Book Review: Foundations of Real-World Economics: What Every Economics Student Needs to Know

1. A Textbook on Humanistic Economics

Although the title and the list of contents of John Komlos’s monograph might suggest that this is just one more conventional textbook, written for first-year undergraduate students who will have their first contact with economics, the book is, in fact, much more than that. Foundations of Real-World Economics is a passionate, incisive, and thorough critique on the economic science of our times and about how economics is currently taught in colleges and universities. Building on this critique, Komlos proposes an overarching new perspective concerning the way we look upon the organization of economic systems, and the way in which policymakers should intervene to assist people in pursuing the goal of accomplishing better lives. The author sustains the view that capitalism needs a human face, and that the new paradigm to approach economics must be grounded on a humanistic view of social relations.

The author is particularly tough in its critique of the American economy. The political choices made over the last decades turned the US society into a ruthless environment where only the strong, the well-connected, and the exceptionally talented, can thrive; a society in which a large part of the population is left behind and without a significant hope of ever improving their well-being or the life conditions of their children. This reality is, in the author’s point of view, the straightforward consequence of the policies adopted by governments whose main reference is the neoliberal perspective that mainstream economics advocates. Hence, the change Komlos emphatically suggests is threefold: it starts in the way economists reflect upon reality; it proceeds to how economics is taught in the classroom; and it ends with the impact that the new research-teaching paradigm has on policymaking and, concomitantly, on social choices.

Along eighteen well-structured and well-written chapters, Foundations of Real-World Economics handles most of the subjects any teacher or scholar would consider fundamental in explaining how the economy works. Consumer preferences, the organization of production, market competition, business cycles, economic growth, international trade, and money and finance, are all topics that the book addresses. What changes, relative to conventional wisdom, is the angle from which the issues are perceived and interpreted. Komlos emphasizes how reality has changed over the first quarter of the twenty-first century and urges a paradigm shift to pull us away from the theories that support what the author designates as “zombie neoliberalism.” The new paradigm should stress the need for a capitalism with a human face, a form of economic organization antipodal to the cutthroat capitalism that western societies, and particularly the United States, have been promoting.

The methodological options taken by the author are clear from the outset, and the reader soon acquires a precise notion of what she or he can expect from the approach to each subject. One such option is to disregard artificial and abstract concepts, like aggregate income or market equilibrium, and to focus instead on life satisfaction, quality of life, and well-being. ¹ Economics does not have to be primarily about quantifiable gains and losses, but rather about how inclusive society needs to be for everyone to feel that their lives are meaningful and rewarding. By focusing on abstract, and often unrealistic, theory, economics seems to have gone astray from its basic purpose. Hence, the most fundamental and urgent methodological change would be to discard the fantasy world of mainstream textbooks, constructed upon baseless assumptions, and to focus instead on empirical evidence and observation, thus replacing the commonly used deductive approach by an inductive logic.

With Foundations of Real-World Economics, the author sets an ambitious agenda, that goes much beyond the classroom. The book is a manifesto on how to promote a better, more inclusive, society. Under the advocated principles, it is possible to reshape the capitalist society, increasing educational attainment, the access to health, and life satisfaction, and also improving the moral and ethical standards that guide our lives. Skeptics might interpret this view as something close to a utopia. However, the most adequate interpretation of Komlos’s proposals is, in my view, a more moderate one: it is an alert call for the current state of economics research and teaching, which, in many regards, might be perceived as overly abstract and formal, thus assisting in perpetuating existing stereotypes about the alleged inevitability of unfair income distribution and unfair economic opportunities.

In synthesis, the book is successful in accomplishing most of its underlying goals: (1) it truly offers an alternative way of thinking about the economy, in which fairness, inclusion, solidarity, and welfare are vital elements; (2) the new paradigm is brought into the classroom in an effective and compelling way: this is, no doubt, an excellent textbook to teach economic principles, as it covers most of the subjects any introductory textbook should address, at the same time it elegantly sets forth the new perspective; ² (3) a pluralist and eclectic view on economic thought is presented in the book, allowing for broadening horizons about how economic issues can be addressed and studied. ³ Notwithstanding, despite its achievements, Komlos’s contribution is not completely free from criticism; perhaps the most relevant critique that can be made is its excessive focus on transmitting a normative message, thus somehow obscuring a positive economics perspective that is not only essential but also easier to convey and assimilate at an introductory level.

The reviewed textbook is a third edition (the first two were published, respectively, in 2015 and 2019). In every edition, the author carefully combines the approach to timeless economic issues with a thorough discussion on the most pressing current economic affairs. Relative to previous volumes, this third edition dedicates new chapters to the economic causes and consequences of the rise in populism (following the political instability in the United States); to the place minorities and discriminated social groups occupy in the economics discourse (following the attention received by the Black Lives Matter movement); and to the consequences of high-impact, low-probability events (following the COVID-19 pandemic).

