TOWARDS IDEAL ECONOMIC THINKING: A PHILOSOPHICAL AND
EMPIRICAL REVIEW
Daniel Alves
ECON 350 - Classical Economics
June, 2024
Introduction
Adam Smith through his great work The Wealth of Nations written in 1776, is often
referred to as the first person to develop economics as a separate branch of science. As an
economist, Smith did not forget his moral roots, especially those contained in The Theory of
Moral Sentiments. The historical development of economic thought then continued by
producing figures such as Alfred Marshall, J.M. Keynes, Karl Marx, to the 2009 Nobel Prize
winners in Economics, Elinor Ostrom and Oliver E. Williamson.
Economic thought actually starts from the pre-classical period, namely the economic
thought of the Ancient Greeks, scholastics, mercantilism and physiocrats. But broadly
speaking, the development of schools of thought in economics was initiated by what is
referred to as the classical school. The flow that was mainly pioneered by Adam Smith was
It emphasizes the invisible hand in regulating the distribution of resources, and therefore the
role of government is severely restricted as it would interfere with this process.
This invisible hand concept is then represented as a market mechanism through price as
its main instrument. The classical school failed after the Great Depression of the 1930s which
showed that the market was unable to react to the turmoil in the stock market.
As a counterpoint to the classical school, Keynes proposed a theory in his book General
Theory of Employment, Interest, and Money which states that markets are not always able to
create equilibrium, and therefore government intervention must be carried out so that the
distribution of resources reaches its target. These two schools then "fight" each other in the
world of economics and produce many variants of both such as: new classical, neo classical,
neo keynesian, monetarist, supply side flow, rational expectations flow and so on. But the
development in this thought also developed in other directions, such as the theory of class
opposition from Karl Marx and Friedrich Engels, as well as the institutional flow that is the
theory of class struggle. It was first developed by Thorstein Veblen et al and later by Nobel
laureate Douglass C. North.
Tracing the history of economic thought is needed to be able to analyze economic
problems, even though economic science shows that there is no economic theory that can
answer all economic problems. Economic problems can be the same but each country has a
different social, political, cultural system, of course the handling is also different. Each theory
is only useful for certain periods, problems, countries. For this reason, it is necessary to
examine which economic thought is ideal, especially for United States, seen from a
philosophical and empirical review of the present so that the United States economy will be
better in the future.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
History Of Economic Thought
Economic Thought of the Pre-Classics
The history of economic thought begins with the socialist pioneers. The economic
concepts of the pioneers are found mainly in religious teachings, legal rules, ethics or moral
rules. The pioneers included Plato who looked down on manual laborers and those who
pursued wealth. Aristotle as a pioneer figure, the concept of economic thought is based on the
concept of good household management, through exchange. It was Aristotle who
distinguished two kinds of value, namely use value and exchange value. He rejected the
presence of money and borrowing money with interest, money is only a means of exchange,
if you accumulate wealth by asking / taking usury, then money becomes barren or
unproductive. Another figure at this time was Xenophon, the core of Xenophon's thinking
was that agriculture was seen as the basis of economic welfare, shipping and commerce were
encouraged to be developed by the state, joint venture capital in business, specialization and
division of labor, the concept of slavery and the mining sector became common property. St.
Thomas Aquinas (1225-1274), a medieval philosopher and economic thinker, put forward the
concept of justice that is Divided into distributive justice and concessional justice, by
upholding God's law, buying and selling must be done at a fair price (just-price) while
interest on money is usury.
The next economic thought was the Mercantilists. Mercantilist economic thought was a
policy that strongly protected domestic industry, but encouraged competition, while there
were controlled restrictions on foreign trade, population policies that encouraged families
with many children, domestic industrial activities with low wage rates. Industrial protection
encouraged domestic competition, and low wage rates encouraged exports. The physiocratic
school grew as a criticism of mercantilist economic thought, the most famous thinker in this
school was Francois Quesnay. His greatest contribution to the development of economics was
the laws of nature, and explaining the circular flow of the economy.
