Contextual Economics

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By Neva Goodwin:

"There is no better way to force yourself to think through an entire theory than to write a textbook. I have now been the lead author on two textbooks for the college level: Microeconomics in Context and Macroeconomics in Context. In addition to the U.S. editions there are Italian, Russian and Vietnamese editions of these books. Roughly 40% of their content is similar to what can be found in a standard, neoclassical textbook. Much of the new material came from existing alternative schools of economics.

The starting premise for Contextual Economics is that an economic system is embedded within a social context that includes ethics, norms and human motivations, and the culture that expresses them. It also includes politics—that is, the deployment of economic and other kinds of power—as well as institutions, and history. Equally important is the recognition that an economic system is embedded within a physical context that includes the built environment, as well as the natural world from which all the materials we use ultimately derive. The health of any economic system is absolutely dependent on the health of these embracing contexts.

Next, contextual economics understands that the economy itself contains at least three spheres. In addition to the for-profit business sphere—the focus of mainstream economics—there is also the core sphere, consisting of families and communities; this is the focus of a good deal of work in feminist and social economics. Third is the public purpose sphere, which includes governments as well as institutions that are both non-governmental and not-for-profit, such as not-for-profit hospitals and universities, environmental advocacy groups, foundations, etc..

The business sphere is currently creating meta-externalities of culture and politics that place great burdens on the core sphere, and that tie the hands of governments. This does not necessarily imply that the for-profit sphere is “bad” and the others “good”—rather that institutional changes must be made to bring the purposes and functions of all three spheres into better harmony.

Another foundational question addressed by contextual economics is: What, in fact, constitutes economic activity? The list found in all standard textbooks is “production, exchange, and consumption.” Beyond these it is critical to include activities of resource maintenance such as work directed toward maintaining environmental sustainability, infrastructure maintenance, and caring activities. Theoretical economics, which has been praised for its ability to improve efficiency in production, will gain in relevance if it also teaches how to sustain and build human, social, natural and built capital.

The preceding is a bird’s eye overview of the content of what I believe needs to be included in an alternative system of economic theory—which is, of course, what is included in contextual economics. As noted, contextual economics has been woven together with strands of everything I and my colleagues could lay our hands on that appeared useful.

There is not perfect harmony among the various schools of heterodox, or alternative, economics. Ecological economists emphasize environmental sustainability. Socio-economists and others emphasize individual well-being, often within a communitarian context. Radical economists emphasize social justice, and often align with Keynesians in assuming that the only way to achieve that is by growing the economy—as Paul Krugman keeps urging.

There are real conflicts among these visions of what constitutes a good society, and how to get there. As I look at these, I am struck by the realization that we may not actually have the choice as to which value should be uppermost. The natural world imposes absolute resource constraints—e.g., on water, fish, wood, and land—that, if used in one way, are not available for another use. Not to mention the limits on the atmosphere’s ability to absorb climate changing pollutants.

If we start with nature as the binding constraint, the resource limits of a finite world mean that economic growth, as we currently understand the term, cannot continue indefinitely.

If we must accept the end of economic growth as we know it, this means that social justice cannot be achieved through the Keynes’s or Krugman’s prescriptions. In a non-growing global economy there is only one way for the poor to have more: that is for the rich to have less. Please note: this means less stuff, not necessarily less well-being.

There has recently been much good work directed to better understanding what really does contribute to well-being. Hedonic psychology and related studies suggest that there may be a reasonably good resolution to the dilemma of how to achieve environmental sustainability and equity and well-being: it lies in cultural and value change, to better understand what truly makes us feel happy and fulfilled.

Some of the unsustainable material pleasures and conveniences of the rich world may need to be given up: casual use of transportation; very large houses; water-skiing; the convenience of massive throw-away packaging, including in medical applications—and so on. But better urban design can offer compensating benefits, such as vastly reduced commuting time and more pleasant living environments.

If labor productivity continues to increase, as it has for the last two hundred years, in a post-growth world one result could be ever greater unemployment. But the obviously preferable alternative would be policies to promote an ever shorter work-week—hence more free time.

Keynes himself imagined this, in his paper on “Economic Possibilities for our Grandchildren.” He projected economic progress forward a hundred years—to the year 2030—when there would be very little reason for anyone to scramble for life’s necessities, and we could mostly devote our lives to the arts of leisure. I would look for those arts of leisure to include active participation in arts, crafts, and other makings, such as gardening, as well as athletics, time with family and friends, and more time available to give every child a superb education.

2030 is only two decades away. We may not have achieved Keynes’ vision by then, but the barriers to doing so lie not so much in the physical constraints posed by nature and technology as in human culture, politics, and values. To change these we need to change much more than economic theory—but changing economic theory is a good start." (

More Information

Goodwin, Neva , Julie A. Nelson, and Jonathan Harris (2009) Macroeconomics in Context. Second edition, M. E. Sharpe

Goodwin, Neva, Julie A. Nelson, Frank Ackerman, and Thomas Weisskopf (2009) Microeconomics in Context. Second edition, M. E. Sharpe

Goodwin, Neva (2005) The Limitations of Markets; available at

Goodwin, Neva, Frank Ackerman and David Kiron (1997), eds. The Consumer Society. Washington, D.C.: Island Press

Harris Jonathan, and Neva Goodwin, eds. (2009) Twenty-first Century Macroeconomics: Responding to the Climate Challenge Edward Elgar; paperback 2010.