [...] effectively regard any stance that questions this approach, whatever the basis, as inevitably misguided. (2) those who are aware that social reality is of a causal-processual nature as elaborated above, who prioritise the goal of being realistic, and who fashion methods in the light of this ontological understanding and thereby recognise the limited scope for any […] science […] that relies on methods of mathematical deductive modelling. (3) those who are aware (at some level) that social reality is of a causal-processual nature as elaborated above, who prioritise the goal of being realistic, and yet who fail themselves fully to recognise or to accept the limited scope for any […] approach […] that makes significant use of methods of mathematical deductive modelling. ( Lawson, 2013 , p. 979)

The question of the group of economists referred to in category (3) has been the subject of some dispute. 4 So, let me explain why I consider that, for Lawson, category (3) refers only to confused, inconsistent, heterodox economists, as I have suggested above, rather than some group of potentially enlightened mainstream economists.

Lawson’s assessment of mainstream economics is that it is the approach that insists on the universal application of mathematical-deductivist method—the description of category (1). Lawson’s assessment of heterodox economics is that it covers all those approaches that at least implicitly accept a social ontology similar to that which he describes and defends, which covers categories (2) and (3). For category (2), Lawson formulates this commitment as being ‘aware that social reality is of a causal-processual nature’. For category (3), he states it as being, ‘aware (at some level) that social reality is of a causal-processual nature’ ( Lawson, 2013 , p. 979). Both of these formulations fit Lawson’s assessment of heterodox economics, but not of mainstream economics, which Lawson argues is entirely unaware of, or unconcerned about, such matters.

Indeed, in the end, Lawson decides that he does not in fact believe that it is appropriate to denote any school of thought by an inconsistency. And he suggests that we give up the term neoclassical:

[R]ather than distinguish/identify a group on the grounds of a fundamental inconsistency in (ontological) theory and (methodological) practice, the term neoclassical economics should be dropped from the literature. ( Lawson, 2013 , p. 980)

Without the term ‘neoclassical’, what remains is the important assessment that heterodox economics, distinguished as all those approaches that accept, at least implicitly, a social ontology similar to that defended by Lawson, is divided between those who make significant use of mathematical modelling and those who use methods that are consistent with the social ontology Lawson defends. Heterodox economics, according to Lawson, exists in two groups: consistent heterodox economists and inconsistent heterodox economists.

The development made in Lawson (2013) to the assessment of heterodox economics in Lawson (2006) is to clearly acknowledge that there is a serious problem posed by the fact that some, and perhaps many, heterodox researchers now make significant use of mathematical modelling, which was left mostly unsaid in 2006. Perhaps then, due to not making this explicit, and to the various misinterpretations that persist regarding Lawson’s views with regards to mathematics, it has been widely thought that economists who use mathematical modelling cannot, according to Lawson’s thesis, be heterodox at all. This, however, for Lawson, is not the case.

Lawson believes that there is a ‘coherent core’ of heterodox economists who employ methods that are consistent with the social ontology they implicitly advance. However, Lawson also acknowledges that many also use mathematical modelling, a method that presupposes a social ontology that is in severe tension with it ( Lawson, 2013 , p. 979). Therefore, I repeat, Lawson proposes that heterodox economists in fact exist in two groups, those who use methods consistent with the social ontology they are committed to, and those who do not. But all are heterodox economists.

Lawson’s hope is that by making the kind of social ontology presupposed by mathematical modelling clear, heterodox economists will increasingly review the legitimacy of the modelling approach. However, Lawson still considers those who make such a methodological mistake to be heterodox economists. For they still, he argues, are committed to the social ontology he defends and always reveal it in some way in their analyses or pronouncements:

[T]he more sustainable causal ontology of openness, process, significant internal relationality and so on is nevertheless regularly, if often only implicitly, recognised, most especially by heterodox practitioners. Or at least this alternative social ontology is often acknowledged in some manner within heterodox pronouncements and more general forms of reasoning. ( Lawson, 2013 , pp. 956–57)

Heterodox economists, so identified, then employ a diversity of methods, including mathematical modelling, which is consistent with the current reality of this diverse grouping. Indeed, pluralism is a crucial but often unacknowledged element of Lawson’s assessment of heterodox economics, and one that further clarifies his position with regard to mathematics:

[M]ost heterodox economists seemingly embrace the idea of pluralism. The need for pluralism, however, applies not just at the level of substantive theorising and policy formulation, but also at the level of method, with informed choices necessitating philosophical reflection and analysis. As I have often repeated, there is no need to exclude methods of mathematical modelling from the tool box; but there are many other methods and approaches that can be fruitfully (and with greater reason) included. A reliance upon any warrants explanation. ( Lawson, 2017b , p. 40)

However, the fact that some, and perhaps many, economists in this grouping make sustained usage of methods of mathematical modelling is not, for Lawson, desirable. In recent years, Lawson has been increasingly frustrated by the continued use of mathematical modelling by heterodox economists, as well as by movements towards its increased usage. 5 An argument made by such heterodox economists is that the problem identified by Lawson lies not with mathematical modelling per se but with the sort of mathematical methods used. They argue that poor mathematical modelling has been the problem and that better, more complex, models will be able to capture the reality of human existence.

Lawson clearly regards that methodological argument to be mistaken. For, as stated above, he finds that even complex mathematical models presuppose a closed system. However, he maintains that the social reality that such researchers reveal themselves to implicitly accept is at least quite similar to that which he defends. Their concern with being realistic, for one, speaks volumes. Therefore, these researchers should, he believes, still be distinguished from the mainstream.

This is the strength of Lawson’s assessment. It is powerful as it is able to encompass the wide variety of approaches that make up heterodox economics whilst also clearly identifying which of those economists are making inappropriate methodological choices. It is a conception that reflects the pluralist reality of heterodox economics and also provides a clear way forward towards improving the explanatory relevance of the discipline. Therefore, Lawson, in his most recent contributions, considers that those who ought to be engaged with most directly, in an attempt to improve the discipline, are heterodox economists that persistently use methods inconsistent with the social ontology in which they otherwise appear to believe.

Lawson’s view is that heterodox economists are best differentiated from the mainstream on the basis of an at least implicit acceptance of a social ontology such as he describes. However, he observes that often, this commitment does not translate to the use of methods that presuppose a consistent world view. Lawson’s assessment should not be mistaken as evidence that he believes all is well in heterodox economics. Indeed, Lawson’s picture of heterodox economics is multifaceted. Although he still considers many who use mathematical models to be heterodox economists, he does not consider them to be contributing to the improvement of economics.

‘[A]ll methods have ontological presuppositions’ and these are inescapable ( Lawson, 2003 , p. 12). So, if ontology is unavoidable, it is better to be explicit and knowingly coherent than implicit and likely not. Regardless of what some heterodox economists might otherwise believe, the sustained use of mathematical modelling presupposes closed systems of isolated atoms and is therefore largely inappropriate for studying social reality. For Lawson, the way forward is for heterodox economists to devise methods that are appropriate to their subject matter. Lawson’s conception of heterodox economics, when properly understood, is powerful as it at once accommodates the variety of approaches that are generally classified as heterodox, identifies what he considers to be their major problem and points to a way forward.

What practical implications follow from this? First, let me indicate what does not. It should now be clear that Lawson does not argue for excluding mathematical models. Rather, as with all other methods, they should only be applied in conditions in which their use is appropriate, though admittedly Lawson does, as an empirical matter, assess the occurrence of the latter to be relatively rare. His stance is not anti-mathematical method but anti- mismatch of method and context of application. Second, although Lawson has argued that methods such as contrast explanation fit with the conception of social ontology defended, he does not suggest that it should always be employed. Like all methods, its use must be justified ( Lawson, 2009a ; Morgan and Patomäki, 2017 ). Furthermore, Lawson does not regard the conception of social ontology defended as infallible for ‘all knowledge is fallible and historically transient’ ( Lawson, 1997 , p. 246). Indeed, he has devoted much research to other contributions, drawing contrasts and exploring their relative explanatory power. He finds the account he defends to be superior so far. But that is all ( Fullbrook, 2009 ; Lawson, 2012 , 2016b , 2016c , 2016d , 2016e , 2018a , 2018b ; Searle, 2016 , 2017 ). What Lawson does argue for regarding practice is an explicit, systematic and sustained ontological awareness, which he believes can only improve the methodological choices of heterodox economists.

That said, no heterodox economist can ignore the institutional constraints that impede such ontologically aware methodological pluralism. There is immense pressure to publish and many journals only accept papers with mathematical modelling. However, whilst it is recognised that survival often requires compromise, Lawson argues that many forms of compromise do more harm than good. He is particularly critical of attempts to present mathematical models that have different or radical assumptions or conclusions as somehow a step forward, or even defining of heterodoxy:

Many [economists] even distinguish themselves as heterodox not by reducing their emphasis on mathematical modelling, but according to the sorts of policy conclusions (for example anti-austerity) they profess to support with their modelling. In so doing, of course, they are most of the time simply reproducing the typical mistakes made by most other modellers; their results, if left-leaning, or ‘alternative’, are mostly just as irrelevant because of the manner in which they are produced. ( Lawson, 2017b , p. 33)

Faced with a situation in which the large-scale transformation of academic economics seems very unlikely, Lawson has instead advocated committing available resources to forming highly protected sub-communities, which he calls ‘eudaimonic bubbles’, in which participants can act authentically. He believes this strategy would benefit in all walks of life in which there is a need to escape dominant forces regarded as harmful ( Lawson, 2017a ). In the case of heterodox economics, Lawson simply advocates that ontological awareness is key and that any increase in such reflection will be positive. However, he is under no illusion that a large-scale transformation of modern economics is imminent. Until it is, he argues that, practically, the best way forward is for heterodox economists to create bubbles in which ontological and methodological debate can flourish.

I would like to thank this journal’s editors and anonymous referees for their very helpful comments in developing this paper.

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For a detailed elaboration of this argument, see Lawson (1995 , 1996 , 1997 , 1999 , 2003 ).

For recent formulations of this conception of social ontology, see Lawson (2012 , 2015a , 2015b , 2016a , 2016b , 2016e ). For wider contributions to this description and a history of the Cambridge Social Ontology Group, see Pratten (2015) .

For a variety of examples of arguments that lean towards this point of view with regards to both heterodox economics and constituent schools of thought such as post-Keynesian economics and institutional economics, see Sawyer (1988) , Hodgson (1989 , 2006 ), Arestis (1990) , Dow (1992 , 2011 ), Lavoie (1992) , Colander et al . (2004) , Rutherford (2000 , 2011 ), Blaug (1996) , Williamson (1998) , Dequech (2007) and Mearman (2011) .

For more on Lawson’s conception of neoclassical economics, and on those of others, see Morgan (2015) .

For more, see Keen (2011 , 2017 ).