Classical Economic Thought
The philosophy of the classics with the figure of Adam Smith regarding society, in
principle, is no different from the philosophy of the physiocratic school, the classics base
themselves on rational actions, and depart from a natural method, an automatic balance,
where society will always automatically reach equilibrium at the level of full employment.
The principle of regulating economic life is based on the market mechanism. Jean Batiste Say
became a supporter of Adam Smith's thought, improving Adam Smith's system in a more
systematic and logical way. Say's work is known as Say's Law, namely supply creats its oven
demand each supply will create its own demand. According to Say, in a free or liberal
economy there will be no "over production" of a comprehensive nature, nor will total
unemployment occur. What might happen according to Say is sectoral overproduction and
also limited unemployment (frictional unemployment).
Another classic figure is Thomas Robert Malthus. The basic pattern of Malthus's thinking
and analytical framework concerns the theory of land rent and the theory of population.
Uncontrolled births cause the population to increase according to the measuring series while
the supply of foodstuffs increases by counting series.Ricardo is the most prominent thinker
among all the experts of the Classical School. The theory developed by Ricardo concerns
four groups of issues, namely: the theory of income distribution as a division of the results of
all production and is presented as the theory of wages, the theory of land rent, the theory of
interest and profit, the theory of value and prices, the theory of international trade and, the
theory of accumulation and economic development.
Economic Thought of the Socialists
The criticisms raised by the socialist school relate to the doctrine of laissez faire with
invisible hand control and government intervention. The ideas discussed are about the theory
of value, division of labor, population theory, and the law of deminishing return, and the
criticism is due to the assumption that the state has the right to regulate the wealth of the
nation. The socialist figure Lauderdale criticized that the value of goods is determined by
scarcity and demand, while Muller and List saw that the value of goods is also determined
not only by physical capital, but also by spiritual capital and mental capital. Likewise, Carey
sees the theory of value in terms of the theory of reproduction costs, while Bastiat that the
factors that determine the value of goods are the amount of labor sacrificed in the
manufacture of goods, according to him things that are gifts of nature have no value, unless
they have been processed by humans.
Sismonde objected to Malthus' population theory, and that it could not be controlled by
the methods proposed by Malthus, because it depended on human will and employment
opportunities, and economic capacity. Machines have the function of replacing human labor,
aspects of machines do not always have the advantage of increasing the wealth of the nation.
Carey argues that capital growth is faster than population growth. John Stuart Mill's thinking
on the theory of value does not look at the cost of production, but has used the demand side
through the theory of elasticity. Mill explained that the law governing production is different
from the law of income distribution, and also introduced human capital investment, namely
the skills, crafts and morals of labor in increasing productivity. The theory of economic
development according to Marx can actually be divided into three parts, first his thoughts on
the process of accumulation and concentration, second the theory of the process of
widespread misery/poverty (die verelendung or increasing misery), third the theory of the
level of profit that tends to decline.
Neo-classical Economic Thought
The neoclassical school has changed the view of economics both in theory and
methodology. Value theory is no longer based on the value of labor or production costs but
has shifted to marginal utility. One of the founders of the neoclassical school is Gossen, he
has contributed to economic thought which is later referred to as Gossen's Law I and II. Apart
from Gossen, Jevons and Menger also developed the theory of the value of marginal utility.
Jevons argues that it is individual behavior that plays a role in determining the value of
goods. And differences in preferences lead to price differences. While Menger explained the
value theory of the order of various types of goods, according to him the value of an item is
determined by the lowest level of satisfaction it can fulfill. With this theory of the order of
goods, the theory of distribution is also included.
Walras's remarkable idea of general equilibrium theory was developed through four
simultaneous systems of equations. In this system, there is a connection between various
economic activities such as production, consumption and distribution theories. The
assumptions used by Walras are perfect competition, limited amount of capital, labor, and
land, while production technology and consumer tastes are fixed. If there is a change in one
of these assumptions, there will be changes related to all economic activities.
