Concepts like "market failure" (e.g., pollution) are framed as exceptions to a well-functioning system. An alternative view is that these are not failures but the intended, logical outcomes of the existing legal framework. Pollution isn't a failure, but a result of property rights that allow companies to externalize waste costs.
The original study of economics was "political economy," which understood the economy as inseparable from politics, law, and history. The late 19th-century rise of neoclassical thought deliberately separated these fields, treating the economy as a natural, pre-political system, akin to a law of physics like gravity.
The post-war dominance of mathematical economics was not a natural evolution. It was heavily influenced by US Department of Defense funding, which employed mathematicians and engineers to model weapon systems. This approach was then applied to the economy, reframing it as an optimized machine populated by rational "cyborgs," divorced from social reality.
Adam Smith is often miscast as the originator of laissez-faire economics. In reality, his work viewed markets as embedded in human-created institutions like law and power structures, a perspective closer to institutionalism than modern neoclassical theory. The phrase "invisible hand" appears only once in his 800-page book.
A National Science Foundation commission in the mid-1980s expressed alarm over the state of graduate economics education. They found that top programs were producing students with sophisticated mathematical skills but who were unable to apply their knowledge to real-world social and economic problems, calling them "idiots savants."
The debate between liberals and conservatives over state intervention is based on a flawed premise. Both sides accept the idea of a pre-political market that sometimes "fails." The reality is that the market is always a product of political and legal decisions. The real question isn't *whether* to intervene, but who benefits from the current structure.
The New Deal is often seen as a radical break in American history. However, historians argue it follows a longer, but largely forgotten, tradition of a robust "developmental state" in the U.S., particularly during the Reconstruction era. This historical amnesia is perpetuated by modern economics programs that don't require students to study economic history.
A core methodological flaw in neoclassical economics is its deductive approach: it builds models based on axioms (e.g., perfect rationality) that don't reflect reality. In contrast, institutional economics is inductive, constructing theory from evidence-based observation. This explains why neoclassical models failed to predict the 2008 crisis and why their proponents refused to change them afterward.