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Expanding the possible: exploring the role for heterodox economics in integrated climate-economy modeling

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• Published: 17 May 2023
• Volume 4 , pages 537–557, ( 2023 )

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This paper explores the degree to which heterodox economics can contribute to the development and use of climate-economy integrated assessment models. To do so, it introduces the field of integrated assessment modeling, with a focus on the core economic methodology used by various types of models. It then summarizes some of the literature critiquing these models and how they inform policy. The paper then provides an extended classification of ways in which heterodox economics could be applied to climate-economy models and presents a number of storylines, or pathways, which could be created using insights and methods from heterodox schools. The paper concludes with an assessment of the scope for heterodox economics to answer the criticisms of climate-economy models, finding that despite not resolving all issues, the heterodoxy has a substantial role to play.

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1 Introduction: extreme stories to expand the possibility space

In late February 2020, just days before Europe and the USA joined China and much of Asia in imposing severe mobility restrictions in response to the COVID-19 pandemic, David McCollum and his colleagues published a short Nature Commentary piece calling on climate-economy modelers to “explore extremes” in their modeling (McCollum et al. 2020 ). Although these models, which attempt to create plausible scenarios of technological, social, economic, and environmental development for the next 80 years, could arguably be described as highly formalized forms of science fiction, the plot-lines investigated by these models are strikingly dull. Where, they ask, are the wars? The geopolitical realignment? The economic panics and shocks? The massive waves of structural economic changes and resulting backlash of social resistance? Where is the space for the wildcards, which are “not even on the radar” (Ibid.)? Their advice was well timed, although their extensive list of specific examples of extremes failed to include the global pandemic which had already quietly begun.

Part of the lack of extreme climate-economy scenarios comes from a failure to pose out-of-the-box research questions to the existing suite of models which have already been built. But part comes directly from the limitations of the models themselves. In their extensive review of the capabilities and limits of the existing integrated assessment modeling literature, Keppo et al. ( 2021 ), speak of “exploring the possibility space,” as according to them, “what is not included within the boundaries of the space to be explored cannot be found.” This paper takes the notions of a possibility space for integrated assessment modeling and turns it towards the realm of heterodox economics.

The various schools of thought and research programs that make up heterodox economics typically operate within more open theoretical frameworks and are generally more comfortable with analyzing extreme potentialities than their neoclassical corollaries. From the notion of government-maintained full employment to a vision of prosperity without economic growth, from an understanding of social reproduction and care to a focus on the evolution of institutions and the development of technology, heterodox economics offers a rich range of ideas and tools that could be useful in understanding what policy makers can, and should, do to resolve the climate crisis.

The purpose of this paper is to assess the degree to which the existing suite of heterodox ideas and tools can contribute directly to the development and use of large scale, quantitative, integrated assessment models in order to expand and improve the stories told by these models. To do this, Section.  2 will start with a short review of integrated assessment models and the criticisms levied against them. Section  3 will then procced to a classification of the potential conceptual and methodological contributions heterodox economics could make to understanding the transition to an emission-free global economy, with examples given for how individual concepts could be incorporated. Section  4 will attempt to use the ideas identified as most relevant to create a number of new climate scenarios which would not be readily told with standard climate-economy models. Finally, Sect.  5 will conclude with an assessment of the usefulness of heterodox economics in responding to the limits of integrated assessment modeling.

2 Integrated assessment models and their discontents

2.1 integrated assessment models.

Integrated assessment models (IAMs) are a class of quantitative models that combine economic and climatic considerations. These models are built by integrating together a number of separate “modules” which represent different aspects of the economy-climate system. IAMs typically have both an economy module and a climate module which projects emissions and their corresponding levels of warming (Cattan and McIsaac 2021 ). Simple models stop here, but the most developed IAMs can add many more modules for systems such as energy, technological development, agriculture, land use, and much more. While some simpler IAMs remain fairly abstract, the more complex models can provide an impressive range of projections at a very high resolution, down to the levels of an individual technology adopted in each year (IRENA 2020 ).

IAMs can be divided into two primary categories according to the research questions they address (IPCC 2022a , 1858). The first, cost–benefit models , compare the expected levels of economic damages that will be caused by climate change with the expected costs of mitigating emissions in order to calculate an optimal growth path for the economy. The second, process-based models , attempt to replicate the connections between various systems or processes which are relevant for climate mitigation (Ibid.). This involves modeling the linkages between various economic, social, and physical systems to create emission scenarios and climate pathways which represent plausible futures. Because of their orientation towards scenario analysis, process base models can also be called emission pathway models .

Prior to the 2015 Paris Agreement, cost–benefit models were frequently used to calculate the optimal level of global emissions, and by extension warming, under various sets of assumptions and model parameters (Nordhaus 1992 , 1993 ). While this research question is still addressed in the post-Paris literature (Glanemann et al. 2020 ; Hänsel et al. 2020 ), the clear 2-degree and 1.5-degree limits agreed to by the international community have facilitated a shift in focus from determining the ideal level of warming towards finding pathways to achieving these fixed emission caps.

Emission pathways models have become highly influential in informing national policy and in tracking international progress in mitigating emissions (Süsser et al. 2021 ). Emissions pathways models are also a core tool of the Intergovernmental Panel on Climate Change (IPCC) reports, with over 3000 scenarios from 191 models submitted for the Sixth Assessment Report on the Mitigation of Climate Change (IPCC 2022a , 1882). A representative story of the kinds of features of the scenarios included in the recent IPCC reports can be found in Table 1 . As this paper is focused primarily on economic scenario analysis, it will prioritize a discussion of emission pathway models and their economic foundations.

The core economics module of each IAM can be designed in a number of different ways. While the results of each model will be determined to a large degree by the specific assumptions and calibrations that go into it, the choice of model structure places key limits on what is possible within the model’s representation of the economic system.

A useful classification of IAMs based on their economic cores is provided by Nikas et al. ( 2019 ) who divide IAMs into optimal growth models (corresponding to cost–benefit models above), general equilibrium models, partial equilibrium models, macroeconometric models, and other process-based models. This last “other” category is helpfully expanded upon by Hafner et al. ( 2020 ) who add system dynamics models, agent-based models, and stock-flow consistent models.

The most common method for building emission pathway models is a computable general equilibrium (CGE) framework in which the path of the entire economy is optimized, typically at a sectoral level (Matsumoto and Fujimori 2019 ). Partial-equilibrium models, in which one sector is fully optimized while the rest of the economy is assumed to follow the status quo, are also common, with many partial-equilibrium frameworks focusing on the energy system. These two equilibrium frameworks can be augmented by including various market imperfections and frictions which would prevent the baseline scenario from achieving an optimal state in the short or medium term, but this technique is at the cutting edge of equilibrium climate modeling (Köberle et al. 2021 ).

Macroeconometric models also include a full representation of the economic system, but unlike CGE models, they are not based on an optimizing function (IPCC 2022a , 1845). Instead, they use real-world data to econometrically calibrate the coefficients of the relationships between the modeled variables, building a web of statistical relationships which can be simulated forward to create scenarios (Lehr and Lutz 2019 ). This structure allows the overall levels of economic activity to fluctuate within the model based on the demand generated in previous periods, creating more dynamic economic effects than are typically obtained in an equilibrium framework (Mercure et al. 2019 ). System dynamics, agent-based, and stock flow consistent models, are all associated with heterodox economics and will be described in Sect.  3 .

2.2 Their discontents

By their very nature, IAMs are highly interdisciplinary endeavors. This opens them up to criticism from a wide range of fields and perspectives, as their holistic scope touches on dozens of domains across the physical and social sciences. A full accounting of the critiques of IAMs is far beyond the scope of this article, but a summary is necessary to identify the areas where contributions from heterodox economics are most promising. For a more complete review of these critiques, Keppo et al. ( 2021 ), Gambhir et al. ( 2019 ), and Chapter 3 on Mitigation Pathways Compatible with Long-term Goals of the IPCC’s 6th Assessment Report on Mitigation of Climate Change (Riahi et al. 2022 ) are very useful.

A good classification of the types of criticisms of IAMs can be found in the Annex III on Scenarios and Modelling Method s from the abovementioned 6th Assessment Report of the IPCC, which divides IAM commentary into four categories (IPCC 2022a , 1862). The first type of criticism is the literature dealing with features and dynamics which are either missing from IAMs or modeled in ways which are perceived to be unfeasible or incredible. The second is a set of concerns around the complexity and comprehensibility of IAMs and their results. The third is a range of critiques about the lack of social, institutional and political elements within IAMs, and fourth is an array of worries about the effects IAMs themselves have on limiting climate policy options.

The first category of literature is the largest, as every parameter, assumption, and model structure is fair game for criticism of being unrealistic or of missing some crucial element. Of particular importance are the assumptions about the development of the costs of particular technologies and the availability of technologies which are currently unproven at large scales (Way et al. 2022 ). As will be discussed in the next section in greater detail, the macroeconomic assumptions within the models are also grounds for criticism (Asefi-Najafabady et al. 2020 ; Pollitt and Mercure 2018 ; Cattan and McIsaac 2021 ; Riahi et al. 2022 , 359).

In terms of complexity, the massive size and scope of most IAMs have raised concerns of a “black box” problem in which results cannot be clearly explained by any identifiable model features (Skea et al. 2021 ). The issue of complexity is compounded by a lack of transparency of data and code on the part of some models. This opacity means that when considering the results from large sets of models, as is the case in the work of the IPCC, distinctions between results driven by empirics and results driven by theoretical choices can be substantially blurred.

The lack of social and institutional considerations within IAMs may be one of the more surprising features of the models for those not familiar with them, as the scenarios created by the models seamlessly couple dramatic, unprecedented technological transformations with an essentially unchanging global pollical economy (Cherp et al. 2018 ; Jewell and Cherp 2020 ). While social dynamics and political change are notoriously hard to quantify and project, the dissonance between the scale of change allowed in some areas of the models and the rigidity of others is striking.

This leads to the final and most fundamental point that IAMs themselves may play a role in closing off doors and “pushing society in certain directions” without proper democratic consent or scientific justification (IPCC 2022a , 1862). Being omitted from IAM scenarios does not mean something has been proven impossible, but omission does have a chilling effect in removing options from the broader policy debate (Gambhir 2019 ). This critique raises the worry that IAMs are formally cutting off exploration in any direction that requires a structural change to underlying socio-economic systems, and, in so doing, are artificially closing off paths towards better worlds.