Marshall's most famous contribution is the operation of the two forces, demand and
supply, like the operation of two scissors. Thus, cost of production analysis is the support for
the supply side and marginal utility theory is the core of the demand discussion. To facilitate
the discussion of partial equilibrium, the ceteris paribus assumption is used, while to take
into account the time element into the analysis, the market is classified into very short-term,
short-term, and long-term. In discussing marginal utility, there is another assumption, namely
the fixed marginal utility of money. Marshall found consumer surplus which is also
associated with welfare economics. That the overall consumer spends less money than his
ability to buy. If that happens, there is a consumer surplus. As long as the tax imposed on the
consumer is smaller than the surplus, his welfare does not decrease. However, taxes can also
be used for subsidies, especially for industries whose cost structure has increased. Marshall
also explains why the average total cost curve decreases and increases depending on the
internal and external of the firm or industry.
Institutionalist Economic Thought
The core of Veblen's thinking can be expressed in several economic realities seen in the
behavior of individuals and society not only due to economic motivation but also due to other
motivations (such as social and psychological motivation), so Veblen was not satisfied with
the theoretical description of the behavior of individuals and society in orthodox economic
thought. Veblen saw the study of economics from various aspects of social science so that
interdisciplinarity was needed. For this reason, Veblen was accused not of being an economic
thinker, but a sociologist.
John R. Commons has made many contributions to labor economics. In the orthodox
market economy, there are exchanges, but not exchange relationships. He divides three kinds
of transactions in the market, namely wealth transfer transactions, leadership transactions,
and distribution transactions. In These transactions involve aspects of custom, tradition, law
and psychology. Other institutional figures are Wesley Mitchel, Gunnar Myrdal, J
Schumpeter and Douglas North. The implication of institutional flow, especially North's
view, is that economic development will only run smoothly if there is a rule of law. Without
clear rules of the game, economic development will run chaotically, and only those who can
collaborate with the authorities will win.
Keynes Economic Thought, Monetarists, Supply Side school and Rational Expextations
school (Ratex)
Keynes' views are often considered the beginning of modern economic thought. He did
much to reform and reformulate classical and neoclassical doctrines. Keynes considered the
role of government necessary in development. Keynes is also considered as the foundation of
macroeconomics, which previously both the classical and neoclassical schools used
microeconomic analysis. Keynes saw the relationship between economic variables such as
income, consumption, savings, taxes, government spending, exports and imports,
unemployment, inflation in aggregate. The supporting figures of Keynes were Simon
Kuznets, Wassilily Leontief, and Paul Samuelson.
The next school of economic thought was monetarist, with Friedrich von Hayek and
Milton Friedman as its leaders. Monetarists think that the rate of money growth is important
for economic activities. Friedman was strongly opposed to the government's overly large role
in the economy. If the government's revenue is too large, its spending must automatically be
large. In fact, many government programs are considered ineffective in achieving their goals.
Harold McCure, Thomas Willet are supply-side school figures. The supply-side school's
view in dealing with economic problems is a decrease in taxes and a balanced budget, while
the Rational Expectations (Ratex) school argues that the rational expectations equilibrium
approach is built with the aim that all macro theories are based on solid micro theories.
Everyone tries to maximize their well being (consumers want maximum satisfaction and
producers want maximum profit, and the government wants maximum public welfare) and
leaves the economy to the market mechanism.
Current Economic Thinking
Philosophical Overview
Economic thinking applied in the world today is based on Neoclassical thinking. This
school is a further development of the classical school pioneered by Adam Smith, where state
intervention can be said to be absent in economic affairs, coupled with the use of
mathematics in economic analysis carried out (Santosa, 2010). According to Mubyarto
(2002), economics has been taught and applied worldwide since World War II, pioneered by
Paul Samuelson's book Economics An Introductory Analysis (MIT, 1946). The core teachings
put forward by Samuelson are known as Neoclassical economic theory. The content of
Neoclassical economic teaching is a synthesis between Classical free competition market
economic theory (homo ekonomikus and invisible hand Adam Smith), and the teachings of
marginal utility and general equilibrium. The emphasis of Neoclassical economics is that the
free competitive market mechanism, under certain assumptions, always leads to optimal
equilibrium and efficiency that is good for everyone. This means that if the market is left
free, undisturbed by even well-intentioned government regulations, society as a whole will
achieve optimal collective welfare (Pareto Optimal).