2. Contradictions of a Dogmatic Science

In this second part of the review, a short selection of specific ideas conveyed in some of the book chapters is highlighted and briefly discussed. These ideas are of particular interest, as they are prone to raise controversy and debate.

2.1. Markets are man-made constructions

In the author’s interpretation, markets are far from being spontaneous orders; instead, they are institutional arrangements. The corollary of conceiving markets as man-made institutions is that they are most likely conceived and organized for the benefit of a few, namely, those who have the power and the ability to set the rules. The lack of opportunities for so many people in the economy (in education and in the access to good jobs) is, under this view, the direct consequence of trading arrangements that are inefficient, that are not inclusive, and that lack adequate oversight.

2.2. Textbook firms and real-world competition

The perfect competition benchmark, exhaustibly described in introductory economics textbooks, takes a sui generis assumption: atomicity. It is as if all firms in the economy were familiar businesses like small grocery stores, bakeries, or barber shops. The point made in the book at this respect is an inescapable truth: such type of firms is irrelevant in most industries, which, in turn, are dominated by large companies that concentrate power and dominate markets. The corollary is an economy in which the concentration of income and wealth is an inevitability. Such outcome is incompatible with the humanistic view advocated in the book. Thus, the author proposes reconsidering and reforming institutions, laws, and tax structures, in ways that place us closer to the ideal concept of social justice proclaimed by the philosopher John Rawls.

2.3. Macroeconomics: The science of economic policy

Komlos dedicates three chapters of his book to macroeconomics. In these chapters, the work of John Maynard Keynes is praised for two reasons: first, because of the emphasis placed on the behavioral foundations of human choice, well expressed in the use of the notion of “animal spirits” to characterize investors’ behavior; second, because of the role assigned to economic policy, both fiscal and monetary, as a safeguard against disruptive market failures. Inspired by Keynesian thinking, and by the evidence that markets cannot self-regulate, Komlos defends, with fervor, the need for government intervention; Keynesian fiscal policy is interpreted, in the book, as the “steering wheel” of the economy.

2.4. The globalization and its dispossessed

The “neoliberal dogma,” as the author defines the ideology behind most of the political decisions taken in the last few decades in the United States and other countries, welcomed globalization with open arms. The logical arguments are difficult to rebut: increasing the scale of markets, one is able to increase the opportunities to create wealth and for everyone to have access to a better life. However, it is also evident that global markets, by themselves, will amplify the imbalances that one observes even in small-scale markets. Hence, one should expect globalization to be accompanied by careful and clever economic policies, capable of making the benefits of wider markets reach everyone. This has not occurred; again, the United States is the prototypical example of a society that allowed global markets to inflate inequalities, creating, along the way, a huge mass of the discontented and dispossessed. As remarked by the author, allowing the advantages of globalization to be captured by a few was a mistake of historical proportions.

2.5. An unprepared science

The most affirmative message conveyed in Foundations of Real-World Economics is that economics, as currently taught and studied, is flagrantly unprepared to deal with people’s concrete problems. In the book’s perspective, what mainstream economics does is to justify and support a status quo that privileges a small fraction of people in society and that is incapable of addressing the problems of those who most need support: the marginalized and the minorities. Furthermore, conventional economics is apparently designed for “ordinary times.” However, the last few years have witnessed a series of low-probability, high-impact events that are anything but ordinary (the so-called black swans), and for which the orthodoxy of the economic science had no meaningful answer. The incapacity to contemplate exceptional circumstances prevents economics from being able to advise policymakers on how to create the safety nets that, in rare circumstances (e.g., the COVID pandemic), can help save lives.

3. Epilogue

As remarked in the beginning of this review, Foundations of Real-World Economics is much more than a textbook. It is a lucid, compelling, and must-read reflection about what is wrong with the current state of economics and what we can do to change the state of affairs. The message of the author is transparent and unambiguous: economics is a social science and, therefore, its primary goal should be to address the concrete problems that concrete people face in their everyday lives. Discussions of imaginary markets, proclamations of efficiency gains that end up in the pockets of a few, and a stubborn conception that the economy is capable of self-regeneration in every circumstance, should not be the guiding lines for teaching or for research. Evolving to an economic science based on the principles of humanism requires bringing to the forefront of the discussion the design of ethically oriented policies and institutions, mostly concerned with a fair distribution of income and with the creation and implementation of the social structures that may foster higher indices of life satisfaction and personal well-being. Conveying such a set of ideas to students through a principles textbook in such a clear and compelling way as Foundations of Real-World Economics does is, undoubtedly, a noteworthy accomplishment.

Orlando GomesLisbon Accounting and Business School, Lisbon Polytechnic Institute (ISCAL-IPL)and CEFAGE (Univ. Évora–ISCAL) Research Center, ISCALLisboa 1069-035, PortugalEmail: [e-mail]