3 Heterodox economics’ contributions to IAMs: concepts, applications, and methods

For the purpose of this paper, heterodox economics will be considered to be the field of economic research which does not rely on the neoclassical foundations of methodological individualism, optimization, and equilibrium analysis (Arnsperger and Varoufakis 2006 ; Earle et al. 2016 ). This includes a wide range of different sub-fields and schools of thought which are both complementary and sometimes contradictory towards each other. Taken together, the broader range of theoretical and methodological starting points contained within heterodox economics provides an inherently expansive view of the possible, allowing for both brighter futures and darker dangers than what is described in the comparatively tranquil world of neoclassical economics. The section will attempt to map some of the potential contributions of heterodox economics in expanding the possibilities allowed within integrated assessment models.

Outlining the contours of heterodox economics, even in the simplest terms, brings a danger of information overload. To better organize the specific ways in which the stock of heterodox knowledge can be used, the paper proposes a classification based on how any given idea could be applied to integrated assessment modeling. At the highest level are conceptual contributions , which are key ideas implying deep, structural changes to existing IAMs. A list of conceptual contributions is shown in Table 2 . The applicability of these concepts is then expanded upon with an extensive list of indicative examples of how each concept could be applied to a specific topic related to climate-economy modeling in Table 3 . Cutting across the broad concepts and the narrow examples are methodological techniques which can augment or replace the equilibrium modeling which is currently standard IAMs. These methodological contributions are detailed in Table 4 .

The concepts presented in Table 2 cover some of the “big ideas” from heterodox economics. These ideas are more than just topical interests, but instead are different ways of looking at the economy. Each highlights a feature of the economic system which, if emphasized, leads to very different lines of research and analysis. Each concept is further subdivided by the school of economic thought they are most closely associated with, with the specific schools of thought adapted from Fischer et al. ( 2018 ). While invoking schools of thought is always fraught with the danger of over-simplification, it is hoped that this further subdivision will help clarify the ideas in question. While the concepts cover a wide range, they were selected for their potential applicability to climate-economy modeling and are not intended to fully cover the contributions of heterodox economics more generally. The objective of identifying these concepts is to allow for clearer discussion of the sorts of stories which could be readily built using the building blocks provided by heterodox economics, a task which will be expanded upon in Sect.  4 .

To provide context for this list of concepts, a short description of each and examples of how each could be applied to integrated assessment modeling is provided in Table 3 . These examples are indicative of the scope of specific interventions which are open to heterodox modelers, and range from those which are straightforwardly implementable (i.e., incorporating extreme climate damage functions or introducing composite wellbeing indicators within IAMs) to those which would require the creation of entirely new climate-economy models. Most of the proposals are compatible with one another, and taken together, they represent a path towards formally synthesizing insights from various schools of heterodox economics.

Finally, Table 4 outlines various research methods which are directly applicable to creating and using emission pathway models. The methodological contributions are divided by the nature of their potential use, with primary modeling techniques being separated from supporting methods. Short descriptions and references to examples are given for each. Compared to the list of concepts, the range of methods is narrower, with priority given to the techniques which are already in use. In particular, the list of modeling frameworks draws directly from the model types reviewed by Hafner et al. ( 2020 ).

The concepts, applications, and methods presented in this section will be illustrated further in the following section, where they will be used to tell the stories of various potential climate futures.

4 Telling new stories with heterodox concepts

To enable easier comparison across models, the IAM community has collaborated to create a set of common narratives which depict potential pathways for the world’s political-economic development over the coming century. These stories, called the Shared Socioeconomic Pathways Footnote 1 (SSPs) provide specific background inputs for population, urbanization, education, and GDP growth for five different global scenarios and are used widely in the modeling community (Riahi et al. 2017 ; O’Neill et al. 2017 ). These sets of inputs are each categorized according to the degree to which they make either mitigating or adapting to climate change easier or more difficult. This creates a matrix of scenarios detailing the various options of overall low challenges, overall high challenges, low challenges for mitigation but difficult adaptation, and finally high challenges for mitigation but low obstacles to adaptation (Kriegler et al. 2012 ; O’Neill et al. 2014 ).

As an example of how heterodox concepts can be put to use, this section will now propose a similar framework of socioeconomic background scenarios which could serve as starting points for modeling projects. Rather than organizing the scenarios along the axes of mitigation and adaptation, we propose a categorization on the basis of the levels of economic growth and institutional change in each storyline. This classification allows us to more systematically explore fundamental changes to both political-economic structures and the underlying growth path of the economy, two features which are not readily treated in the existing IAM literature. Figure  1 depicts the five scenarios detailed in this section, arranged approximately along the beforementioned axes.

Climate-economy pathways organized by levels of growth and institutional change (author’s elaboration)

Building off of the heterodox concepts listed in Sect.  3 , each scenario also highlights a number of concepts which would be particularly important for modeling the pathway. While a large number of the concepts are fully compatible with each other and should be considered in any scenario built on heterodox foundations, the concepts identified as particularly relevant are those which would likely need to be explicitly modeled in a formal representation of each particular scenario. Each scenario will also be linked with examples of methods which could be readily applied to it, with preferences given to references to existing work where possible. The remainder of the paper will detail the pathways in Fig.  1 , starting from a narrative description of each scenario.

4.1 Bumpy Green Boulevard

Particularly relevant concepts: effective demand, bio-physical embeddedness

Countries around the world embrace the environmental transition as an opportunity to fight climate change while boosting sluggish post COVID-19 economies. This ‘green growth’ strategy initially pays off, as green investments spark an economic boom which keeps workers employed and demand strong. Unfortunately, as the transition is truly getting off the ground, the global economy starts to run up against hard limits to energy, material and land availability. These limits slow not only the transition, but economic activity more generally, as countries struggle against each other to find enough inputs to maintain growth.

In this story, the concepts of effective demand and biophysical embeddedness are emphasized to tell a cautionary tale about potential non-economic limits to the speed of the transition. In a standard neoclassical IAMs this story would look quite different. Firstly, the large-scale green investment campaigns would not be met with a spike in growth due to increased aggregate demand, but would rather be fully crowded out by reductions in investments elsewhere in the economy. Furthermore, as the green investments are only being made because of a policy intervention, they would be assumed to be less productive than whatever was crowded out, meaning the long-term growth potential of the economy would be somewhat lower. Secondly, while standard IAMs can and do track the amount of energy, materials and land associated with various pathways, they do not typically use these features to impose binding limits on either sectoral or economy-wide growth.

In terms of actually modeling this story, a very similar scenario has already been created using the MEDEAS World model (Capellán-Pérez et al. 2020 ; Nieto et al. 2020 ). Within MEDEAS, the economy is represented as demand-led, with an input–output framework providing insights about how demand is distributed across the various sectors of the economy. As a system dynamics model, MEDEAS also includes hard energy availability feedbacks which prevent desired demand from being fully fulfilled unless the energy submodule is able to generate a sufficient amount of energy. In similar scenarios in MEDEAS to the story presented above, deployment of new renewable energy infrastructures is unable to keep up with the quick pace of “green growth,” leading to a relative scarcity of fossil fuels and unintentional near-zero growth rates (Nieto et al. 2020 ).

Comparable demand-led growth effects also exist in macroeconometric models, although so far without an emphasis on energy limits (Pollitt and Mercure 2018 ; Mercure et al. 2019 ). Along with full integration into heterodox IAMs, the concepts of effective demand and bio-physical limits can also be applied in ad hoc ways to equilibrium models by testing their results under significantly higher growth paths and by conducting feasibility analyses of the levels of material and energy inputs required at various points in a given scenario.

4.2 Slow and stable street

Particularly relevant concepts: social metabolism, wellbeing, and endogenous money

After a nasty set of energy crises in the early 2020s, the countries of the European Union decide to stop pursuing economic growth as a policy goal and instead target a broader index of wellbeing. While the shift in goals is certainly radical, it leaves the fundamental structure of Europe’s economy largely in place. This leads to some financial difficulties, particularly concerning public debts. To overcome these challenges, international financial institutions are forced to adapt, creating a more flexible financial regime for both Global North and Global South alike.

By combining a reduction in the rate of social metabolism with a focus on wellbeing, this story describes a path characterized more by a slowing of environmental pressures than a mad dash of technological deployment. The scenario is enhanced by a detailed examination of what this slowing means for the financial system and public finances, each of which could become problematic as credit endogenously contracts alongside the slowing economy. In principle, the slowing of growth could be explored with existing IAMs by simply inputting a desired growth path which converges near zero. This, however, would miss the complications a lack of growth would cause for the financial system and public finances, features which are not readily included within standard equilibrium IAMs.

Versions of this story have been a key starting point for a number of heterodox modeling exercises, with Jackson and Victor ( 2020 ) and Dafermos et al. ( 2017 ) doing so in a stock flow consistent modeling framework and D’Alessandro et al. ( 2020 ) with a system dynamics model. Key insights to come out of this work include the macroeconomic feasibility of such a path and a warning about the role public debt in particular may play as economic activity plateaus or contracts. The possibility of integrating wellbeing as a target within modeling exercise has also been shown, for example in Jackson and Victor ( 2020 ) who track a “sustainable prosperity index” and in the “average wellbeing index” of the Earth4All system dynamics model (Dixson-Declève et al. 2022 ). The concepts of social metabolism and wellbeing are also good starting points to further analyze the question of global justice during the ecological transition (Rubiano Rivadeneira and Carton 2022 ).

4.3 Science fiction freeway

Particularly relevant concepts: creative destruction, path dependency, and heterogenous agents

Recognizing the difficulties of honoring the 1.5-degree limit with existing technology, a core group of countries enter into an International Innovation Club. Membership in the club requires large public funding of green research and development and mandates that all results are shared openly. By coordinating and expanding the world’s knowledge creation, the Club manages to shock the world, introducing new techniques and technology which dramatically reshape the direction of the transition. Old problems are replaced with new however, as the solutions to the climate crisis put pressures on other ecological systems, and new inequalities arise between member and non-member countries.

Current IAMs typically rely on specific sets of individual technologies for their projections. This makes sense in the near term: it is fairly unlikely that something no one has ever heard of will be a major player in the transition over the next decade. In the longer term it is less clear, as if history is any guide, the types and levels of technology in 2100 will likely be quite different than today. Capitalism has a powerful capacity to create, especially under specific institutional and legal conditions which allow for coordination and cooperation. Combined with the notion of deep path dependency, a concerted effort to alter our technological path could potentially take us places that are currently difficult to imagine.

In terms of modeling, what is needed to better tell this story is a more explicit representation of technological change. This should certainly include possibilities for the refinement of existing technologies (Way et al. 2022 ), but ideally would also include space for new tools to emerge based on the needs displayed in a given scenario. A promising path forward could be with agent-based models, which allow the differentiation between innovative and static actors and the comparison of various knowledge-sharing regimes. Agent-based models have already been used extensively to study innovation and technology, and have recently been combined with climate modules to create IAMs (Dosi et al. 2010 ; Lamperti et al. 2018 , 2020 ). A further step could be to build modules depicting state-led innovation programs to be integrated as policy options within larger IAMs. The models could also explore the implications of various technological paths for development and international wealth distribution.