Nelson in Santosa (2010) even considered that Samuelson was able to inspire economics
to function as a religion, where the final pole of economic activity is market efficiency. The
rise of developed countries due to the application of Samuelson's teachings, then for the
general public there is a belief "God is on our side" and the market has also been "blessed" by
God. According to him, every good activity is efficient, while the inefficient ones should be
eliminated because they are not good.
A distinctive feature of the Neoclassical school of economics is the dominant use of
quantitative methods in conducting economic analysis. The quantitative approach used in
economics as well as exact sciences cannot be separated from the positivism paradigm. The
basic belief of the positivism paradigm is rooted in the ontology of realism which states that
reality exists in reality and runs according to natural law. Research seeks to reveal the truth
of existing reality, and how that reality actually works. Positivism, valid science is science
that is built from empirics.
The criticism that rests on the Neoclassical school of economics philosophically actually
rests on the bias that is too absolutizing to the positivism paradigm, which sees reality only
from the angle of modeling that is too simplified by relying on quantitative analysis,
supported by the use of assumptions that are often unrealistic. The empirical reality that
occurs is a reflection of deterministic conditions and is just a mere material and like a
machine, so that its repair only relies on the elements in the machine. This overly simplistic
and sterile analysis can in fact be at odds with what actually happens.
Empirical Review
Empirically, neoclassical theory is not suitable for solving the economic problems of
developing countries. J.H. Boeke in Santosa (2010), has stated that there is socio-economic
dualism in society in the Dutch East Indies (United States). Developing countries need
specific economic science. In line with the results of the study, Gunnar Myrdal said
Neoclassical economic theory was not developed to analyze the economic problems of
underdeveloped countries (developing countries), therefore for developing countries another
theory is needed with developed countries due to differences in social, economic, political,
legal and cultural problems. Likewise, Yunus criticized economic theory with a free market
pattern as not suitable for overcoming poverty in developing countries. J.E Stiglitz (2002),
Hatta (1976, 1979) said that globalization is the application of neoclassical economic theory
and neoliberalism that only benefits a small number of developed countries but harms
developing countries. Hatta (1976, 1979) said the free market causes the danger of
exploitation. Chapra (2001) stated that Neoclassical economics ignores morals.
From the discussion of current economic thought, both from a philosophical and
empirical point of view, it can be concluded that neoclassical economic thought which is the
development of classical economic thought and is used today in the world and uses the
positivism paradigm, is not suitable and failed to be applied to developing countries including
United States. For that there must be an economic thought that is ideal for United States.
Ideal Economic Thinking
In general, there are three paradigms in social science, including economics. Paradigm
can be interpreted as a set of basic beliefs or beliefs that guide a person in acting in everyday
life (Salim, 2006). The post-positivism paradigm emerged as an improvement to the view of
positivism, where the experimental approach methodology through observation is seen as
insufficient, but must be complemented by triangulation, namely the use of various methods,
data sources, researchers and theories. Critical theory in viewing a reality is full of certain
ideological content, such as neo-Marxism, materialism, feminism and other understandings.
The constructivism paradigm ontologically states that reality exists in various forms of
mental construction based on social experience, is local and specific and depends on the party
doing it. Based on this philosophical view, the epistemological relationship between the
observer and the object is a subjective unity and is a combination of interactions between the
two.
Capra in Santosa (2010) states that the damage in this world is caused by the mechanistic
worldview of science based on Cartesian and Newtonian, and to change it to a better future
based on a holistic paradigm of science knowledge and spiritualism. A holistic review is
needed, seeing that there is a phenomenon of "the death of science" where particularistic
studies lack axiological usefulness. In the future, the development of science will lead to
interdisciplinary studies where the element of spirituality, especially the element of morality,
must receive the main portion.