4.4 Path to perdition

Particularly relevant concepts: Institutional embeddedness, social reproduction, and fundamental uncertainty

The horrors of climate change, which had always seemed distant, arrive with a fury in the 2030s. While the direct damage from not-so-natural disasters are substantial, the more serious issues come from the gradual breakdown of political and social institutions, as democracies become less democratic and the rule of law routinely fails. Things which were once taken for granted, like public educational and health systems, become fragile or non-existent, shifting burdens once shouldered by the state on to families and local communities. The old distinctions between developing and developed countries fade, as new divisions arise between failed and functioning societies. While the global economy continues to muddle through the chaos, it is a shadow of it’s early 21 st century peak.

Most emission pathway IAMs are designed to better understand how society can limit global warming. This makes them somewhat utopian, as in both their construction and the bulk of their scenarios, they are exploring some of the brightest possible futures. More work could be done in exploring the other side of the bell curve, in trying to understand what could happen if we fail. Here, the concepts of institutional embeddedness and social reproduction could be very useful for understanding how things turn from bad to worse should the social and institutional pillars holding up market economies falter. The recognition of the often-overlooked prerequisites of our economic systems, along with an honest appraisal of the fundamental limits to our abilities to know what is around the corner, allow for the telling of a much more sober story than what is implied by measuring the effects of shocks within an equilibrium framework.

Heterodox scholars have already extensively criticized existing efforts to estimate potential climate damages (Keen 2020 ; Woillez et al. 2020 ; Asefi-Najafabady et al. 2020 ). A new challenge would be to construct an alternative modeling framework that examines not just climate changes’ effect on productivity or growth in a given year, but its cumulative effect on political, institutional, and social systems. Of particular importance would be recognizing the impact of climate change on activities like care work which often take place outside of markets but are essential for supporting market economies (Pearse 2017 ; Eastin 2018 ). This line of modeling would also allow space for international comparisons of institutional resilience.

By identifying possible tipping points and subsequent chain reactions, this line of modeling could provide a more complex and detailed pictures of what a warming world could look like. This would be useful not only as a warning in the here and now, but also as an improvement to the internal logic of the IAMs themselves, as the addition of social and institutional loops would force actors within the modeled world to face clear and severe consequences if they decide to shirk on mitigation.

4.5 Rue de Révolution

Particularly relevant concepts: power and economic democracy

What starts as a protest movement grows into something bigger, as wide swaths of civil society come together to demand something different. Starting from the periphery of the global economy and spreading country by country towards the core, the result is an economy transformed from below, with massive global corporations replaced by local and regional cooperatives, and the rule of the free market replaced with democratic planning. The economy is transformed, but ecological challenges remain as the leaders of the new system struggle to balance environmental concerns with the material interests of the people who they serve.

Standard climate-economy models explore a world in which the technology that underlays our economy changes dramatically, but the fundamental structure of the economy, and the broader society it supports remain essentially the same. Not only is this not the only possibility, but it also seems a fairly unlikely one. Social upheaval and revolution are a core part of the story of the first Industrial Revolution, and it remains entirely possible that something comparable could accompany an ecological transition. Power is a clear conceptual building block for analyzing societal transformations, and when combined with the idea of economic democracy, one can start to see the broad shape of a very different economic system.

Modeling this new system, the transition that creates it, and its interaction with the core environmental and technical challenges of decarbonization, is a tall task, which to the author’s knowledge has not been fully embraced by any large-scale integrated modeling projects. At the macro level, system dynamics modeling could be flexible enough to accommodate entirely different political-economic systems within the same model, with social tipping points endogenously pushing countries from one system to another, while at the micro level, an agent-based representation could simulate the social processes which lead to system changes. Perhaps a concrete way forward would be through participatory modeling, in which non-modelers build detailed descriptions of existing and potential systems that modelers then attempt to formalize. A set of such formalized alternative economic systems then could serve as a kind of post-capitalist Shared Socioeconomic Pathways, providing common end points to reconstruct within the various heterodox IAMs.

5 Conclusions: the role of heterodox economics in expanding the possible

The previous section shows that the concepts and methods of heterodox economics could be used to tell different stories than those which are currently told by neoclassical integrated assessment models. The final task then is to assess whether telling these additional stories would actually be an improvement to the landscape of climate-economy modeling. To approach this assessment, it is helpful to recall the typology of common criticisms against IAMs presented in the 6th IPCC Assessment Report and summarized in Sect.  2 , which included criticisms of IAMs for (1) having missing or incorrect assumptions, (2) being overly complicated and unclear, (3) lacking social and institutional consideration, and (4) for being used to close doors to unmodeled possibilities.

On the first count, of adding and substituting assumptions, heterodox economics has much to contribute, as elaborated in many of the applications shown in Table 3 . In terms of substituting existing assumptions, one concept that stands out is effective demand, which can literally turn the economics of IAMs on its head by flipping losses from mitigation into gains. In terms of new assumptions to be added, the bio-physical embeddedness of the economy is a clear priority, as current models lack even damages from climate change, let alone interactions and limits coming from other physical and ecological systems.

For the criticism of the opacity of IAMs, the contribution of heterodox economics is less clear. If anything, the long list of new complexities suggested by a heterodox analysis has the effect of increasing, not decreasing, how complicated new IAMs would need to be. Especially when attempting to formalize multiple concepts within the same model structure, there is a real danger of losing track of the effect of any given assumption to the larger picture. Similarly, when trying to model large, systemic shifts in one part of a model there is a possibility that the nuances of other parts of the model will be overwhelmed. The additional complexity called for by heterodox modeling also brings with it serious technical challenges for actually building and running quantitative models which can convincingly represent real world systems. This balance between realism and complexity is a key challenge for potential heterodox IAMs.

For the criticisms that IAMs need stronger social and institutional contextualization heterodox economics again has a clear contribution to make, with a number of entire schools of thought dedicated to analyzing the broader societal context within which economies operate.

But it is in the critique that IAMs should be used in ways that do not artificially close off viable policy options, in which perhaps the strongest argument for involving heterodox economics in integrated assessment modeling emerges. No economic theory or methodology can describe every reality or every possibility. As such, a plurality of perspectives and tools are needed to have a true sense of what the future may have in store for us. The concepts and techniques used within heterodox economics can be used to describe and explore scenarios which are currently impossible in neoclassical climate-economy models yet remain entirely plausible in the real world. This suggests a strong and persistent role for heterodox ideas and heterodox scholars in building, adapting, and improving emission pathway scenarios and the models which create them.

Not every story can or should be told through formal, quantitative models. But more stories, and more stories which are considered extreme, must be told if humanity hopes to achieve its climate goals as laid out in the 2015 Paris Agreement.

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For reference, the names given to the five shared socioeconomic pathways (SSPs) are (1) Sustainability — Taking the Green Road; (2) Middle of the Road; (3) Regional Rivalry — A Rocky Road; (4) Inequality — A Road Divided; and (5) Fossil-fueled Development — Taking the Highway.

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Proctor, J.C. Expanding the possible: exploring the role for heterodox economics in integrated climate-economy modeling. Rev Evol Polit Econ 4 , 537–557 (2023). https://doi.org/10.1007/s43253-023-00098-7

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Expanding the possible: exploring the role for heterodox economics in integrated climate-economy modeling

J. christopher proctor.

1 Sorbonne University Alliance, University of Technology of Compiègne, Costech laboratory, Compiègne, France

2 Roma Tre University, Rome, Italy

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This paper explores the degree to which heterodox economics can contribute to the development and use of climate-economy integrated assessment models. To do so, it introduces the field of integrated assessment modeling, with a focus on the core economic methodology used by various types of models. It then summarizes some of the literature critiquing these models and how they inform policy. The paper then provides an extended classification of ways in which heterodox economics could be applied to climate-economy models and presents a number of storylines, or pathways, which could be created using insights and methods from heterodox schools. The paper concludes with an assessment of the scope for heterodox economics to answer the criticisms of climate-economy models, finding that despite not resolving all issues, the heterodoxy has a substantial role to play.

Introduction: extreme stories to expand the possibility space

In late February 2020, just days before Europe and the USA joined China and much of Asia in imposing severe mobility restrictions in response to the COVID-19 pandemic, David McCollum and his colleagues published a short Nature Commentary piece calling on climate-economy modelers to “explore extremes” in their modeling (McCollum et al. 2020 ). Although these models, which attempt to create plausible scenarios of technological, social, economic, and environmental development for the next 80 years, could arguably be described as highly formalized forms of science fiction, the plot-lines investigated by these models are strikingly dull. Where, they ask, are the wars? The geopolitical realignment? The economic panics and shocks? The massive waves of structural economic changes and resulting backlash of social resistance? Where is the space for the wildcards, which are “not even on the radar” (Ibid.)? Their advice was well timed, although their extensive list of specific examples of extremes failed to include the global pandemic which had already quietly begun.

Part of the lack of extreme climate-economy scenarios comes from a failure to pose out-of-the-box research questions to the existing suite of models which have already been built. But part comes directly from the limitations of the models themselves. In their extensive review of the capabilities and limits of the existing integrated assessment modeling literature, Keppo et al. ( 2021 ), speak of “exploring the possibility space,” as according to them, “what is not included within the boundaries of the space to be explored cannot be found.” This paper takes the notions of a possibility space for integrated assessment modeling and turns it towards the realm of heterodox economics.

The various schools of thought and research programs that make up heterodox economics typically operate within more open theoretical frameworks and are generally more comfortable with analyzing extreme potentialities than their neoclassical corollaries. From the notion of government-maintained full employment to a vision of prosperity without economic growth, from an understanding of social reproduction and care to a focus on the evolution of institutions and the development of technology, heterodox economics offers a rich range of ideas and tools that could be useful in understanding what policy makers can, and should, do to resolve the climate crisis.

The purpose of this paper is to assess the degree to which the existing suite of heterodox ideas and tools can contribute directly to the development and use of large scale, quantitative, integrated assessment models in order to expand and improve the stories told by these models. To do this, Section.  2 will start with a short review of integrated assessment models and the criticisms levied against them. Section  3 will then procced to a classification of the potential conceptual and methodological contributions heterodox economics could make to understanding the transition to an emission-free global economy, with examples given for how individual concepts could be incorporated. Section  4 will attempt to use the ideas identified as most relevant to create a number of new climate scenarios which would not be readily told with standard climate-economy models. Finally, Sect.  5 will conclude with an assessment of the usefulness of heterodox economics in responding to the limits of integrated assessment modeling.

Integrated assessment models and their discontents

Integrated assessment models.

Integrated assessment models (IAMs) are a class of quantitative models that combine economic and climatic considerations. These models are built by integrating together a number of separate “modules” which represent different aspects of the economy-climate system. IAMs typically have both an economy module and a climate module which projects emissions and their corresponding levels of warming (Cattan and McIsaac 2021 ). Simple models stop here, but the most developed IAMs can add many more modules for systems such as energy, technological development, agriculture, land use, and much more. While some simpler IAMs remain fairly abstract, the more complex models can provide an impressive range of projections at a very high resolution, down to the levels of an individual technology adopted in each year (IRENA 2020 ).

IAMs can be divided into two primary categories according to the research questions they address (IPCC 2022a , 1858). The first, cost–benefit models , compare the expected levels of economic damages that will be caused by climate change with the expected costs of mitigating emissions in order to calculate an optimal growth path for the economy. The second, process-based models , attempt to replicate the connections between various systems or processes which are relevant for climate mitigation (Ibid.). This involves modeling the linkages between various economic, social, and physical systems to create emission scenarios and climate pathways which represent plausible futures. Because of their orientation towards scenario analysis, process base models can also be called emission pathway models .

Prior to the 2015 Paris Agreement, cost–benefit models were frequently used to calculate the optimal level of global emissions, and by extension warming, under various sets of assumptions and model parameters (Nordhaus 1992 , 1993 ). While this research question is still addressed in the post-Paris literature (Glanemann et al. 2020 ; Hänsel et al. 2020 ), the clear 2-degree and 1.5-degree limits agreed to by the international community have facilitated a shift in focus from determining the ideal level of warming towards finding pathways to achieving these fixed emission caps.

Emission pathways models have become highly influential in informing national policy and in tracking international progress in mitigating emissions (Süsser et al. 2021 ). Emissions pathways models are also a core tool of the Intergovernmental Panel on Climate Change (IPCC) reports, with over 3000 scenarios from 191 models submitted for the Sixth Assessment Report on the Mitigation of Climate Change (IPCC 2022a , 1882). A representative story of the kinds of features of the scenarios included in the recent IPCC reports can be found in Table ​ Table1. 1 . As this paper is focused primarily on economic scenario analysis, it will prioritize a discussion of emission pathway models and their economic foundations.

A representative story of achieving the 1.5- or 2-degree limits according to the scenarios included in recent IPCC reports

Author’s elaboration.

The core economics module of each IAM can be designed in a number of different ways. While the results of each model will be determined to a large degree by the specific assumptions and calibrations that go into it, the choice of model structure places key limits on what is possible within the model’s representation of the economic system.

A useful classification of IAMs based on their economic cores is provided by Nikas et al. ( 2019 ) who divide IAMs into optimal growth models (corresponding to cost–benefit models above), general equilibrium models, partial equilibrium models, macroeconometric models, and other process-based models. This last “other” category is helpfully expanded upon by Hafner et al. ( 2020 ) who add system dynamics models, agent-based models, and stock-flow consistent models.

The most common method for building emission pathway models is a computable general equilibrium (CGE) framework in which the path of the entire economy is optimized, typically at a sectoral level (Matsumoto and Fujimori 2019 ). Partial-equilibrium models, in which one sector is fully optimized while the rest of the economy is assumed to follow the status quo, are also common, with many partial-equilibrium frameworks focusing on the energy system. These two equilibrium frameworks can be augmented by including various market imperfections and frictions which would prevent the baseline scenario from achieving an optimal state in the short or medium term, but this technique is at the cutting edge of equilibrium climate modeling (Köberle et al. 2021 ).

Macroeconometric models also include a full representation of the economic system, but unlike CGE models, they are not based on an optimizing function (IPCC 2022a , 1845). Instead, they use real-world data to econometrically calibrate the coefficients of the relationships between the modeled variables, building a web of statistical relationships which can be simulated forward to create scenarios (Lehr and Lutz 2019 ). This structure allows the overall levels of economic activity to fluctuate within the model based on the demand generated in previous periods, creating more dynamic economic effects than are typically obtained in an equilibrium framework (Mercure et al. 2019 ). System dynamics, agent-based, and stock flow consistent models, are all associated with heterodox economics and will be described in Sect.  3 .

Their discontents

By their very nature, IAMs are highly interdisciplinary endeavors. This opens them up to criticism from a wide range of fields and perspectives, as their holistic scope touches on dozens of domains across the physical and social sciences. A full accounting of the critiques of IAMs is far beyond the scope of this article, but a summary is necessary to identify the areas where contributions from heterodox economics are most promising. For a more complete review of these critiques, Keppo et al. ( 2021 ), Gambhir et al. ( 2019 ), and Chapter 3 on Mitigation Pathways Compatible with Long-term Goals of the IPCC’s 6th Assessment Report on Mitigation of Climate Change (Riahi et al. 2022 ) are very useful.

A good classification of the types of criticisms of IAMs can be found in the Annex III on Scenarios and Modelling Method s from the abovementioned 6th Assessment Report of the IPCC, which divides IAM commentary into four categories (IPCC 2022a , 1862). The first type of criticism is the literature dealing with features and dynamics which are either missing from IAMs or modeled in ways which are perceived to be unfeasible or incredible. The second is a set of concerns around the complexity and comprehensibility of IAMs and their results. The third is a range of critiques about the lack of social, institutional and political elements within IAMs, and fourth is an array of worries about the effects IAMs themselves have on limiting climate policy options.

The first category of literature is the largest, as every parameter, assumption, and model structure is fair game for criticism of being unrealistic or of missing some crucial element. Of particular importance are the assumptions about the development of the costs of particular technologies and the availability of technologies which are currently unproven at large scales (Way et al. 2022 ). As will be discussed in the next section in greater detail, the macroeconomic assumptions within the models are also grounds for criticism (Asefi-Najafabady et al. 2020 ; Pollitt and Mercure 2018 ; Cattan and McIsaac 2021 ; Riahi et al. 2022 , 359).

In terms of complexity, the massive size and scope of most IAMs have raised concerns of a “black box” problem in which results cannot be clearly explained by any identifiable model features (Skea et al. 2021 ). The issue of complexity is compounded by a lack of transparency of data and code on the part of some models. This opacity means that when considering the results from large sets of models, as is the case in the work of the IPCC, distinctions between results driven by empirics and results driven by theoretical choices can be substantially blurred.

The lack of social and institutional considerations within IAMs may be one of the more surprising features of the models for those not familiar with them, as the scenarios created by the models seamlessly couple dramatic, unprecedented technological transformations with an essentially unchanging global pollical economy (Cherp et al. 2018 ; Jewell and Cherp 2020 ). While social dynamics and political change are notoriously hard to quantify and project, the dissonance between the scale of change allowed in some areas of the models and the rigidity of others is striking.

This leads to the final and most fundamental point that IAMs themselves may play a role in closing off doors and “pushing society in certain directions” without proper democratic consent or scientific justification (IPCC 2022a , 1862). Being omitted from IAM scenarios does not mean something has been proven impossible, but omission does have a chilling effect in removing options from the broader policy debate (Gambhir 2019 ). This critique raises the worry that IAMs are formally cutting off exploration in any direction that requires a structural change to underlying socio-economic systems, and, in so doing, are artificially closing off paths towards better worlds.

Heterodox economics’ contributions to IAMs: concepts, applications, and methods

For the purpose of this paper, heterodox economics will be considered to be the field of economic research which does not rely on the neoclassical foundations of methodological individualism, optimization, and equilibrium analysis (Arnsperger and Varoufakis 2006 ; Earle et al. 2016 ). This includes a wide range of different sub-fields and schools of thought which are both complementary and sometimes contradictory towards each other. Taken together, the broader range of theoretical and methodological starting points contained within heterodox economics provides an inherently expansive view of the possible, allowing for both brighter futures and darker dangers than what is described in the comparatively tranquil world of neoclassical economics. The section will attempt to map some of the potential contributions of heterodox economics in expanding the possibilities allowed within integrated assessment models.

Outlining the contours of heterodox economics, even in the simplest terms, brings a danger of information overload. To better organize the specific ways in which the stock of heterodox knowledge can be used, the paper proposes a classification based on how any given idea could be applied to integrated assessment modeling. At the highest level are conceptual contributions , which are key ideas implying deep, structural changes to existing IAMs. A list of conceptual contributions is shown in Table ​ Table2. 2 . The applicability of these concepts is then expanded upon with an extensive list of indicative examples of how each concept could be applied to a specific topic related to climate-economy modeling in Table ​ Table3. 3 . Cutting across the broad concepts and the narrow examples are methodological techniques which can augment or replace the equilibrium modeling which is currently standard IAMs. These methodological contributions are detailed in Table ​ Table4 4 .

Potential conceptual contributions to IAM modeling from the various heterodox schools of economic thought

a Path dependency is also closely associated with Post-Keynesian economics.

Descriptions of heterodox concepts and potential applications to integrated assessment modeling

Methodologies associated with heterodox economics relevant for integrated assessment modeling

Author’s elaboration, modeling frameworks adapted from Hafner et al. ( 2020 )

The concepts presented in Table ​ Table2 2 cover some of the “big ideas” from heterodox economics. These ideas are more than just topical interests, but instead are different ways of looking at the economy. Each highlights a feature of the economic system which, if emphasized, leads to very different lines of research and analysis. Each concept is further subdivided by the school of economic thought they are most closely associated with, with the specific schools of thought adapted from Fischer et al. ( 2018 ). While invoking schools of thought is always fraught with the danger of over-simplification, it is hoped that this further subdivision will help clarify the ideas in question. While the concepts cover a wide range, they were selected for their potential applicability to climate-economy modeling and are not intended to fully cover the contributions of heterodox economics more generally. The objective of identifying these concepts is to allow for clearer discussion of the sorts of stories which could be readily built using the building blocks provided by heterodox economics, a task which will be expanded upon in Sect.  4 .

To provide context for this list of concepts, a short description of each and examples of how each could be applied to integrated assessment modeling is provided in Table ​ Table3. 3 . These examples are indicative of the scope of specific interventions which are open to heterodox modelers, and range from those which are straightforwardly implementable (i.e., incorporating extreme climate damage functions or introducing composite wellbeing indicators within IAMs) to those which would require the creation of entirely new climate-economy models. Most of the proposals are compatible with one another, and taken together, they represent a path towards formally synthesizing insights from various schools of heterodox economics.

Finally, Table ​ Table4 4 outlines various research methods which are directly applicable to creating and using emission pathway models. The methodological contributions are divided by the nature of their potential use, with primary modeling techniques being separated from supporting methods. Short descriptions and references to examples are given for each. Compared to the list of concepts, the range of methods is narrower, with priority given to the techniques which are already in use. In particular, the list of modeling frameworks draws directly from the model types reviewed by Hafner et al. ( 2020 ).

The concepts, applications, and methods presented in this section will be illustrated further in the following section, where they will be used to tell the stories of various potential climate futures.