In 1976, a book entitled Economics in the Future was published, which actually contained
dissatisfaction with the teachings of Neoclassical economics. Jan Tinbergen and Gunnar
Myrdal as two examples of famous authors in the book proposed in the future should be
developed inductive-empirical economics and pay attention to institutional issues
(institutional). Chapra (2001) states that conventional economics has indeed gained great
intellectual prestige, but it is not the sophistication of a discipline that attracts people's
attention, but what contribution the discipline offers to humanity in an effort to realize the
goals of mankind, which at the peak people will put justice and general welfare on it.
Conventional economics has failed in this regard due to its dislike of norm-based judgments,
and its over-concentration on wealth maximization, the satisfaction of wants and the
fulfillment of individual needs. As far as social interests are concerned, conventional
economists have generally assumed that competition will limit self-interest, and therefore
promote the fulfillment of social interests. If the discussion of economics is oriented towards
human welfare, then its scope is not limited to economic variables alone, but needs to pay
attention to moral, psychological, social, political, demographic, and historical issues.
Keen (2001) criticizes the existence of Neoclassical economic theory and the need for
alternative teachings. The alternatives include:
Austrian Economics, which accepts many of the tenets of Neoclassical economics except
for the concept of equilibrium.
Post Keynesian Economics, which is highly critical of Neoclassical teachings and
emphasizes the importance of uncertainty.
Sraffian Economics, based on the concept of commodity production in the sense that
commodities (real sector) become the icon of analysis.
Complexity Theory, which applies concepts of nonlinear dynamics and chaos theory to
economic issues.
Evolutionary Economics, which treats the economy as an evolutionary system similar to
Darwin's teachings.
From the discussion of ideal economic thought it can be concluded that ideal economic
thought as an alternative to Neoclassical economic theory is an economic theory based on a
holistic paradigm, human welfare orientation, multidisciplinary. The flow of economics that
is expected to be very suitable / ideal to replace the role of Neoclassical economic flow is the
flow of institutional economics.
Institutional Economic Thinking
A Philosophical Overview.
Institutional economics is a new paradigm in economics that sees institutions (rules of the
game) playing a central role in shaping an efficient economy. There are two types: Old
Institutional Economics and New Institutional Economics (NIE).Old Institutional Economics
was born from Thorsten Veblen's criticism of the basic assumptions of classical / neoclassical
economics which he considered weak. Veblen's view is as follows:
Humans are not only rational beings but also emotional beings who have feelings, tastes,
values, and tendencies (instincts) that are tied to culture.
Tastes, feelings, values and inclinations also affect the economic transactions carried out
by humans.
Economic choices are also influenced by the physical and technological environment.
The world of economics cannot be separated or even influenced by historical, social and
institutional factors that are always changing, dynamic, and dynamic.
Economic development is always conditioned either directly or indirectly by the social
and institutional circumstances surrounding it.
The NIE view: To operate, markets require costs because information is asymmetric.
Competition is not perfect because it depends on the availability of information and the
control of power resources.
o Transactions are costless (zero cost)
o Enforcement of property rights is not costless
o Market mechanism is unable to solve the case of externalities, commons pool resources
and public goods.
Institutionalization means the rules of the game adopted by the community or members
which are used as guidelines by all members of the community or members of the
organization in conducting transactions North in Sutrisno (2007). The extent to which
institutions can be accepted by society depends on the structure of authority, individual
interests, community circumstances, customs and culture. This implies that institutions have
values and norms that are able to regulate their members to behave in harmony with their
environment, which will reflect a totality of typical social life performance. According to
North, formal institutions are written rules such as laws, agreements, contract agreements,
regulations in the fields of economics, business, politics and others. Agreements that apply at
international, national, regional and local levels are included in formal institutions.