Telling new stories with heterodox concepts

To enable easier comparison across models, the IAM community has collaborated to create a set of common narratives which depict potential pathways for the world’s political-economic development over the coming century. These stories, called the Shared Socioeconomic Pathways 1 (SSPs) provide specific background inputs for population, urbanization, education, and GDP growth for five different global scenarios and are used widely in the modeling community (Riahi et al. 2017 ; O’Neill et al. 2017 ). These sets of inputs are each categorized according to the degree to which they make either mitigating or adapting to climate change easier or more difficult. This creates a matrix of scenarios detailing the various options of overall low challenges, overall high challenges, low challenges for mitigation but difficult adaptation, and finally high challenges for mitigation but low obstacles to adaptation (Kriegler et al. 2012 ; O’Neill et al. 2014 ).

As an example of how heterodox concepts can be put to use, this section will now propose a similar framework of socioeconomic background scenarios which could serve as starting points for modeling projects. Rather than organizing the scenarios along the axes of mitigation and adaptation, we propose a categorization on the basis of the levels of economic growth and institutional change in each storyline. This classification allows us to more systematically explore fundamental changes to both political-economic structures and the underlying growth path of the economy, two features which are not readily treated in the existing IAM literature. Figure  1 depicts the five scenarios detailed in this section, arranged approximately along the beforementioned axes.

Climate-economy pathways organized by levels of growth and institutional change (author’s elaboration)

Building off of the heterodox concepts listed in Sect.  3 , each scenario also highlights a number of concepts which would be particularly important for modeling the pathway. While a large number of the concepts are fully compatible with each other and should be considered in any scenario built on heterodox foundations, the concepts identified as particularly relevant are those which would likely need to be explicitly modeled in a formal representation of each particular scenario. Each scenario will also be linked with examples of methods which could be readily applied to it, with preferences given to references to existing work where possible. The remainder of the paper will detail the pathways in Fig.  1 , starting from a narrative description of each scenario.

Bumpy Green Boulevard

Particularly relevant concepts: effective demand, bio-physical embeddedness

Countries around the world embrace the environmental transition as an opportunity to fight climate change while boosting sluggish post COVID-19 economies. This ‘green growth’ strategy initially pays off, as green investments spark an economic boom which keeps workers employed and demand strong. Unfortunately, as the transition is truly getting off the ground, the global economy starts to run up against hard limits to energy, material and land availability. These limits slow not only the transition, but economic activity more generally, as countries struggle against each other to find enough inputs to maintain growth.

In this story, the concepts of effective demand and biophysical embeddedness are emphasized to tell a cautionary tale about potential non-economic limits to the speed of the transition. In a standard neoclassical IAMs this story would look quite different. Firstly, the large-scale green investment campaigns would not be met with a spike in growth due to increased aggregate demand, but would rather be fully crowded out by reductions in investments elsewhere in the economy. Furthermore, as the green investments are only being made because of a policy intervention, they would be assumed to be less productive than whatever was crowded out, meaning the long-term growth potential of the economy would be somewhat lower. Secondly, while standard IAMs can and do track the amount of energy, materials and land associated with various pathways, they do not typically use these features to impose binding limits on either sectoral or economy-wide growth.

In terms of actually modeling this story, a very similar scenario has already been created using the MEDEAS World model (Capellán-Pérez et al. 2020 ; Nieto et al. 2020 ). Within MEDEAS, the economy is represented as demand-led, with an input–output framework providing insights about how demand is distributed across the various sectors of the economy. As a system dynamics model, MEDEAS also includes hard energy availability feedbacks which prevent desired demand from being fully fulfilled unless the energy submodule is able to generate a sufficient amount of energy. In similar scenarios in MEDEAS to the story presented above, deployment of new renewable energy infrastructures is unable to keep up with the quick pace of “green growth,” leading to a relative scarcity of fossil fuels and unintentional near-zero growth rates (Nieto et al. 2020 ).

Comparable demand-led growth effects also exist in macroeconometric models, although so far without an emphasis on energy limits (Pollitt and Mercure 2018 ; Mercure et al. 2019 ). Along with full integration into heterodox IAMs, the concepts of effective demand and bio-physical limits can also be applied in ad hoc ways to equilibrium models by testing their results under significantly higher growth paths and by conducting feasibility analyses of the levels of material and energy inputs required at various points in a given scenario.

Slow and stable street

Particularly relevant concepts: social metabolism, wellbeing, and endogenous money

After a nasty set of energy crises in the early 2020s, the countries of the European Union decide to stop pursuing economic growth as a policy goal and instead target a broader index of wellbeing. While the shift in goals is certainly radical, it leaves the fundamental structure of Europe’s economy largely in place. This leads to some financial difficulties, particularly concerning public debts. To overcome these challenges, international financial institutions are forced to adapt, creating a more flexible financial regime for both Global North and Global South alike.

By combining a reduction in the rate of social metabolism with a focus on wellbeing, this story describes a path characterized more by a slowing of environmental pressures than a mad dash of technological deployment. The scenario is enhanced by a detailed examination of what this slowing means for the financial system and public finances, each of which could become problematic as credit endogenously contracts alongside the slowing economy. In principle, the slowing of growth could be explored with existing IAMs by simply inputting a desired growth path which converges near zero. This, however, would miss the complications a lack of growth would cause for the financial system and public finances, features which are not readily included within standard equilibrium IAMs.

Versions of this story have been a key starting point for a number of heterodox modeling exercises, with Jackson and Victor ( 2020 ) and Dafermos et al. ( 2017 ) doing so in a stock flow consistent modeling framework and D’Alessandro et al. ( 2020 ) with a system dynamics model. Key insights to come out of this work include the macroeconomic feasibility of such a path and a warning about the role public debt in particular may play as economic activity plateaus or contracts. The possibility of integrating wellbeing as a target within modeling exercise has also been shown, for example in Jackson and Victor ( 2020 ) who track a “sustainable prosperity index” and in the “average wellbeing index” of the Earth4All system dynamics model (Dixson-Declève et al. 2022 ). The concepts of social metabolism and wellbeing are also good starting points to further analyze the question of global justice during the ecological transition (Rubiano Rivadeneira and Carton 2022 ).

Science fiction freeway

Particularly relevant concepts: creative destruction, path dependency, and heterogenous agents

Recognizing the difficulties of honoring the 1.5-degree limit with existing technology, a core group of countries enter into an International Innovation Club. Membership in the club requires large public funding of green research and development and mandates that all results are shared openly. By coordinating and expanding the world’s knowledge creation, the Club manages to shock the world, introducing new techniques and technology which dramatically reshape the direction of the transition. Old problems are replaced with new however, as the solutions to the climate crisis put pressures on other ecological systems, and new inequalities arise between member and non-member countries.

Current IAMs typically rely on specific sets of individual technologies for their projections. This makes sense in the near term: it is fairly unlikely that something no one has ever heard of will be a major player in the transition over the next decade. In the longer term it is less clear, as if history is any guide, the types and levels of technology in 2100 will likely be quite different than today. Capitalism has a powerful capacity to create, especially under specific institutional and legal conditions which allow for coordination and cooperation. Combined with the notion of deep path dependency, a concerted effort to alter our technological path could potentially take us places that are currently difficult to imagine.

In terms of modeling, what is needed to better tell this story is a more explicit representation of technological change. This should certainly include possibilities for the refinement of existing technologies (Way et al. 2022 ), but ideally would also include space for new tools to emerge based on the needs displayed in a given scenario. A promising path forward could be with agent-based models, which allow the differentiation between innovative and static actors and the comparison of various knowledge-sharing regimes. Agent-based models have already been used extensively to study innovation and technology, and have recently been combined with climate modules to create IAMs (Dosi et al. 2010 ; Lamperti et al. 2018 , 2020 ). A further step could be to build modules depicting state-led innovation programs to be integrated as policy options within larger IAMs. The models could also explore the implications of various technological paths for development and international wealth distribution.

Path to perdition

Particularly relevant concepts: Institutional embeddedness, social reproduction, and fundamental uncertainty

The horrors of climate change, which had always seemed distant, arrive with a fury in the 2030s. While the direct damage from not-so-natural disasters are substantial, the more serious issues come from the gradual breakdown of political and social institutions, as democracies become less democratic and the rule of law routinely fails. Things which were once taken for granted, like public educational and health systems, become fragile or non-existent, shifting burdens once shouldered by the state on to families and local communities. The old distinctions between developing and developed countries fade, as new divisions arise between failed and functioning societies. While the global economy continues to muddle through the chaos, it is a shadow of it’s early 21 st century peak.

Most emission pathway IAMs are designed to better understand how society can limit global warming. This makes them somewhat utopian, as in both their construction and the bulk of their scenarios, they are exploring some of the brightest possible futures. More work could be done in exploring the other side of the bell curve, in trying to understand what could happen if we fail. Here, the concepts of institutional embeddedness and social reproduction could be very useful for understanding how things turn from bad to worse should the social and institutional pillars holding up market economies falter. The recognition of the often-overlooked prerequisites of our economic systems, along with an honest appraisal of the fundamental limits to our abilities to know what is around the corner, allow for the telling of a much more sober story than what is implied by measuring the effects of shocks within an equilibrium framework.

Heterodox scholars have already extensively criticized existing efforts to estimate potential climate damages (Keen 2020 ; Woillez et al. 2020 ; Asefi-Najafabady et al. 2020 ). A new challenge would be to construct an alternative modeling framework that examines not just climate changes’ effect on productivity or growth in a given year, but its cumulative effect on political, institutional, and social systems. Of particular importance would be recognizing the impact of climate change on activities like care work which often take place outside of markets but are essential for supporting market economies (Pearse 2017 ; Eastin 2018 ). This line of modeling would also allow space for international comparisons of institutional resilience.

By identifying possible tipping points and subsequent chain reactions, this line of modeling could provide a more complex and detailed pictures of what a warming world could look like. This would be useful not only as a warning in the here and now, but also as an improvement to the internal logic of the IAMs themselves, as the addition of social and institutional loops would force actors within the modeled world to face clear and severe consequences if they decide to shirk on mitigation.

Rue de Révolution

Particularly relevant concepts: power and economic democracy

What starts as a protest movement grows into something bigger, as wide swaths of civil society come together to demand something different. Starting from the periphery of the global economy and spreading country by country towards the core, the result is an economy transformed from below, with massive global corporations replaced by local and regional cooperatives, and the rule of the free market replaced with democratic planning. The economy is transformed, but ecological challenges remain as the leaders of the new system struggle to balance environmental concerns with the material interests of the people who they serve.

Standard climate-economy models explore a world in which the technology that underlays our economy changes dramatically, but the fundamental structure of the economy, and the broader society it supports remain essentially the same. Not only is this not the only possibility, but it also seems a fairly unlikely one. Social upheaval and revolution are a core part of the story of the first Industrial Revolution, and it remains entirely possible that something comparable could accompany an ecological transition. Power is a clear conceptual building block for analyzing societal transformations, and when combined with the idea of economic democracy, one can start to see the broad shape of a very different economic system.

Modeling this new system, the transition that creates it, and its interaction with the core environmental and technical challenges of decarbonization, is a tall task, which to the author’s knowledge has not been fully embraced by any large-scale integrated modeling projects. At the macro level, system dynamics modeling could be flexible enough to accommodate entirely different political-economic systems within the same model, with social tipping points endogenously pushing countries from one system to another, while at the micro level, an agent-based representation could simulate the social processes which lead to system changes. Perhaps a concrete way forward would be through participatory modeling, in which non-modelers build detailed descriptions of existing and potential systems that modelers then attempt to formalize. A set of such formalized alternative economic systems then could serve as a kind of post-capitalist Shared Socioeconomic Pathways, providing common end points to reconstruct within the various heterodox IAMs.

Conclusions: the role of heterodox economics in expanding the possible

The previous section shows that the concepts and methods of heterodox economics could be used to tell different stories than those which are currently told by neoclassical integrated assessment models. The final task then is to assess whether telling these additional stories would actually be an improvement to the landscape of climate-economy modeling. To approach this assessment, it is helpful to recall the typology of common criticisms against IAMs presented in the 6th IPCC Assessment Report and summarized in Sect.  2 , which included criticisms of IAMs for (1) having missing or incorrect assumptions, (2) being overly complicated and unclear, (3) lacking social and institutional consideration, and (4) for being used to close doors to unmodeled possibilities.

On the first count, of adding and substituting assumptions, heterodox economics has much to contribute, as elaborated in many of the applications shown in Table ​ Table3. 3 . In terms of substituting existing assumptions, one concept that stands out is effective demand, which can literally turn the economics of IAMs on its head by flipping losses from mitigation into gains. In terms of new assumptions to be added, the bio-physical embeddedness of the economy is a clear priority, as current models lack even damages from climate change, let alone interactions and limits coming from other physical and ecological systems.

For the criticism of the opacity of IAMs, the contribution of heterodox economics is less clear. If anything, the long list of new complexities suggested by a heterodox analysis has the effect of increasing, not decreasing, how complicated new IAMs would need to be. Especially when attempting to formalize multiple concepts within the same model structure, there is a real danger of losing track of the effect of any given assumption to the larger picture. Similarly, when trying to model large, systemic shifts in one part of a model there is a possibility that the nuances of other parts of the model will be overwhelmed. The additional complexity called for by heterodox modeling also brings with it serious technical challenges for actually building and running quantitative models which can convincingly represent real world systems. This balance between realism and complexity is a key challenge for potential heterodox IAMs.

For the criticisms that IAMs need stronger social and institutional contextualization heterodox economics again has a clear contribution to make, with a number of entire schools of thought dedicated to analyzing the broader societal context within which economies operate.

But it is in the critique that IAMs should be used in ways that do not artificially close off viable policy options, in which perhaps the strongest argument for involving heterodox economics in integrated assessment modeling emerges. No economic theory or methodology can describe every reality or every possibility. As such, a plurality of perspectives and tools are needed to have a true sense of what the future may have in store for us. The concepts and techniques used within heterodox economics can be used to describe and explore scenarios which are currently impossible in neoclassical climate-economy models yet remain entirely plausible in the real world. This suggests a strong and persistent role for heterodox ideas and heterodox scholars in building, adapting, and improving emission pathway scenarios and the models which create them.

Not every story can or should be told through formal, quantitative models. But more stories, and more stories which are considered extreme, must be told if humanity hopes to achieve its climate goals as laid out in the 2015 Paris Agreement.

Author contribution

The sole author was responsible for all aspects of creating the paper, with support and advice from two PhD supervisors and two anonymous reviewers.

Open access funding provided by Università degli Studi Roma Tre within the CRUI-CARE Agreement. No specific funding was received for the creation of this paper. The author receives a research stipend from the University of Technology of Compiègne.

Data availability

Declarations.

There are no ethical considerations in publishing the paper.

The authors declare no competing interests.

1 For reference, the names given to the five shared socioeconomic pathways (SSPs) are (1) Sustainability — Taking the Green Road; (2) Middle of the Road; (3) Regional Rivalry — A Rocky Road; (4) Inequality — A Road Divided; and (5) Fossil-fueled Development — Taking the Highway.

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Is There a Future for Heterodox Economics?

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Paper | This paper assesses economics research and teaching frameworks in the United States by examining how knowledge is produced and ranked, the flaws and strengths of heterodox economic theory; and how students are trained, especially for careers in economic policy. 

By: Teresa Ghilarducci, Zachary Knauss, Richard McGahey, William Milberg, Drew Landes

This study considers how the field of economics has developed to help the public understand capitalism. Challenges to orthodox theory need to be analytically sound and many economists, in and out of the so-called mainstream, want their work to be the basis for economic justice, democracy, and environmental sustainability. Despite a record length of economic recovery since the trough of the Great Recession in 2008, there is concern about a repeat of the financial crisis. All of this angst is reflected in a wave of nationalism, xenophobia, protectionism and a deep political divide. (Stiglitz 2019 has argued that this divide has itself exacerbated existing economic inequities.) Economics should be a tool both to understand and address these problems, but in spite of successful individual analyses around issues like minimum wage, climate change, trade, inequality, and discrimination, the methodological core of modern economics is relatively untouched. Alternative or ‘heterodox’ visions have achieved littletraction in most economic departments, and modern economics is isolated from other social sciences and fields of inquiry. Given the inadequacies of mainstream economics, understanding why alternative visions have not been more successful is of paramount importance. This ambitious project is approached by focusing on what is perceived to be barriers to the success of existing alternative economic theories and policies. Three types of barriers are considered: (1) the hegemony of neoclassical economics within the economics profession; (2) limits of heterodox economics itself; and (3) weaknesses in pedagogical practices of heterodox economics from high school and community college teaching through graduate training. 

Read the paper in the Journal of Philosophical Economics . 

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Please note you do not have access to teaching notes, heterodox economics and dissemination of research through the internet: the experience of repec and nep.

On the Horizon

ISSN : 1074-8121

Article publication date: 26 September 2008

This paper seeks to study how the democratization of the diffusion of research through the internet could have helped non‐traditional fields of research.

Design/methodology/approach

The specific case the authors approach is heterodox economics as its pre‐prints are disseminated through NEP, the e‐mail alert service of RePEc.

Comparing heterodox and mainstream papers, the authors find that the heterodox are quite systematically more downloaded, and particularly so when considering downloads per subscriber.

Research limitations/implications

The authors conclude that the internet definitely helps heterodox research, also because other researchers get exposed to it. But there is still room for more participation by heterodox researchers.

Originality/value

The paper shows how RePEc and NEP try to pursue democracy and help in the dissemination of research. It also shows how heterodox communities can benefit and have benefited from this system, because they need new ways for disseminating research.

Novarese, M. and Zimmermann, C. (2008), "Heterodox economics and dissemination of research through the internet: the experience of RePEc and NEP", On the Horizon , Vol. 16 No. 4, pp. 198-204. https://doi.org/10.1108/10748120810912529

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• Call for papers Conference

Call for Papers – AHE 2024 Conference

Call for Papers

26th Annual Conference of the Association for Heterodox Economics

10-12 July 2024 in Bristol, UK

In collaboration with Bristol Research in Economics and

The College of Business and Law at the University of the West of England in Bristol

We invite submissions for the 26th Conference of the Association for Heterodox Economics , taking place on July 10-12, 2024 at the University of the West of England (Frenchay Campus), in Bristol (UK) and online. This is an event organised in collaboration with Bristol Research in Economics at UWE College of Business and Law .  

This year’s theme, “Heterodox Alternatives for a World of Multiple Crises”, seeks to explore innovative and diverse perspectives to address the complex challenges facing our global economy. In the midst of unprecedented crises, including environmental degradation, economic inequality, and political instability, we believe that heterodox approaches hold the key to unlocking new solutions. We welcome submissions that challenge conventional economic paradigms, offer alternative frameworks for understanding and navigating our multifaceted crises and actively work towards social change.

Submissions may cover a wide range of approaches and sub-topics, including but not limited to:

• Ecological Economics
• Post-Keynesian Economics
• Feminist Economics
• Institutional Economics
• Marxist Economics
• Political Economy
• Economic Development 
• Postcolonial perspectives on economics
• Imperialism
• Economic History and History of Economic Thought
• Race and Economics
• Economics Pedagogy

Join us in fostering a vibrant intellectual exchange that transcends traditional boundaries. Let’s collectively explore heterodox alternatives and contribute to building a more resilient, sustainable, and equitable world.

Abstract submission

Submit abstracts for individual papers (max 300 words) by 1st March 2024 by filling in this form and be a part of the dialogue shaping the future of heterodox economics.

We particularly encourage applications from underrepresented groups in the economics discipline including, but not limited to women, people of colour, scholars from the Global South. 

Limited travel support is available for selected early career scholars from the Global North and South. Early career scholars include PhD students as well as those who received their PhD no more than 2 years prior to the date of the conference and are not currently in a full-time, tenured position. When submitting your abstract, please indicate if you would like to be considered for the bursaries.

Panel submission

To make submission for a panel please fill this form . Please note that a panel consists of 3-4 presentations around similar topics. We welcome online contributions but ask that a maximum of 1 speaker per suggested panel presents remotely.

Fred Lee Prize

If you are an early career researcher and interested in having your paper considered for the Fred Lee Early Career Prize, please indicate this on the paper submission form. You will be asked to send your full paper by June 1st, 2024 with the subject line “ Early career prize submission ” at [email protected] . Eligible scholars for the prize include PhD students as well as those who received their PhD no more than 2 years prior to the date of the conference and are not currently in a full-time, tenured position.

Conference location

The 2024 AHE conference will take place at the Business School of UWE Bristol, UK.

Click here for the Google Maps link to the conference venue.

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One thought on “ call for papers – ahe 2024 conference ”.

I need to book travel to the UK, but I have yet to hear as to whether my Abstract for the Conference has been accepted. When do you expect to advise colleagues about successful submissions? Many thanks. Kind regards Martin Watts

Dr Martin Watts Emeritus Professor of Economics Newcastle Business School Research Associate Centre of Full Employment and Equity (CofFEE) The University of Newcastle Newcastle NSW 2300 Australia

Dear professor Martin Watts,

The AHE will send acceptance confirmations in the first week of April .

The AHE conference received about 200 submissions and the management committee is selecting the papers at the moment. You should receive an email in the first week of April.

Once the management committee sends the acceptance emails, registration will be open on the AHE website.