Many definitions have been given by economists on institutional economics, Samuels in
Prasad (2003) summarizes eight aspects of institutional economics as follows:
Emphasizes the evolutionary process through the development of institutions and rejects
neoclassical theory that emphasizes automatic adjustment mechanisms through the price
system.
Rejects the neoclassical view that efficiency will be achieved with a market system.
Technology is dynamic
Resource allocation depends on institutional structure.
Institutional theory considers not only prices but also the values embodied in social
structures and behaviors.
Rejecting the neoclassical view that only maximizes individual satisfaction without
looking at the norms that exist in society.
More "pluralistic or democratic" oriented. While neoclassical does not pay attention to
social inequality and crime as a result of existing institutional structures.
Viewing the economy in a holistic way and explaining economic activities in a multi-
disciplinary way
Institutional economists believe that a multidisciplinary approach is essential to portray
economic problems, such as social, legal, political, cultural, and other aspects as a single unit
of analysis (Yustika, 2008). Therefore, to approach economic phenomena then, economic
approach The institutional economic approach uses qualitative methods that are built on three
important premises, namely: particular, subjective and, nonpredictive.
Particular is defined as the heterogeneity of characteristics in society. This means that
every social phenomenon is always specific to certain social conditions (and does not
apply to other social conditions). Through the premise of particularity, qualitative
research actually directly speaks of two things: (1) the belief that social phenomena are
not singular; and (2) qualitative research has humbly proclaimed its limitations.
Subjective here actually does not mean that researchers conduct research subjectively
but social reality or phenomena. Therefore, it is closer to the situation and conditions
that exist in the data source, by trying to put yourself and think from the point of view of
an "insider" in anthropology called emic.
Nonpredictive is that in the qualitative research paradigm does not enter at all into The
emphasis here is on the meaning, concepts, definitions, characteristics, metaphors,
symbols, and descriptions of something. So the emphasis is on fully explaining the
process behind a phenomenon.
Paarberg in Arifin and Rachbini (2001) states the fundamental differences between
Neoclassical economics and Institutional economics. Note Table 1 below which illustrates
the fundamental differences between the two economic schools.
SBM (2008) suggests several institutional policies that must be taken in agricultural
development in United States, including institutional policies that will be implemented by the
government must not damage existing institutions and the need to reduce transaction costs in
buying and selling agricultural products formally and not based on ethnic, social or kinship
networks. Jaya (2004) conducted a theoretical study on the extent to which the role of New
Institutional Economics (NIE) can be applied to the case of regional autonomy in United
States. The results of the study found that the region (state) is a nexus of contractual
relationships between principals, namely constituents and representative agents. If the
relationship is harmonious, the development performance in the autonomous region will be
better, and vice versa.
Karseno and Adjie (2001) have conducted research on economic policy and institutional
development in United States. Both researchers highlighted the weaknesses of United States
economy during the new order government in the form of a lack of institutional and human
resource capacity building, which of course can vary from region to region in United States.
Santosa (2009) highlights election problems that can be analyzed using institutional
economics, especially using the discipline of political economy. Based on the theory of
public choice, it seeks to examine the rational behavior of political actors, both in parliament,
government agencies, presidential institutions, the voting public, environmentalists and so on.
According to Dr. Yustika (2004), elections held in United States often incur enormous
political transaction costs, which are often funded by capital owners.
Tjitoresmi, et al (2007) examined the problem of leakage in United States due to the
problem of unprofessional bureaucracy and not applying the principles of transparency and in
accordance with applicable legal rules. The results of his research show various forms of
business that are prone to leakage economic and irregularities, due to the problem of
asymmetric information, high economic costs of deviations from intellectual property rights
(IPR), business competition and externalities of an activity that require compensation.
Conclusion
From the discussion it can be concluded:
Neoclassical economic thinking is not suitable for developing countries including
United States.
Ideal economic thinking is holistic, multidisciplinary and community welfare oriented.
Philosophical and empirical institutional economic thinking can be used as ideal
economic thinking.