Kind regards, Tomas Rotta

Dear Thomas, Unfortunately I need to withdraw the joint paper entitled Labour Underutilisation and the Demand for Health Services in Australia: An Alternative Fiscal Strategy which was accepted for the Conference. We decided that data and other limitations which we have encountered meant that we could not justify taking up a scarce slot at the Conference.

However, I would be happy to present a response to the recent CJE paper entitled Political aspects of ‘buffer stock’ employment: a reconsideration by Setterfield et al. (2023). Since our rather lengthy paper is in fact a Comment, it does not have an abstract. I am happy to send you the complete paper, if necessary.

I apologise for the somewhat unorthodox approach to paper submission!

Kind regards Martin

Dear Tomas, I am following up on my email of last Wednesday, shown above. Please could you indicate if my proposal is agreed.

Many thanks.

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Are Markups Driving the Ups and Downs of Inflation?

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FRBSF Economic Letter 2024-12 | May 13, 2024

How much impact have price markups for goods and services had on the recent surge and the subsequent decline of inflation? Since 2021, markups have risen substantially in a few industries such as motor vehicles and petroleum. However, aggregate markups—which are more relevant for overall inflation—have generally remained flat, in line with previous economic recoveries over the past three decades. These patterns suggest that markup fluctuations have not been a main driver of the ups and downs of inflation during the post-pandemic recovery.

In the recovery from the pandemic, U.S. inflation surged to a peak of over 7% in June 2022 and has since declined to 2.7% in March 2024, as measured by the 12-month change in the personal consumption expenditures (PCE) price index. What factors have been driving the ups and downs of inflation? Production costs are traditionally considered a main contributor, particularly costs stemming from fluctuations in demand for and supply of goods and services. As demand for their products rises, companies need to hire more workers and buy more intermediate goods, pushing up production costs. Supply chain disruptions can also push up the cost of production. Firms may pass on all or part of the cost increases to consumers by raising prices. Thus, an important theoretical linkage runs from cost increases to inflation. Likewise, decreases in costs should lead to disinflation.

Labor costs are an important factor of production costs and are often useful for gauging inflationary pressures. However, during the post-pandemic surge in inflation, nominal wages rose more slowly than prices, such that real labor costs were falling until early 2023. By contrast, disruptions to global supply chains pushed up intermediate goods costs, contributing to the surge in inflation (see, for example, Liu and Nguyen 2023). However, supply chains have more direct impacts on goods inflation than on services inflation, which also rose substantially.

In this Economic Letter , we consider another factor that might drive inflation fluctuations: changes in firms’ pricing power and markups. An increase in pricing power would be reflected in price-cost markups, leading to higher inflation; likewise, a decline in pricing power and markups could alleviate inflation pressures. We use industry-level measures of markups to trace their evolving impact on inflation during the current expansion. We find that markups rose substantially in some sectors, such as the motor vehicles industry. However, the aggregate markup across all sectors of the economy, which is more relevant for inflation, has stayed essentially flat during the post-pandemic recovery. This is broadly in line with patterns during previous business cycle recoveries. Overall, our analysis suggests that fluctuations in markups were not a main driver of the post-pandemic surge in inflation, nor of the recent disinflation that started in mid-2022.

Potential drivers of inflation: Production costs and markups

To support households and businesses during the pandemic, the Federal Reserve lowered the federal funds rate target to essentially zero, and the federal government provided large fiscal transfers and increased unemployment benefits. These policies boosted demand for goods and services, especially as the economy recovered from the depth of the pandemic.

The increase in overall demand, combined with supply shortages, boosted the costs of production, contributing to the surge in inflation during the post-pandemic recovery. Although labor costs account for a large part of firms’ total production costs, real labor costs were falling between early 2021 and mid-2022 such that the increases in prices outpaced those in nominal wages. This makes it unlikely that labor costs were driving the surge in inflation.

Instead, we focus on another potential alternative driver of inflation that resulted from firms’ ability to adjust prices, known as pricing power. As demand for goods surged early in the post-pandemic recovery, companies may have had a greater ability to raise their prices above their production costs, a gap known as markups. Following a sharp drop in spending at the height of the pandemic, people may have become eager to resume normal spending patterns and hence more tolerant to price increases than in the past. In fact, growth of nonfinancial corporate profits accelerated in the early part of the recovery (see Figure 1), suggesting that companies had increased pricing power. Some studies have pointed to the strong growth in nonfinancial corporate profits in 2021 as evidence that increased markups have contributed to inflation (see, for example, Weber and Wasmer 2023). However, the figure also shows that growth in corporate profits is typically volatile. Corporate profits tend to rise in the early stages of economic recoveries. Data for the current recovery show that the increase in corporate profits is not particularly pronounced compared with previous recoveries.

Figure 1 Profit growth for nonfinancial businesses

More importantly, corporate profits are an imperfect measure of a firm’s pricing power because several other factors can drive changes in profitability. For instance, much of the recent rise in corporate profits can be attributed to lower business taxes and higher subsidies from pandemic-related government support, as well as lower net interest payments due to monetary policy accommodation (Pallazzo 2023).

Instead of relying on profits as a measure of pricing power, we construct direct measures of markups based on standard economic models. Theory suggests that companies set prices as a markup over variable production costs, and that markup can be inferred from the share of a firm’s revenue spent on a given variable production factor, such as labor or intermediate goods. Over the period of data we use, we assume that the specific proportion of a company’s production costs going toward inputs does not change. If the share of a firm’s revenue used for inputs falls, it would imply a rise in the firm’s price-cost margin or markup. In our main analysis, we use industry-level data from the Bureau of Economic Analysis (BEA) to compute markups based on the share of revenue spent on intermediate inputs. Our results are similar if we instead use the share of revenue going toward labor costs.

We compare the evolution of markups to that of prices, as measured by the PCE price index, since the recovery from the pandemic. In constructing this price index, the BEA takes into account changes in product characteristics (for instance, size) that could otherwise bias the inflation measure by comparing the prices of inherently different products over time. Similarly, based upon standard economic theory, our markup measure implicitly captures changes in those characteristics (see, for example, Aghion et al. 2023).

The post-pandemic evolution of markups

We examine the evolution of markups in each industry since the third quarter of 2020, the start of the post-pandemic recovery. Figure 2 shows that some sectors, such as the motor vehicles and petroleum industries, experienced large cumulative increases in markups during the recovery. Markups also rose substantially in general merchandise, such as department stores, and for other services, such as repair and maintenance, personal care, and laundry services. Since the start of the expansion, markups in those industries rose by over 10%—comparable in size to the cumulative increases over the same period in the core PCE price index, which excludes volatile food and energy components. However, the surge in inflation through June 2022 was broad based, with prices also rising substantially outside of these sectors. Thus, understanding the importance of markups for driving inflation requires a macroeconomic perspective that examines the evolution of aggregate markups across all sectors of the economy.

Figure 2 Cumulative changes in markups for salient industries

The role of aggregate markups in the economy

To assess how much markup changes contribute to movements in inflation more broadly, we use our industry-level measurements to calculate an aggregate markup at the macroeconomic level. We aggregate the cumulative changes in industry markups, applying two different weighting methods, as displayed in Figure 3. In the first method (green line), we match our industry categories to the spending categories in the core PCE price index for ease of comparison; we then use the PCE weights for each category to compute the aggregate markup. Alternatively, we use each industry’s cost weights to compute the aggregate markup (blue line). Regardless of the weighting method, Figure 3 shows that aggregate markups have stayed essentially flat since the start of the recovery, while the core PCE price index (gray line) rose by more than 10%. Thus, changes in markups are not likely to be the main driver of inflation during the recovery, which aligns with results from Glover, Mustre-del-Río, and von Ende-Becker (2023) and Hornstein (2023) using different methodologies or data. Markups also have not played much of a role in the slowing of inflation since the summer of 2022.

Figure 3 Cumulative changes in aggregate markups and prices

Moreover, the path of aggregate markups over the past three years is not unusual compared with previous recoveries. Figure 4 shows the cumulative changes in aggregate markups since the start of the current recovery (dark blue line), alongside aggregate markups following the 1991 (green line), 2001 (yellow line), and 2008 (light blue line) recessions. Aggregate markups have stayed roughly constant throughout all four recoveries.

Figure 4 Cumulative changes of aggregate markups in recoveries

Firms’ pricing power may change over time, resulting in markup fluctuations. In this Letter , we examine whether increases in markups played an important role during the inflation surge between early 2021 and mid-2022 and if declines in markups have contributed to disinflation since then. Using industry-level data, we show that markups did rise substantially in a few important sectors, such as motor vehicles and petroleum products. However, aggregate markups—the more relevant measure for overall inflation—have stayed essentially flat since the start of the recovery. As such, rising markups have not been a main driver of the recent surge and subsequent decline in inflation during the current recovery.

Aghion, Philippe, Antonin Bergeaud, Timo Boppart, Peter J. Klenow, and Huiyu Li. 2023. “A Theory of Falling Growth and Rising Rents.”  Review of Economic Studies  90(6), pp.2,675-2,702.

Glover, Andrew, José Mustre-del-Río, and Alice von Ende-Becker. 2023. “ How Much Have Record Corporate Profits Contributed to Recent Inflation? ” FRB Kansas City Economic Review 108(1).

Hornstein, Andreas. 2023. “ Profits and Inflation in the Time of Covid .” FRB Richmond Economic Brief 23-38 (November).

Liu, Zheng, and Thuy Lan Nguyen. 2023. “ Global Supply Chain Pressures and U.S. Inflation .” FRBSF Economic Letter 2023-14 (June 20).

Palazzo, Berardino. 2023. “ Corporate Profits in the Aftermath of COVID-19 .” FEDS Notes , Federal Reserve Board of Governors, September 8.

Weber, Isabella M. and Evan Wasner. 2023. “Sellers’ Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency?” Review of Keynesian Economics 11(2), pp. 183-213.

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System. This publication is edited by Anita Todd and Karen Barnes. Permission to reprint portions of articles or whole articles must be obtained in writing. Please send editorial comments and requests for reprint permission to [email protected]

Half Empty and Half Full? Women in Economics and the Rise in Gender-Related Research

Using the EconLit dissertation database and large-scale algorithmic methods that identify author demographics from names, we investigate the connection between the gender of economics dissertators and dissertation topics. Despite stagnation in the share of women among economics Ph.D.s in recent years, there has been a remarkable rise in gender-related dissertations in economics over time and in many sub-fields. Women economists are significantly more likely to write gender-related dissertations and bring gender-related topics into a wide range of fields within economics. Men in economics have also substantially increased their interest in gender-related topics.

We thank Shaianne Osterreich and participants at the 2024 ASSA meeting for their feedback. Tiger Sun and Sheng Qu provided excellent research assistance. This project was supported by the National Science Foundation, under NSF Award Number SES: 2121120. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

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